Interglobe’s valuations face turbulence on weak show

ET Intelligence Group: The disappointing performance of Interglobe Aviation in the June quarter has prompted brokerages including Morgan Stanley, Edelweiss and Motilal Oswal to cut their target prices for the stock by 22-27%. The airline’s guidance for business and delivery of Airbus aircraft has not been encouraging.

Interglobe, which owns and operates Indigo Airlines, has acknowledged delay in delivery of Airbus aircraft due to engine issues and rising pressure on ticket prices due to fierce competition. This is reflected in the airline’s falling yield and load factor in the June quarter. Average fare fell by 10.9% to Rs4,032 year-onyear.

The load factor declined by 450 bps to 83.3%. In comparison, low cost carrier SpiceJet, recorded load factor of 92% in the quarter.



Some analysts point out that there is no trigger for renewed interest in the airline’s stock. An analyst with a leading brokerage said, “There is no valuation comfort in Indigo’s stock now. We think the best is already reflected in the stock. The airline may not be able to seek incremental market share given the stiff competition.”

Indigo had a market share of 38.4% at the end of the June quarter. Due to these factors, leading brokerages have cut EBIDTAR (earnings before interest depreciation tax amortisation and rentals) margin estimates for FY17 to 31.2-32% from 34.8% in FY16.

At CMP of Rs862.8, the enterprise value (EV) of Indigo is 8.1 times FY18 projected EBITDAR. This is 25-30% premium to its peers.