Q2FY24 Review: InterGlobe Aviation: Strong Q2 despite weak seasonality

6 Nov 2023 , 03:33 PM

Indigo’s Q2 Ebitdar (adjusted for one-offs) came in 15% higher than analysts of IIFL Capital Services estimate due to higher volumes and lower costs. This is Indigo’s first profitable Q2 (seasonally weakest Q) since FY18. Mgmt. has guided for 25% YoY growth in capacity in Q3FY24. Although Oct was off to a slow start, mgmt. expects strong Nov/Dec in terms of occupancy and yield. Analysts of IIFL Capital Services largely maintain their FY24-FY26 earnings estimates following these results. The P&W engine issue may result in accelerated engine inspections over 8- 10 months starting Jan 2024. Mgmt. is hopeful of mitigating additional aircraft grounding through extension of existing leases and entry into additional leases. Indigo is likely to receive compensation from OEMs for losses incurred during this period. Reiterate BUY, with TP of Rs3,200. 

Q2 Ebitdar 15% higher than estimate: 

Indigo’s Q2 Ebitdar (adjusted for Rs6.5bn one-off gains and Rs6.2bn Fx MTM loss) came in at Rs23.6bn vs analysts of IIFL Capital Services est. of Rs20.6bn. Revenue came in slightly better than their estimate, while fuel cost and operating expenses (excl. one-offs) were slightly lower. As a result, Indigo was able to report a profit in Q2 (seasonally weakest quarter) for the first time since FY18. 

Q3 should be strong with seasonal pick-up in demand, pricing: 

Mgmt. guided for 25% YoY growth in capacity in Q3FY24. Oct was off to a slow start in terms of occupancy and yield (down high single-digit YoY), due to the shift in festive calendar. However, mgmt. expects improvement in Nov/Dec, which should help Q3FY24 yields to be flattish YoY. Q3 yields being flat YoY is in line with analysts of IIFL Capital Services erstwhile estimates, and an improvement compared to 12% YoY decline in yield in Q2FY24. 

Mgmt. plans to mitigate P&W engine inspections with additional aircraft leases: 

Currently, >40 aircraft are grounded due to supply-side issues. In addition to the above, mgmt. expects P&W engine inspections and shop visits for the “powdered metal” issue. These would be done over 250-300 days starting Jan 2024. This would lead to higher aircraft grounding. Mgmt. is planning to mitigate the above through extension of existing leases which are set to expire, damp leases of narrow bodies and short-term leases of used A320ceos. Indigo is likely to receive compensation from OEMs, for losses incurred during this period.