InterGlobe Aviation Slumps To 16-Month Low After Earnings Letdown Triggers Price Target Cuts
IndiGo’s first quarter net profit plunged 97 percent due to higher fuel cost, lower yields, rupee depreciation and other expenses.
Shares of InterGlobe Aviation Ltd. fell as much as 10 percent to Rs 904, a 16-month low for the stock, as brokerages cut their price targets by up to 22 percent on the owner of IndiGo Airlines after a disappointing first quarter earnings.
India’s largest air carrier’s first quarter net profit plunged 97 percent to Rs 28 crore due to higher fuel cost, lower yields, rupee depreciation and higher other expenses.
Key Q1 Highlights
- Revenue rose 13 percent year-on-year to Rs 6,512 crore.
- Earnings before interest, taxes, depreciation, amortisation and rentals fell 47 percent to Rs 1,031 crore.
- Margin more than halved to 15.8 percent from 33.9 percent earlier.
Rising global fuel prices and foreign exchange losses hurt IndiGo in the last two quarters even as its passenger growth surpassed the industry’s average in June.
Yields Not Sustainable
In the conference call held post the earnings, the management reiterated that current yields are not sustainable given the rising input cost. IndiGo was forced to keep ticket prices at a lower rate because of pricing pressure in the industry which in turn impacted the yields of the company.
Other Key Takeaways:
- Facing shortages due to lack of spare engines.
- Lower yields had a negative impact of Rs 330 crore on net profits.
- Maintenance cost of older planes increased.
- Expect cost to come down as older fleet get replaced by new A320neos.
- Not yet decided when the A320neo buying programme will start.
IndiGo's profitability will remain under pressure for the rest of the fiscal year if jet-fuel prices stay elevated and competitive intensity in the Indian aviation market fails to recede, according to Bloomberg Intelligence’s Rahul Kapoor.
He wrote:
Improvement in passenger yields will hinge on industry actions to slow capacity addition and raise fares, as Indigo is currently forced to match competitors’ low pricing to remain competitive. Aggressive expansion will continue to pressure yields for the foreseeable future. Negative headwinds are only marginally cushioned by IndiGo’s tight cost controls.
Here’s what the brokerages made of IndiGo’s Q1 earnings:
SBI Capital
- Maintained Buy; cut target price to Rs 1,043 from Rs 1,324.
- Non-fuel cost pressures add to rising fuel costs.
- Yields in 0-15 days bucket continued to be weighed down.
- Sustained pricing pressure, high industry supply in near term to put pressure on profitability.
UBS
- Maintained Sell; cut target price to Rs 940 from Rs 1,040.
- Q1 net profit declines significantly on high fuel and other expenses.
- Continue to expect FY19 yield growth to be weak.
- Maintenance spend to remain high going forward in the near term.
- Cut FY19 and FY20 earnings per share estimates by 34 percent and 5 percent, respectively.
Motilal Oswal
- Maintained Neutral; cut target price to Rs 903 from Rs 1,132.
- Hit by a double whammy of crude and competition.
- Ticket yield down 5 percent in a seasonally strong first quarter.
- Cutting estimates by 27 percent for FY19 and expected pricing pressure in the second quarter.
JPMorgan
- Downgraded to Neutral from Overweight; cut target price to Rs 900 from Rs 1,150.
- Q1 earnings impacted on all fronts.
- Expect industry to either take up pricing or cut back on capacity addition.
- Lower pricing due to competitive intensity to pressure the stock near term.
- Sufficient levers to improve its cost base over medium to long term.
Citi
- Maintained Sell; cut target price to Rs 850 from Rs 1,070.
- Q1 results disappoint; revenue also below estimates.
- Overestimated first quarter yields.
- Appears that IndiGo continues to focus on market share rather than profitability.
- IndiGo will attract more flyers as a result of low fares.