IndiGo turns it around home and away, and Street likes it

ET Intelligence Group: After a fall of about 17 per cent in the past one year until February, the stock of InterGlobe Aviation, the owner of the low-fare airline IndiGo has climbed 27 per cent in the past one month.

This dramatic change in the stock’s trajectory indicates sustainable and massive earnings growth in an industry where competition would likely trail the biggest carrier by market share.

This is also reflected in the earnings upgrades at the airline. Analysts have upgraded the EPS estimates for the next two fiscals — in the range of 17-85 per cent.


This optimism is an outcome of two key factors. First, it is set to benefit hugely in the local skies. Second, there has been a turnaround in its international operations as well.

In the past one-and-a-half years, IndiGo added more capacity than peers. In February, its share in the industry’s total capacity was 44.5 per cent. In 2019, IndiGo’s capacity is estimated to increase by a fourth, while the industry’s capacity would climb 19 per cent.

In the next two fiscals, IndiGo’s revenue available seat kilometer (RASK)—a variable indicating airline profitability — is expected to climb by 5.5 per cent, while for SpiceJet and Jet Airways, it is in the range of 3.8-5 per cent. This growth in RASK will have more significant impact on IndiGo’s earnings than on its peers, considering its dominant market share, highest capacity in the industry and the recent increase in airfares.

Furthermore, IndiGo gained from the recent grounding of the fleet (Boeing Max 737) at its peers. This is one of the reasons that within a month, its market share improved by 0.5 per cent to 43 per cent in February. It is expected to continue to gain market share in March also.

IndiGo has replicated its domestic strategy on its international routes (short-haul destinations). In the past one year, IndiGo recorded average passenger growth of 48.2 per cent on international routes.

In the same period, its peer Jet Airways’ passenger traffic on international routes declined by 1.3 per cent while for low-fare rival Spice-Jet it grew by 15.5 per cent.

IndiGo has gained market share on the Middle East and Southeast Asian routes. In the next three years, it plans to add 20-30 per cent additional capacity on international routes.

Jet’s financial worries have helped IndiGo log market share gains — both domestically and internationally — and boost its earnings prospects. In the past one year and since Jet Airways has grounded its fleet due to its inability to repay debt and other liabilities, IndiGo gained 6 per cent market share in the international markets to reach 21 per cent.

Analysts believe that interest in IndiGo’s stock is likely to increase in the coming months as they believe Jet’s revival plans appear tied largely to political considerations.

On the valuation front, considering FY20 earnings estimates, the stock of InterGlobe Aviation, or IndiGo, is trading at an EV/EBITDAR of 7.9, which is in line with its peers such as SpiceJet and Jet Airways. Given IndiGo’s strong earnings growth prospects in the next two fiscals, this valuation gap should widen.