Sell InterGlobe Aviation, target Rs 850: Citi

Citi has a sell call on InterGlobe Aviation with a target price of Rs 850.

The current market price of InterGlobe Aviation is Rs 1,072.90.

Time period given by the brokerage is one year when InterGlobe Aviation price can reach the defined target.


View of the brokerage on the company:
July domestic passenger growth helped by a weak base — Domestic passenger traffic rose a healthy nearly 21 per cent YoY. We note that July’17 base was weak with nearly 12 per cent YoY growth (lowest growth in FY18). While it is difficult to guess exact fare patterns, we note that airline operators launched a series of attractive discounts and offers over June/July. We believe that lower fares could have also helped overall demand.

IndiGo’s market share rises — IndiGo’s domestic passenger market share was nearly 42 per cent in July, up nearly 340bps YoY, and nearly 80bps QoQ. We reckon that this could reflect: 1) no significant capacity addition by other leading players, 2) increase in IndiGo’s own fleet due to deliveries of A320neos.

How is the competitive intensity? — SpiceJet’s 1QFY19 yields rose nearly 3 per cent YoY vs nearly 5 per cent YoY decline in IndiGo’s 1QFY19 yields. SpiceJet’s EBITDAR/ASK declined nearly 31 per cent YoY vs nearly 55 per cent decline in IndiGo’s. We think that while competition is tough, IndiGo is focusing on market share even as profitability is being impacted. SpiceJet mgmt. has said that the company will add 11 Boeing 737 MAX and four Q400 aircraft by Dec’2018. This implies nearly 26 per cent addition to total capacity and nearly 31 per cent addition to the “larger” plane capacity. We think that SpiceJet, which is currently operating at nearly 94 per cent PLF and 12.3 per cent market share in the domestic sector (July’18) vs nearly 89 per cent PLF for IndiGo, could cut fares when the new capacity is absorbed.

We maintain Sell — We think that the recent uptick in IndiGo’s stock price primarily reflects market share gain expectations in the event of a significant decline in competition. We admit that crude prices have also cooled off slightly, but the sharp decline in INR more than offsets any positive impact on profits. ATF prices in August are up nearly 42 per cent YoY. Our negative stance on IndiGo is predicated on a steep decline in profits due to: 1) elevated cost pressures, and 2) weak pricing, esp with an increase in system-wide capacity.