IndiGo reported a decent quarter with revenues beating our estimates by 13%, driven by 5% higher RPKs and 7% higher yields.

Indigo reported better-than expected Q4FY20 earnings driven by higher yields and volumes. Q4 results are, however, not very relevant in the context of near-term uncertainties. We anticipate a longer drawn recovery with a large loss expectation for FY21E. Lack of clarity on demand revival drives our ‘sell’ rating. Roll forward to March 2022E drives a revised fair value of Rs 925 (Rs 900 earlier).

IndiGo reported a decent quarter with revenues beating our estimates by 13%, driven by 5% higher RPKs and 7% higher yields. Overall revenues were higher by `950 crore versus forecasts. Costs, however, remained elevated on account of higher maintenance expense for older A320ceo aircraft, and CASK ex-fuel ex-forex increased 19% y-o-y, resulting in only Rs 400 crore higher Ebitda. Despite good yields, loss of Rs 280 crore (excl forex loss) is representative of the difficult operating environment faced by IndiGo Q2FY20 onwards, primarily due to slow neo deliveries.

The management seeks to replace most of the current fleet of 123 A320ceo aircraft in the next two years, prompting us to believe that the current fleet count may not change much over FY21-22. Interestingly, the management also said it was not looking to negotiate terms with lessors and will continue to make timely payments. While surprising, this indicates that IndiGo may be availing of low/nil cancellation penalties and other benefits from lessors, and hence, does not want to change any existing lessor-lessee arrangement.

Current capacity utilisation is 20% of original capacity versus the permitted 33%. Capacity ramp-up will thus happen slowly with international (~25% of pre Covid capacity) to recover even more gradually. While we do bake in lower employee and other expense, we still arrive at a fairly sizeable loss estimate of Rs 7,300 crore for FY21. We assume some normalcy in FY22, though we expect capacity to still remain lower than FY20.

Steep decline in crude prices is a positive for the airline industry. IndiGo’s cash reserves of Rs 8,900 crore of free cash and Rs 11,500 crore of restricted cash provide comfort. We, however, remain cautious, given uncertainty of demand revival even once the pandemic is behind us. We roll forward to March 2022 and arrive at a new FV of Rs 925 based on 14XFY22 P/E.