InterGlobe Aviation: Well-placed for near-term and long-term

27 Mar 2023 , 10:07 AM

Recommendation: Buy

Target Price: Rs 2,680

Aircraft utilization (flying hours per day) may stay subdued in FY24 due to aircraft grounding (supply issues), but may normalize over the medium-term and would be an important earnings driver. Indigo plans to double its fleet size over 2023-2030, implying 2.4 jump in capacity (13-14% CAGR). India has a long runway for growth given low penetration of air travel and Government’s push to improve airport infrastructure. Indigo plans to grow its international capacity at a faster clip than domestic, with plans to induct wide-bodies in 2025 or beyond.

Long runway for growth

Indigo plans to double its fleet-size over 2023-2030. As current fleet utilization is only 80-85% of normal levels (due to aircraft grounding), 2x aircraft count implies 2.4x jump in capacity over 2023-2030 (13-14% CAGR). Domestic industry had grown at 14% CAGR over FY09-19. Air travel penetration in India is still low at 25% of China and 4% of USA (per capita basis). Government of India plans to increase airports from 140 currently to 220 by 2025. Indigo expects growth in its international capacity to be higher than domestic. International will increase from 23% of Indigo’s capacity in FY23 to 30% by FY25.

Growth expected to stay strong in FY24

Current industry demand is strong and on track to grow 15% in FY24. Indigo is targeting “north of high teens” capacity growth in FY24 and expects its passenger volumes to grow from ~85mn in FY23 to ~100mn in FY24 (IIFL estimate is 99mn). Indigo expects to end FY24 with a fleet size of 350 aircraft versus 306 at FY23-end. Aircraft utilization (flying hours per day) at the fleet level may stay below normal even in FY24 due to aircraft grounding (supply issues). Analysts at IIFL Capital Services expect normalization of utilization to be an important earnings driver in FY25.

Indigo to continue focusing on core LCC strengths

Indigo will continue to focus on its strengths namely, affordable fares, high on-time performance, courteous and hassle-free service and an unparalleled network. Management highlighted that Indigo is one of the best airlines globally on the above parameters. Indigo has one of the lowest CO₂ emissions amongst large global airlines.