Hold InterGlobe Aviation\, target price Rs 961: Edelweiss

Edelweiss has given a hold rating to InterGlobe Aviation with a target price of Rs 961. The share price moved up by 1.78 per cent from its previous close of Rs 1005.45. The last traded stock price is Rs 1023.30.

Interglobe Aviation (IndiGo) posted Q4FY20 net loss of Rs 8.7 billion against the brokerage estimate of Rs 9.7 billion loss) due to massive month to month loss on capitalised lease liability of Rs 10 billion. Adjusted for forex loss, EBITDAR at Rs 11 billion beat brokerage estimates of Rs 7.7 billion due to higher yield (up 1.2 per cent year on year) despite weak demand. Capacity growth slowed sharply in Q4FY20 (+4.1 per cent year on year) with FY21 guidance to be announced at a later date given demand uncertainty.

PLF fell to 82.8 per cent and management expects it to fall further due to weak demand rather than government-imposed restrictions. Yields beat estimates (up 1.2 per cent year on year) and should increase further in Q1FY21, partly offsetting lower PLF.

Cash reserves jumped to Rs 200 billion in FY20, significantly alleviating liquidity concerns. While the brokerage expects huge losses in FY21 due to lower PLFs and negative operating leverage, it is banking on a recovery in operations in FY22. The current stock price is reflecting the same.

Investment Rationale

The brokerage says IndiGo is taking steps to rationalise costs--employee CASK is expected to fall 25 per cent due to salary cuts, while lease rentals are being negotiated downwards. Due to these measures, the brokerage expects non-fuel CASK to decline 10-15 per cent versus Q4FY20 level. Liquidity is not an issue, with cash accruals of Rs 50 billion in FY20 boosting reserves to Rs 200 billion.

Source: Edelweiss

Edelweiss says that while IndiGo losses will surge in FY21, the stock is pricing-in a recovery during FY22. IndiGo’s scale, so far an advantage, will not benefit it in the event of consolidation, due to antitrust concerns..

Hence, the brokerage maintains a hold rating with a target price of Rs 961/share (8 times FY22E EV/EBITDAR).

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 8299.06 crore, down -16.44 per cent from last quarter sales of Rs 9931.69 crore and up 5.27 per cent from last year's same quarter sales of Rs 7883.26 crore. The company reported net profit after tax of Rs -870.80 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 74.86 per cent stake in the company as of March 31, 2020, while FIIs held 13.59 per cent, DIIs 9.16 and public and others 2.39 per cent.