InterGlobe Aviation: Strong demand; falling costs; easing competition

4 May 2023 , 10:41 AM

Recommendation: Buy

Target Price: Rs 2,680

If Go’s capacity goes out of the system, industry-level load factor and pricing environment can improve substantially. There is also scope for Indigo to improve its market-share. Meanwhile, domestic demand scenario remains very strong; April average daily passenger traffic was at an all-time high. Crude is at a multi quarter low. Crude-ATF spread has also narrowed substantially in recent months. These bode well for margins. Indigo is one of IIFL’s top picks for 2023. Stock is cheap at 10x FY25 PE. 

Go First suspension of operations to take out 8% from domestic industry supply

Go First filed for insolvency resolution before the National Company Law Tribunal. Based on recent months (November 2022- January 2023), Go First had 8% market-share in the Indian domestic traffic and 5% share in international traffic (among Indian carriers). If Go’s capacity goes out of the system, industry-level load factor can theoretically go up by 6-7ppt, all else remaining same. This may also result in better pricing for other carriers. Overall, this should boost RASK substantially.

Domestic passenger traffic at an all-time high; well-placed for 15% growth in FY24

Domestic passenger traffic averaged about 430k per day in April 2023. This is much higher than the average of 373k passengers in FY23. Industry-level load factor is holding up above 85% in Q4FY23. IIFL Capital Services’ FY24 industry volume forecast is 155mn (15% growth over FY23). Current daily volumes (420k) are almost at the same level as the daily volumes implied by IIFL Capital Services’ FY24 forecast (423k).

Crude falling; Crude-ATF spread narrowing

Current crude price is 15% lower than the average in the last reported quarter (Q3FY23). In addition, the spread between Crude and ATF has narrowed. As a result, current ATF price is 20% below Q3FY23 average. Fuel being about 40% of revenue, it implies that carriers can cut fares by 8% versus Q3FY23 (to support volumes), without impacting per unit profitability. IIFL Capital Services’ base case estimates build in Crude assumption of USD85. If Crude stays here, analysts at IIFL Capital Services see upside to their earnings assumptions.