Interglobe Aviation rating: Retain ‘hold’ with target price of Rs 935

The company plans to operate 40% of capacity in Q2. (Image: Reuters)

Q1 loss worse than consensus, driven by weak demand; Q2 capacity guided at 40% but demand remains sluggish. Target to recapitalise and raise liquidity by Rs 50-60 billion seems sensible but bullish; we adjust our forecasts Hold; cut target to Rs 935 (from Rs 955); plans to raise liquidity and recapitalise are plausible, but road to recovery seems long.

A reported net loss of Rs 28 billion missed consensus of Rs 21 billion loss and our forecast of Rs 24 billion loss, driven by softer demand. The load factor and yield for the quarter were impressive, but distorted by repatriation and charter flights where the loads and yield would both be strong. Otherwise, demand remains relatively soft. Booking periods have been reduced to one-two weeks, which has made it difficult for the company to manage pricing and capacity. With a cash burn rate of Rs 300 million per day, liquidity declined by Rs 14 billion in the quarter, despite some cost cuts and deferred rentals.

The company plans to operate 40% of capacity in Q2 and around 60-70% in Q3 versus last year. However, it indicated that demand remains soft, which means even with the increase in size of operations, losses might not shrink significantly in Q2 versus Q1. On the fleet, it will continue to take delivery of new aircraft, but will try to shrink its fleet this year by returning more A320 CEO aircraft. The company also plans to increase liquidity by Rs 50-60 billion by deferring rentals, cutting costs and through the sale and lease-back of its owned aircraft.

The company is cutting its costs, which is the most obvious step to reduce losses. It also plans to raise liquidity by Rs 50-60 billion and recapitalise its balance sheet; we estimate its equity was Rs 30 billion at the end of Q1. So, while we think these steps are plausible in the current uncertain times, we see the liquidity target as too bullish and vague.