Interglobe Aviation Ltd Management Discussions.

For last three consecutive years ending 2017, India continued to be the fastest growing domestic aviation market as both economic and network expansion boosted the sector.

Economic Overview

According to the international Monetary Fund (IMF), india remains amongst the fastest growing economies in the world, as it continues to benefit from strong private consumption and the gradual introduction of significant domestic reforms. Today, it is one of the most dynamic and emerging economy amongst large countries.

According to the Ministry of Statistics and Programme implementation (MOSPI), the provisional estimate of growth in Indias real GDP was 7.7% for the period January to March 2018. This translates into growth in real GDP of 6.7% for FY18. For the fiscal year, this was primarily driven by growth in trade, hotel, transport and communication, financial services and public administration. IMF projects Indias economy to grow by 7.8% in 2019 by virtue of strong private consumption and the fading of transitory effects of implementation of the national goods and services tax. In the medium term, economic growth is seen gradually rising with the continued implementation of structural reforms that increase productivity and incentivise private investment.

As per IMF, Indias economy is currently valued at USD 2.6 trillion, making it the 6th largest in the world in terms of nominal GDP. As per their estimates, the Indian economy is expected to grow to a size of USD 4.7 trillion by 2023.

Industry Overview

According to International Air Transport Association (IATA), India continued to be the fastest growing domestic aviation market for 3 consecutive years ending 2017, as economic and network expansion boosted the sector. Indias air transport sector has supported 8 million jobs and contributed to USD 72 billion to its GDP. From a current domestic market of 117 million passengers travelling in 2017, India is expected to be a market of 442 million passengers by 2035, with the aviation industry supporting 19.1 million jobs and contributing USD 172 billion to the GDP, according to IATA.

In India, low cost is critical to the airline industry which is characterised by highly price-sensitive consumers. On one hand, increase in input costs such as fuel prices and aircraft landing and en-route charges have added pressure to the industrys profitability. While on the other hand, demand for air travel continues to be robust at low fares in the domestic market, thereby absorbing the rapid capacity expansion and stimulating higher air travel demand. Amongst the macro-economic factors such as Indias relatively low per capita income and low domestic air penetration levels, low cost carriers or LCCs continue to be one of the key drivers for traffic growth by offering affordable flying options to Indias rapidly growing air travel market. With a share of over 65% in Indias air travel market, LCCs continue to gain increased acceptance not only amongst leisure travelers, but have also turned into a favorite for corporate travelers by meeting their key expectations of network density, schedule and on-time performance.

Air travel penetration in India stood at 0.10 trips/capita in FY17, which is 59% lower than countries with similar GDP/capita, and 76% lower than BRICS nations (barring India), according to the Directorate General of Civil Aviation (DGCA) and IMF. This gap is expected to dissipate expeditiously at 18% CAGR over FY17-22E, due to the rising disposable incomes, supported by increasing working age population. According to World Bank, Indias domestic passenger travel market is projected to grow at 20% CAGR during FY17-22E, assuming 1.2% population CAGR.

Key Growth Drivers

Strong Economic Growth

According to Economist Intelligence Unit (EIU), India is expected to be one of the fastest growing major economies in the world, with real GDP growing a CAGR of 7.6% between CY16 and CY2, surpassing that of China, APAC and the world average, which are expected to grow by 5.2%, 3.8% and 3.6%, respectively, during the same period.

Continued Working-age Population Growth India, currently the 2nd most populous country across the globe, is expected to grow its population at a CAGR of 1.1% over CY17- CY22, according to EIU. This is higher than the average population growth of the top 20 domestic air travel markets in the world, as per a report by Center for Asia Pacific Aviation (CAPA).

Expansion in Aviation Infrastructure

Increased focus of the Indian Government in infrastructureexpansion is a key catalyst to growth of Indias aviation market.

In the Union Budget 2018-19, the Government has proposed to expand Indias airport capacity more than 5 times to handle one billion trips a year under its new initiative - NABH (NextGen Airports for Bharat) Nirman. Public private partnerships have also yielded state-of-the-art Greenfield airports in Hyderabad and Bengaluru, while new airport infrastructure investments in Delhi and Mumbai are further expected to increase capacity and service quality.

Company Overview

Head-quartered in Gurgaon, InterGlobe Aviation Limited operates IndiGo, Indias largest and one of the fastest growing passenger airline in the country. With a low-cost carrier (LCC) business model, we primarily operate in Indias domestic air travel market, the 3rd largest air travel market in the world in terms of domestic passenger traffic. Our activities primarily include the transportation of passengers, cargo and mail on regularly scheduled flights, serving both domestic and international geographical segments. With an overall fleet size of 159 aircraft including 32 A320neos and 6 ATRs, we fly to 50 destinations including 8 international destinations as of March 31,2018.

W strive to maintain low costs (as measured by Cost per Available Seat Kilometer, or CASK), a high frequency of flights and world-class quality. This is to fulfil our singular brand promise of providing "low fares, on-time flights and a courteous and hassle- free service" to our customers. We truly believe that it is our focus on maintaining one of the lowest cost structure, including fleet uniformity across each service type, high aircraft utilisation, no frills service and low turnaround time that makes us the leader in every market we enter.

