InterGlobe Aviation: Volumes strong in seasonally weak quarter

17 Mar 2023 , 11:21 AM

Recommendation: Buy

Target Price: Rs 2,680

 

While the Street has been concerned post the large 470-aircraft order by Air India, bulk of the deliveries would arrive from mid-2025. The sharp decline in Crude means that carriers can lower yields by 7% versus Q3FY23 and still maintain profitability.

Current passenger traffic gives confidence for 15% industry volume growth in FY24

Domestic passenger traffic is averaging about 420k per day in February-March 2023. This is much higher than the average of 390k passengers in the seasonally strong October-December 2022. Industry-level load factor is holding up above 85% in Q4FY23, which is only slightly lower than 86.6% in the seasonally strong Q3FY23. IIFL Capital Services’ FY24 industry volume forecast is 155 million (15% growth over FY23). Current daily volumes (420k) are almost at the same level as the daily volumes implied by IIFL Capital Services’ FY24 forecast (423k).

Fears of competitive intensity overdone

Since the announcement of the 470-aircraft order by Air India in mid-February 2023, there have been fears on Street regarding increasing competition. These concerns are overdone, at least from a 2-year perspective. The first of the ordered new aircraft will enter service in late-2023, while the bulk of deliveries would arrive from mid-2025 onwards (more than two years out). In the interim, strong demand growth would ensure that upcoming deliveries (at the industry level) are well-absorbed. Analysts at IIFL Capital Services estimate net deliveries at the industry-level to be 50-70 aircraft per annum over FY24/FY25, which is unlikely to create a supply glut when seen in the light of existing industry strength of 700 aircraft and a potential 15% growth in passenger traffic.

Sharp fall in Crude leaves room for moderation in yield

Current crude price is 18% lower than the average in the preceding quarter (Q3FY23). Fuel being about 40% of revenue, it implies that carriers can cut fares by 7% (to support volumes), without impacting per unit profitability. Although analysts at IIFL Capital Services have cut their Crude assumption from USD 95 to USD 85, the same has been offset by a lower yield assumption (FY24 4% below FY25), As a result, their FY24/FY25 earnings assumptions are unchanged.