InterGlobe Aviation: Sharp drop in industry growth

17 Nov 2023 , 01:41 PM

While fluctuations in monthly YoY growth is not abnormal, volumes have seen a sharp fall even on a SAAR basis. Nov is the first month in almost two years, where YoY growth in demand is less than the growth in supply. This would bring down load factor and possibly, put pressure on pricing. Analysts at IIFL Capital Services continue to like the industry for its long-term growth prospects and market-share consolidation. But they believe Q3 FY24 (seasonally strongest quarter) may not be as strong as earlier envisaged. They have cut their FY24/FY25/FY26 EPS estimates by 5%/10%/10%. Their Target Price of Rs. 3,000 is based on 8x 2YF Ebitdar.

Recommendation: Buy

Target Price: Rs. 3,000

Sharp deceleration in passenger traffic growth

Domestic passenger traffic has decelerated from +20% YoY in H1 FY24, to +10% October and +5% in November (estimated, based on first 2 weeks). Daily volumes have plateaued at ‘slightly above 400k per day’. Even on a SAAR basis (seasonally adjusted annualized rate), volumes have seen moderation. November SAAR is the lowest in 11 months. Analysts at IIFL Capital Services have cut their domestic industry forecast from 15% earlier to 12%, implying about 6% YoY growth in H2 FY24.

Fall in passenger traffic growth would hurt load factor, and possibly yields

November 2023 is the first month in almost two years, where YoY growth in demand (5% passenger growth) is less than the growth in supply (9-10% increase in flights). This would result in YoY drop in load factors, which in turn may result in fall in pricing power. Analysts at IIFL Capital Services now estimate November load factor at 84-85% versus 88% in Nov 2022. Indigo management had stated in its Q2 concall that October yield was down high single-digit % YoY, but were hopeful of better trends in November/December. That optimism may not pan out in reality.

Cut EPS estimates by 5-10%

Analysts at IIFL Capital Services are now building YoY decline in domestic load factor in Q3 FY24, which may also hurt pricing power and hence, yields. The fall in price of Crude/ATF may partly offset the impact. Yet, it results in 5%/10%/10% cut to IIFL’s FY24-FY26 EPS estimates. Weaker-than-expected Q3 may keep the stock range-bound in the near-term, especially as we head into the seasonally weaker Q4, and with engine inspections and aircraft grounding starting in January 2024.