InterGlobe Aviation - Strong operational show on yield recovery

InterGlobe Aviation (INDIGO IN, INR 1,291, Hold)

InterGlobe Aviation’s (IndiGo) Q1FY18 EBITDAR (up 28% YoY) surpassed estimates by 9% on: 1) 4% better-than-expected yields - yields improved 2% YoY to INR3.83/km after the 11% YoY dip in FY17; 2) Robust RPKM growth (25% YoY) surpassed capacity addition (ASKM growth of 19%), driving 470bps YoY improvement in PLFs (at 88%); 3) Despite the sharp 16% YoY rise in fuel price, overall cost/ASKM growth was controlled at 1% due to induction of NEOs (15% more fuel efficient) and 2.6% lower cost /ASKM (ex fuel). Indigo plans to own more aircrafts, a shift from its earlier sale-and-lease model, which could potentially result in cost benefits. We expect robust 27% EBITDAR CAGR over FY17-19 and raise FY19E EV/EBITDAR to 9.2x (from 8.0x), yielding target price of INR1,330. Maintain ‘HOLD’.

Yields recovered, costs contained

Passenger revenue grew at robust 28% YoY to INR51bn, driven by 25% YoY spurt in RPKM and 2% YoY improvement in passenger yields. ASKM grew 18.7% lower than the 22% guidance, due to delays in delivery of A320 NEOs (22 delivered versus 36 expected) and grounding of NEO aircrafts due to engine related issues. As volume growth surpassed capacity addition, PLF improved 470bps YoY to 88%. Yields improved despite unfavourable base last year when the company shifted towards matching competition’s fare. On cost front: 1) fuel/ASKM grew by mere 8% YoY to INR1.19, despite the sharp 16% spurt in fuel price, as Indigo benefitted from fuel-efficient NEOs and opportunistic imports; 2) cost/ASKM (ex-fuel) fell 2.5% YoY due to higher aircraft utilisation and improved employee productivity. Highest-ever PAT, at INR8.1bn, jumped 29% YoY.

Shift from aircraft leasing to ownership; fleet guidance reduced

Indigo aims to own more aircraft, a shift from its earlier sale & lease model, which could potentially be cost competitive as observed globally. Dividend payouts could therefore get reduced to that extent. Management lowered its earlier FY18 fleet guidance due to engine issues with NEOs, but it expects strong 20% capacity addition over next 3 years.

Outlook and valuations: Growing profitably; maintain ‘HOLD’

We have raised FY18E EBITDAR by 9% on 6% higher yields, while maintaining FY19 estimates. We estimate robust 19% volume CAGR and improvement in yields, driving 27% EBITDA CAGR over FY17-19. We maintain ‘HOLD’.

InterGlobe Aviation - Strong operational show on yield recovery; result update Q1FY18; Hold

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