Our Company has made a firm aircraft order of 100 A320 aircraft in June 2005, 180 A320neo aircraft in June 2011 and 250 A320neo aircraft in August 201 5. Cach of these were the largest single orders by number from Airbus at the time of placing the order, according to Airbus. We believe that

the magnitude of our 2005, 2011 and 201 5 aircraft orders helped us in negotiating favorable terms with Airbus and our other aircraft-related suppliers and service providers. This provides us with a structural cost advantage by reducing the overall costs associated with the acquisition, maintenance and operation of our aircraft. Globally, we have been one of the first few airlines to order, and in 2016, became the first airline in Asia, to take delivery of the A320neo aircraft, according to Airbus. At the end of March 2018, we had 32 fuel efficient A320neos, which gave us 1 5% lesser fuel burn compared to the current generation of A320ceos without sharklets. Going forward, as more and more such aircraft enter our fleet, it would further reduce our fuel consumption per block hour.

We have also placed an order with Avions de Transport Aegional G.I.C., or ATA, in August 201 7, for the purchase of up to 50 ATA 72-600 turboprop aircraft. These aircraft have given us the opportunity to once again redefine air travel in cities which were so far devoid of reliable air service or were subject to exorbitant air fares.

We have been also been awarded as "Best Low Cost Airline in Asia" by TripAdvisor Travelers Choice Award 2018. This was based on millions of reviews from travelers across the world and reflect superior quality, service and customer satisfaction.

Our Strategy, Going Forward:

By origin and destination passenger flows, Indias domestic air travel market is forecast to grow 5.4 times over the next two decades, the highest growth rate among the expected 20 largest markets globally by 2036, according to Airbus. Our order book of 430 A320neos (combined order of 180 A320neos and 250 A320neos) enables us to strengthen the breadth and depth of our network by adding flights in our existing markets and selectively adding new routes and destinations. Additionally, our turboprop order book will help us serve routes in "Tier 2" and "Tier 3" cities in India, including routes qualified under the Government of Indias Ude Desh ka Aam Naagrik regional air connectivity scheme.

At IndiGo, low cost is fundamental for the success of an airline.

On the back of a strong balance sheet and with an endeavor to further lower our costs, the Company has started acquiring some of the planes out of the free cash available with the Company.

This will further reduce the overall ownership cost, going forward, against relatively higher lease rentals associated with sale and lease back aircraft. During FV18, the Company acquired 6 ATA aircraft out of its free cash.

Our Operational Highlights

The following table sets forth key operational data for the periods indicated


FV Cnded March

2018 1 2017 Change
ASK (in million) 63,510 54,583 16.4%
RPK (in million) 55,524 46,288 20.0%
Passenger Load Factor (%) 87.4% 84.8% +2.6pts
Number of Scheduled Passengers Carried (in Thousands) 52,142 43,532 19.8%
Block Flours 654,040 558,567 17.1%
Number of Scheduled Destinations Served as of period end 50 44 13.6%
Total Number of Flights 347,640 300,526 15.7%
Number of Aircraft at period end 159* 131 21.4%
ARSK (As.) 3.64 3.44 6.0%
Vield (As.) 3.59 3.50 2.6%
CASK (As.) 3.15 3.04 3.5%
CASK €x-fuel (As.) 1.93 1.88 2.5%
*exduding 4 A320 on damp lease

Our Financial Overview


Passenger ticket revenue: Passenger ticket revenue increased by 23.1 % from As. 161,970.72 million inFV17to As. 199,432.69 million in FV18.

Aevenue from ancillary products and services: Aevenue from ancillary products and services primarily include cargo, special service requests, ticket modification and cancellation, in-flight sales and tours. This revenue increased by 13.7% from As. 22,667.58 million in FV17 to As. 25,778.36 million in FV18.

Other Income: Other Income primarily comprises financial income on our cash, net mark to market gain on net liabilities denominated in foreign currency and other non-operating income. Other Income increased by 20.0% from As. 7,890.70 million in FV17 to As. 9,468.56 million in FV18.

Aevenue per Available Seat Kilometer AASK increased by 6.0% from As. 3.44 in FV17 to As. 3.64 in FV18, driven by an increase in yield by 2.6% and a 2.6 point increase in load factor.


Total expenses increased by 21.0% from As. 1 72,252.30 million in FV1 7 to As. 208,410.66 million in FV18.

Aircraft fuel expenses: Aircraft fuel expenses increased by 22.4% from As. 63,415.13 million inFV17to As. 77,601.36 million in FV18, due to an increase in capacity and fuel prices.

Aircraft ownership cosl Aircraft ownership cost comprises aircraft and engine rentals, depreciation and net interest expense. Aircraft ownership cost increased by 7.7% from As. 32,965.08 million in FV17 to As. 35,501.43 million in FV18.

Employee benefits expense: Employee benefits expense increased by 19.9% from As. 20,481.90 million in FV1 7 to As. 24,550.22 million in FV18.

