InterGlobe Aviation: Demand strong, but ATF shock coming?

30 Aug 2023 , 11:13 AM

Recommendation: Buy; Target Price: Rs 3300

Domestic passenger traffic continues to remain strong, with Aug 2023 volumes likely to be up 24% YoY, and FY24 YTD volumes up 21%. Analysts of IIFL Securitieis industry volume growth estimate of 15% in FY24 is in the bag. They estimate load factor to bounce back to 86% in Aug, after a seasonally weak July (84%). Indigo’s market share has increased to ~63.5% in recent months, up from ~56.5% in FY23. Crude has rebounded from the low of ~$75 to ~$85; this is not a concern as analysts of IIFL Capital Services estimates build $85. The red flag for the industry is the sharp widening of ‘Crude-Jet Kero’ spread. This may result in double-digit % increase in the price of ATF on Sep 1, 2023, to add to the 9% MoM increase on Aug 1, 2023. In effect, this may push ATF price higher to the Crude equivalent of $95 vs low of $75 (June avg.). As a result, there is a possibility of Q2FY24 being a small loss for Indigo vs analysts of IIFL Capital Services earlier estimate of a small profit. 

Passenger traffic growth remains robust; load factor bounces back in Aug: 

Based on updates from The Ministry of Civil Aviation, analysts of IIFL Capital Services estimate Aug domestic passenger traffic at 12.6mn, up 24% YoY. Volumes are up 21% in the first 5 months of FY24, implying that analysts of IIFL Capital Services estimate of 15% growth for FY24 is likely to be achieved. Load factor has improved in Aug (86%) from seasonal low of 84% in July. Indigo’s domestic volume growth is much higher at 29% (Apr-Jul), resulting in sharp market-share improvement (~63.5% in recent months vs ~56.5% in FY23). 

Widening of ‘Crude-Jet Kero’ spread a concern: 

Although Crude price has rebounded from lows, it is not worrisome as analysts of IIFL Capital Services earnings estimates are built on an assumption of $85. However, sharp widening of ‘Crude-Jet Kero’ spread in the last 2 months is a big concern. While crude price has moved up from ~$75 to ~$85 in 2 months, the widened spread has the same effect as crude price moving from $75 to $95. This may result in double-digit % increase in the price of ATF on Sep 1, 2023. 

Retain estimates for now; Q2 may be a small loss for Indigo: 

A 10% increase in ATF price would be neutralised by a 4% increase in yield. Given the strong demand and low competitive intensity, analysts of IIFL Capital Services believe this is achievable. However, Sep is a seasonally weak month; it is even weaker this year due to the push-out of festive season into Oct. This may result in pricing shortfall in Sep, leading to Q2 being a small loss for Indigo, vs analysts of IIFL Capital Services earlier estimate of a small profit