InterGlobe Aviation: Early observations post Go First insolvency

24 May 2023 , 10:50 AM

Recommendation: Buy

Target Price: Rs. 2,750

Industry-level daily departures (capacity) have dropped by 5% in May versus April, contrary to typical seasonality. This should result in 3-4ppt MoM increase in load factor (occupancy). When combined with lower ATF (Q1FY24 is 13-15% lower than Q4FY23) and sequential increase in yield, analysts at IIFL Capital Services are looking forward to a very strong Q1FY24. They have reiterated their positive view on the industry with strong demand, low fuel costs and easing competitive intensity. Their FY24/FY25 EPS estimates are 44%/59% above Street.

Sharp rise in load factor after Go First ceased operations

Daily departures in May are down 5% versus April (lower capacity is positive). This is contrary to typical seasonality of May departures being 2-4% higher versus April. Go First’s flight cancellations have had a small impact on daily passenger traffic, with May tracking 1% lower than April. Overall, load factor in May would be 3-4ppt higher than April. Even before Go First filed for insolvency, the ~88% occupancy in April 2023 was near all-time high for the month of April. Load factor in May would be even better.

Industry on track to meet IIFL’s 15% growth forecast in FY24; load factor may see upside

Overall, analysts at IIFL Capital Services believe the industry volume forecast for FY24 (+15% YoY) is on track to be met, as daily traffic in May (424k) is within touching distance of our FY24 implied average of 430k. Load factor may see upside to their FY24 estimate of 85%. April 2023 industry load factor was at ~88%, while May would end up at 91-92%.

Q1FY24 profitability may turn out to be stronger than Q3FY23

Indigo’s management mentioned in its Q4FY23 con-call that Q1FY24 yields are better than Q4FY23 (seasonality). Analysts at IIFL Capital Services expect industry load factor to improve from 85% in Q4FY23 to 89-90% in Q1FY24. Lastly, Q1FY24 ATF price would be down 13-15% QoQ, given fall in Crude as well as narrowing of the Crude-ATF spread. Overall, they believe there is a potential for Q1FY24 earnings (excluding Fx) to be higher than Q3FY23 (seasonally strongest quarter). There were some concerns on Street with the QoQ drop in yields in Q4FY23 from the seasonal high of Q3FY23. Analysts at IIFL Capital Services see other factors (ATF, load factors) more than offsetting lower yields.