Investors get off IndiGo on profitability concerns

ET Intelligence Group: Shares of InterGlobe Aviation, which runs IndiGo, fell 7.4 per cent on Tuesday, reflecting the Street’s increasing pessimism with India’s biggest airline by market share that seemingly failed to translate its robust industry position into stellar profits in the June quarter.

In the past few quarters, Indigo’s performance has been far from top notch. It has beaten consensus profit estimates on the Bloomberg only in two quarters in the past seven three-month periods.

Analysts say IndiGo is unable to translate its strengths — dominant market share, a light balance sheet and cost efficiency—into superior performance on key operational variables. Two key parameters — revenues and cost — reveal the operational challenges for the local aviation market leader.

On revenues, the airline has been reeling under extreme pressure from rivals, thwarted any material growth in yields. Analysts point out that in the 0-15-day ticket booking window, which forms 40 per cent of the yield, IndiGo is losing out to its peers. Consequently, as seen in the past few quarters, its yields have fallen in the June quarter also.

Yields fell 5.4 per cent to Rs 3.62 in the June quarter. Analysts have expressed their concern that considering the dominant market share of the airline, it should dictate yields in the industry instead of succumbing to the pressure from competition.

Furthermore, analysts have raised concerns over the airline’s plans to move partially from acquiring aircraft entirely on the sale and leaseback model to outright purchase. The airline’s sale-and-leaseback model has been one of the key strengths, helping it earn premium multiples.

On costs, analysts point out that IndiGo has been unable to rein in expenses. Its cost per available seat kilometres (CASK, ex-fuel)—a parameter which captures how efficiently an airline manages its costs-—increased 13.3 per cent in the June quarter. Also, its interest expense has risen by 41 per cent in the June quarter. As against the Bloomberg’s net profit estimate of Rs 514 crore, the airline posted a net profit of Rs 27.8 crore in the June quarter.

Analysts point out that in such an environment, the only trigger that could help re-rate the IndiGo stock is a pronounced improvement in ticket prices.