InterGlobe Aviation: Very strong long-term story

26 Mar 2024 , 02:31 PM

Analysts of IIFL Capital Services attended IndiGo’s Analyst meet on Friday. India’s Aviation sector has a long runway for growth, given low penetration of air travel and the Govt’s push to improve airport infrastructure, including increase in the number of airports. Large aircraft orders by Indian carriers demonstrate the confidence in the industry’s growth potential. IndiGo expects the industry (domestic + international) to grow 130% over FY24-FY30. Indigo is wellplaced to participate in this growth story, with its cost leadership, good fleet strategy and an unparalleled network. Although mgmt. mentioned that current demand is strong, analysts of IIFL Capital Services notice moderation in industry growth (domestic), from 20% YoY in H1FY24 to 9% in Q3 and 5% in Jan/Feb 2024. Mgmt.’s FY25 volume guidance of “early double-digit growth” reflects demand moderation and supply-side issues. Retain BUY with TP of Rs3,500.

Long runway for growth for the industry:

India’s domestic seats per capita stands at 0.13 vs China at 0.49 and US at 3.09. With continuous rise in per capita income and higher affordability for air-travel, the industry is poised for strong growth over the long term. The government is supporting growth with investment in airport infrastructure. The number of airports is likely to increase from 140 in 2019 to 220 in coming years. IndiGo expects the industry to grow 130% over FY24-FY30. Indian carriers placed orders for 1,124 new aircraft in 2023 (existing fleet ~750).

IndiGo well placed to participate:

IndiGo’s advantages range from its cost leadership, efficient operations/fleet strategy and its unparalleled network. IndiGo plans to expand its fleet from current 366 (incl. 70+ grounded) to 600+ aircraft by 2030. Analysts of IIFL Capital Services expect Indigo to maintain its leadership in domestic traffic (current mkt share 62%). In addition, IndiGo is growing its international ops at a fast clip, with 33 international destinations and strategic partnerships with 8 global carriers. Induction of XLRs would increase IndiGo’s flying range to mid-long haul markets.

Moderation seen in domestic traffic:

Growth in domestic traffic has moderated from 20% YoY in H1FY24 to 9% in Q3 and 5% in Jan/Feb 2024. Analysts of IIFL Capital Services believe this may be a result of weakness in overall consumption, and supply constraints in airline industry. This moderation is reflected in Mgmt.’s FY25 volume guidance of “early double digit growth”.