Crude price drop unlikely to help IndiGo

ET Intelligence Group: In a capital-intensive industry such as aviation, fortunes of airlines are often linked to several external factors which are beyond their control.

The latest to mar the earnings prospects of the sector is the outbreak of Covid-19 and among the most vulnerable players is market leader Inter-Globe Aviation, which has close to 48 per cent share. Despite a sharp drop in crude oil prices, a positive for the sector which spends over 40 per cent of revenue on fuel costs, analyst expect grim earnings forecast for the airline as the virus outbreak affects passenger traffic.

InterGlobe, which runs IndiGo airline, had aggressively expanded capacity by 30 per cent in FY19 given the 18-25 per cent increase in the passenger traffic till January 2019. However, passenger growth fell to single digits in subsequent months forcing the airline to cut its capacity guidance to 22 per cent from 25 per cent for FY20. Analysts estimate a 5-7 per cent drop in domestic passenger traffic and 19-25 per cent fall in international traffic for the first quarter of FY21 due to the pandemic. They have also cut earnings estimates of airlines for the next two fiscals by 20-50 per cent.


In the coming quarters, notwithstanding the lower crude oil prices, stagnant passenger growth, working capital and other expenses may put pressure on IndiGo’s balance sheet. At the end of the December 2019 quarter, the company had total cash of Rs 20,068 crore and debt of Rs 21,555 crore.

According to Centrum Institutional Research, InterGlobe is expected to report total expenses of nearly Rs 32,000 crore and net revenues of nearly Rs 36,000 crore for FY20. The lower passenger traffic is likely o affect the cash generation in the coming quarters, the firm said.