IndiGo Q3: Focus on international destinations lifts outlook, say analysts

InterGlobe Aviation, the parent firm of IndiGo Airlines, reported a record net profit of Rs 1,422 crore in the October-December quarter (Q3) of financial year 2022-23 (FY23), prompting brokerages to increase their one-year target price on the company's stock.

On the bourses, however, shares of IndiGo dipped 1.32 per cent to Rs 2,071 apiece, as against a 0.5-per cent fall in the benchmark S&P BSE Sensex.

Kotak Institutional Equities, meanwhile, has revised its target to Rs 2,550 on the back of a sharp beat in Q3 profit, driven by better volumes and yields, coupled with surpassing pre-Covid levels of international market.

The airline's best quarterly profit came on the back of 60.7 per cent year-on-year (YoY) growth in revenue from operations, which stood at Rs 14,933 crore. Bloomberg consensus estimates put the airline’s adjusted revenue and adjusted net profit at Rs 14,198 crore and Rs 1,274 crore, respectively.

IndiGo's passenger load factor rose to 85.1 per cent (up from 79.7 per cent), and the yield rose nearly 22 per cent to Rs 5.38 on a YoY basis.

Operationally, its fuel cost per available seat kilometer (ASK) declined faster than aviation turbine fuel (ATF) price decline at 11 per cent QoQ. Load factors also improved by around 600 bps sequentially to pre-Covid levels of 85 per cent.

It also generated Rs 2,000 crore in operational profit, and saw cash accretion of nearly Rs 2,300 crore for the quarter. Operational RASK-CASK was Rs 0.53 for FY2024/25E, and the management has guided for the upper-end of its ASK guidance of 13-17 per cent growth over the FY2020 base.

"Though the management has hinted at a sequential decline for Q4 at the higher end of the range; it would still yield a positive operational spread in Q4," said KIE, adding that, to limit the effects of seasonality on volumes and yields, IndiGo is aiming for, and benefiting from increasing focus on international bookings.

IndiGo's international business during the quarter stood at 105 per cent compared to pre-Covid levels. The business' share in total ASK stands at 23 per cent, at present, which the company hopes to increase to 30 per cent by FY24. The management also expects international business will likely grow at a faster pace compared to domestic.

The company has signed a codeshare agreement with Turkish Airlines, helping customers fly to 26 different cities in Europe, aiding IndiGo to expand its footprint in the international market. Further. international connectivity through codeshares will be started to Manchester, Amsterdam, Milan, and Athens. Also, direct operations to Nairobi/Jakarta are in pipeline.

ICICI Securities, for instance, has increased its target price to Rs 2,415 per share from Rs 2,360, as the airline is benefiting from strong traffic, cost leadership in the industry, and relatively benign competition.

"Its structural cost advantage is best defined through its fleet size of 302 aircraft with 238 neos (fuel efficient), and an average age of only 3.5 years. Its balance sheet has total free cash (net of debt) at Rs 7,100 crore as of Q3FY23. We remain positive on the supply-demand cycle, which will remain tight in the medium term," it said in its result review report.

IndiGo has been taking big bets by placing bulk purchase orders for aircraft/engines, helping it negotiate favourable terms with original equipment manufacturers (OEMs). The airline flies limited point-to-point destinations, achieving the lowest cost structure in a highly competitive industry.

"The company has been delivering best-in-class performance, thereby gaining market share," said analysts at Nuvama Institutional Equities. The brokerage's upwardly revised target price stands at Rs 2,501 per share.

That said, the resurgence of airlines (Air India, Spice Jet), and the entry of Akasa, along with comeback of the established Jet Airways could reduce IndiGo’s market share going forward, analysts caution.

Besides, adverse taxation structure driving up the cost, weak demand amid economic slowdown denting profitability, and peak capacity at Mumbai, Chennai and Kolkata airports turning out to be growth bottlenecks, are other key monitorables.