Aditya Ghosh’s exit from IndiGo a blip, use turbulence to buy

InterGlobe Aviation, parent of Indigo airlines, will witness the departure of its President and Whole-Time Director, Aditya Ghosh on July 31. The news took the investing community by surprise on Friday, resulting in the counter falling 6.7 percent. Rahul Bhatia, co-founder of IndiGo, will be its interim CEO. His departure comes at a time when the company is in the midst of changing its business model from leasing aircraft to owning them, operating a mixed instead of single fleet and looking for opportunities in low-cost-long-haul services.

Ghosh had been serving the airline for more than a decade. During his tenure, the company scaled new heights. It became a leader in the domestic skies, with 39.5 percent market share as of March. It achieved an eight-fold increase in topline in the last decade and added 161 aircrafts to its fleet from just 15 aircrafts in 2007.

Its passenger (pax) traffic saw close to 28 percent compounded annual growth rate (CAGR) over FY12-17 as against industry growth of around 10 percent on the back of its competitive priced, no-frill products, reach and on-time performance. IndiGo achieved a significant 27.3 percent CAGR in gross sales and 67 percent CAGR in profit-after-tax over FY12-17. Its earnings before interest, tax and depreciation (EBITDA) margin witnessed a huge 1,277bps expansion over the same period.

In terms of stock returns, IndiGo delivered a total return of 59.3 percent from its listing day (November 10, 2015) close of Rs 878.45 per share till Monday’s close of Rs 1,400 per share. This compares to a 36.6 percent gain on the Sensex over this period.

The journey has not been devoid of challenges. The recent being the Pratt & Whitney (P&W) engine issues on its newly inducted A320neo fleet which led to cancellation/rescheduling of several flights. The management also received a lot of bad press due to issues relating to manhandling of passengers.

Interim CEO Bhatia has announced the return of Greg Taylor as Senior Advisor to the company. The Board will consider his appointment as Chief Executive Officer (CEO) and President at it is yet to be announced meet. Interestingly, Taylor is not new to the company. In his earlier stint, he was Executive Vice President Revenue Management and Network Planning. Taylor has also been instrumental in shaping the future of United Airlines and US Airways.

With the promoter at the helm, finding the right fit for the airline should not be difficult. However, a short-term impact, especially on investor sentiment, cannot be ruled out. The stock has had a dream run and recorded 16.6 percent return year-to-date. With a strong business model in place and support from the promoter, the business should continue to remain on an even keel and not be impacted by this departure.

In terms of valuation, IndiGo continues to trade at expensive valuations. We advise investors to accumulate the stock on any lingering weakness or consolidation on this news.