An aircraft operated by IndiGo, a unit of InterGlobe Aviation Ltd., prepares to land at Chhatrapati Shivaji International Airport in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

IndiGo’s Profitability To Remain Under Pressure, Brokerages Say

Escalating costs will keep IndiGo’s margin under pressure for the rest of the year, according to brokerages.

InterGlobe Aviation Ltd., the parent of India’s largest airline, posted its first quarterly loss since listing, hit by rising fuel prices and a weaker rupee. The carrier was unable to raise ticket prices amid intense competition in the world’s fastest-growing aviation market.

IndiGo also withdrew the fuel surcharge introduced earlier due to intense competition, the management said in an analyst call. The current yields, which measures average earnings per passenger per kilometer, aren’t sustainable given the rising input costs, it added.

The recovery will hinge on jet fuel prices and currency volatility easing in the second half of the year, according to a Bloomberg Intelligence report. “The company’s lack of hedging strategy will remain an impediment to margin improvement.”

Key Earnings Highlights

  • Revenue rose 17 percent year-on-year to Rs 6,185 crore.
  • Earnings before interest, taxes, depreciation, amortisation and rentals fell 93 percent to Rs 111 crore.
  • Yields declined 10 percent to Rs 3.21.

Also read: India’s Largest Airline Just Got Bigger

Here’s what brokerages have to say about IndiGo:

SBICAP Securities

  • Maintains ‘Buy’ with a target price of Rs 881, implying a potential upside of 8 percent.
  • Sees limited visibility on improvement in pricing despite a seasonally strong third quarter.
  • Continued high industry supply in near term amid rising costs to put pressure on profitability.
  • ‘Buy’ only on improvement in industry pricing scenario which appears remote.

JPMorgan

  • Maintains ‘Neutral’ with a target price of Rs 900, a potential upside of 10 percent.
  • Price war led to higher-than-expected loss; competitive pricing may sustain for a couple of quarters.
  • Pricing growth may remain elusive until some consolidation takes place.
  • Sees downside risk to earnings estimates; stock may remain under pressure in near term.

Motilal Oswal

  • Maintains ‘Neutral’ with a target price of Rs 785, a potential downside of 4percent.
  • Ebitdar significantly below estimate due to lower yield, higher fuel and operating costs.
  • Expects IndiGo to continue facing pricing pressure in the next few quarters.
  • Cuts FY19 estimates on dismal operating performance and on expectations that it may continue.

Credit Suisse

  • Maintains ‘Neutral’ but cuts target price to Rs 940 from Rs 1,000—a potential upside of 15 percent.
  • Results may disappoint market, but are better than expected.
  • Remains watchful for continued yield pressure given aggressive capacity addition.
  • Cuts earnings per share estimates to factor lower yield, higher crude and weaker rupee.

Edelweiss

  • Maintains ‘Buy’ but cuts target price to Rs 1,073 from Rs 1,153—a potential upside of 31 percent.
  • Yield disappoints; forex and fuel impact compounds pressure.
  • Pricing pressure continues to persist, especially in the highly-profitable business segment.
  • Robust passenger growth leading to market share gains.

Watch IndiGo Q2 review here

Also read: Excise Duty Cut On Aviation Turbine Fuel To Benefit IndiGo The Most