Q4FY23 Review: InterGlobe Aviation: Good results in seasonally weak Q4; Outlook +ve

19 May 2023 , 11:35 AM

Indigo’s Q4 results, although slightly lower than estimates (3% Ebitdar miss), were strong for the seasonally weak quarter. The fall in yield (-10% QoQ) was higher than analysts of IIFL Capital Services estimate. However, yield should inch up QoQ in Q1FY24. When combined with sharp fall in ATF and potential increase in load factor (lower industry capacity), profitability should improve substantially. Overall industry outlook is quite positive with strong demand, falling fuel cost and favourable competitive environment. There is scope for Indigo to improve its market-share further.

Q4 Ebitdar 3% lower than estimates: 

Q4 revenue grew 77% YoY and dropped 5% QoQ, largely in line with analysts of IIFL Capital Services estimates. Yield increased 10% YoY but contracted 10% QoQ. While QoQ fall in yield was expected, the extent was higher. As a result, Ebitdar missed our estimate by about 3%. Indigo reported a profit of Rs9.2bn; this is the highest-ever profit reported in the seasonally weak Q4.

Well-set for strong growth in FY24: 

Mgmt. guided for “higher than mid-teens” capacity growth in FY24. Indigo plans to add 40-50 aircraft to its current fleet of 304. They forecast 15% volume growth for the industry. Analysts of IIFL Capital Services industry forecast implies daily traffic of 430k per day in FY24; current daily passenger volumes are almost at the required rate. With YoY drop in Go First and possibly SpiceJet’s capacity, there is a strong case for Indigo to gain further market-share. Indigo is also planning to scale up its international operations at a fast clip, which would contribute to overall growth. As a result, analysts of IIFL Capital Services forecast 20% volume growth for Indigo.

Margin outlook positive with strong volumes, higher load factor and fall in fuel cost: 

Due to YoY drop in Go First and SpiceJet’s capacity, industry-level load factor may increase. While Crude has fallen, the Crude-ATF spread has also narrowed substantially. Current ATF price of Rs95 per litre is 15% below the average in Q4FY23. Analysts of IIFL Capital Services are conservatively basing their forecasts on ATF of Rs106 in FY24. Their yield assumptions for FY24 (-4% YoY) are also conservative, as they build in some room for carriers to pass on part of the fuel cost benefit to customers.

Analysts of IIFL Capital Services FY24/FY25 EPS estimates are largely unchanged. Indigo generated Rs63bn FCF (excl. restricted cash) in FY23; they expect FCF to stay strong in coming years. Retain BUY with TP of Rs2,750.