12 Feb , 2022 By : monika singh
Net profit of Rs 1.3 bn was much better than consensus of an Rs 3-bn net loss, and was driven by a much stronger yield. Indigo reported its highest passenger yield for the last 10 years during the quarter, driven by strong yield on international charter flights and government capping. However, given that revenue in the quarter was 95% of pre-COVID-19 level revenue, profit of Rs 1.3 bn was very small. Net cash increased from Rs 16 bn at the end of Sept to Rs 34 bn at the end of Dec, primarily driven by sales and lease-back gains and advance sale.
Yield outlook blurred: The key issue we think remains how the yield will behave once the government removes fare capping (lower and upper end of domestic fares for 0-15 days before the flight are decided by the government) and scheduled international operations resume. Given that fares for flights beyond 15 days remain very low, we think fares could trend down post the special situation.
Unfavourable demand-supply equation: Despite weaker demand, some of the aircraft deliveries have continued at Indigo and the industry. Going forward, we calculate a net addition of 60-70 aircraft in CY22 and that means the industry would need around 20% or more traffic on pre-COVID-19 levels to maintain those loads levels which doesn’t seem possible at the moment since the industry is yet to touch pre-COVID-19 level demand. So even if conditions normalise, we expect pressure on yields.
Competitive landscape another potential threat: The aviation industry will be more competitive, with a couple of new airlines expected to start operations and Tata also expected to launch a scaled-up business. Thus a significant number of aircraft will be added to the industry over the next couple of years. However, demand is not fully developed as it is concentrated on tier-1 and -2 cities which are already well served by airlines. While the focus has now moved to tier-3 routes, significant capacity addition there could weaken yields as demand is not yet fully developed.
Forecasts adjusted, TP edged up, but Reduce retained: We have adjusted our PBT, improving our FY22 forecast by 5% (losses cut by 5%) but cut our FY23 forecast by 55%. We have edged up our TP from Rs 1,615 to Rs 1,720 on the back of our forecast changes and lowered WACC, but maintain Reduce. We don’t upgrade our rating since we think Indigo’s shares are very expensive now, trading at 15.4x FY23e EV/Ebitda, well above their historical EV/Ebitda of 8.5x, (excluding FY21 when it was abnormally high).
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