Other expenses: Other expenses increased by 27.4% from As. 47,985.83 million in FV1 7 to As. 61,1 38.76 million in FV18.

Cost per Available Seat Kilometre (CASK): CASK increased by 3.5% from As. 3.04 in FV17 to As. 3.1 5 in FV18, primarily driven by an increase in fuel prices and maintenance cost. Profit after Tax increased by 35.1 % over the last fiscal year to As. 22,423.74 million.

Balance Sheet During the year, the Company successfully completed an Institutional Placement Programme or IPP to comply with the minimum public shareholding requirement. The IPP has resulted in a fresh issue of 22.4 million shares, taking the total number of shares outstanding to 384.4 million asof March 31,2018. Our total cash increased by 46.7% to As.137,082.56 million as of March 31,2018, comprising free cash of As. 70,586.64 million and restricted cash of As. 66,495.92 million. Total debt for the Company reduced by 5.5% to As. 24,527.21 million as of March 31,2018.

: Opportunities, Threats, Risks and Concerns

The Indian aviation industry is expected to continue to grow at a robust pace based on several factors including strong economic growth, continued population growth, expansion of middle class, strong growth in tourism, increased aircraft penetration from current levels and expansion of aviation infrastructure. In addition to these, exploring the untapped markets of Tier 2 and Tier 3 cities and the long haul opportunity provides the added stimulus to the existing levels of opportunity.

While we believe that our structural cost advantages gives us the ability to withstand various challenges, our profitability is dependent upon certain external factors. Below are some of the risks that are considered to potentially have an adverse impact on our business, financial results our future outlook.

a. Inability to strengthen the organisation to efficiently manage larger operations

Certain functions of the airlines business require deep functional expertise acquired over decades working in "smart" airlines globally. Hence, we seek to continuously add such professionals to manage our ever larger operations.

b. Airport Infrastructure constraints and increased airport costs in India As we expand our fleet, our future growth is dependent on adequate airport infrastructure in India to support our operations. Non-availability of terminal space, slots and aircraft parking and increasing cost of airport landing and departures may adversely affect our operations. While some of the key metro airports are slot constrained, the Governments initiatives towards the construction of a newer runway or terminals may ease some of these constraints. Up gauging with H321 neos is expected to further help in slot maximisation.

c. Operational issues with our new A320neo aircraft and engines

W have experienced operational issues with our fl320neo engines, which has adversely impacted our operations. These operational challenges have required the engine supplier to deliver upgraded engines and provide spare engines in the interim to reduce operational disruptions.

d. Non-availability of fuel and exceptional variation in fuel prices

Aircraft fuel expenses continue to be the single largest expense of our total cost. Availability and price of fuel cannot be accurately predicted because of several economic and political factors and events that govern them.

Our operating results could be negatively impacted by any adverse movement in aircraft fuel prices.

e. Adverse movement in foreign exchange as most of the expenses are exposed to foreign exchange rate risk Several cost items including aircraft and engine lease rentals, aircraft and engine maintenance and aircraft insurance are denominated in foreign currency and any adverse movement in foreign exchange may negatively impact our profitability. Further, we may not be able to pass the increase in cost to our customers through higher fares, resulting in decreased profits.

f. Competition in the airline industry

The airline industry is highly competitive. We face intense competition from other low cost carriers as well as full-cost carriers that operate on our routes.

We may also face competition from airlines that could be established in the future.

g. Changes in Government regulations

The civil aviation industry in India is regulated by the Ministry of Civil Aviation (MoCA), the DGCA and the Airports Authority of India (AAI). The regulations are extensive, complex and cover all major aspects of operations, including basic licenses, aircraft acquisitions and routing. Any changes in regulations, or the imposition of additional restrictions and conditions, can affect our business and operations.

Internal Control Systems and their Adequacy

Our internal control procedures are adequate to ensure compliance with various policies, practices and statutes in keeping with the organisations pace of growth and increasing complexity of operations. We have in place systems and processes commensurate with our size and nature of business and we maintain a system of internal controls designed to provide reasonable assurance regarding the following:

• Effectiveness and efficiency of operations

• Adequacy of safeguards for assets

• Prevention and detection of frauds and errors

• Accuracy and completeness of the accounting records

• Timely preparation of reliable financial information

An independent internal audit is carried out to ensure the adequacy of the internal control system and adherence to policies and practices. The scope of internal audit activity is guided by the internal annual audit plan, which is approved by the Audit Committee of the Board. The Audit Committee reviews reports submitted by the independent internal auditor and monitors follow up and corrective action taken.

Human Resources

At IndiGo, we have laid a foundation that emphasises on people. This has helped us create an environment where employees thrive to deliver an exceptional customer experience. We have extended our work culture from beyond what we offer to our customers to a larger audience including our employees. Our Company has invested into training and learning Si development of employees on a regular basis through a state-of-the-art learning academy, 1 ifly. As of March 2018, we had 18,060 employees on the Companys rolls comprising of 2,349 pilots and 4,635 cabin crew. Through our talent retention and acquisition efforts, we have been able to hire sufficient pilots and cabin crew to keep pace with our expansion plans.