Analyst Corner: Retain ‘Reduce’ InterGlobe Aviation with Rs 1,200 TP

Although the vaccination program could boost demand a little but the Covid-19 spread is far wider this year.

Dense clouds in the sky: The Indian aviation industry is facing its most challenging period — demand has disappeared, recovery remains highly uncertain and macro factors continue to be unfavourable. Current traffic is down almost 83% from the recent peak in February 2021 and is at about 13% of pre-pandemic levels in 2019. April-June is usually the busiest quarter when the industry earns 45-50% of full-year profit, which will be wiped out this year.

The July-September quarter tends to be the weakest, which means we are not likely to see recovery until the October-December quarter at the earliest. Indigo said it is now exploring options to raise Rs 30bn. Indigo reported a cash burn rate of Rs 150m per day in the quarter to December, and we estimate its cash burn at Rs 70-75bn in FY21e.

Recovery remains uncertain: The trend last year suggests that recovery in demand could be delayed by at least 9-12 months. Although the vaccination program could boost demand a little but the Covid-19 spread is far wider this year.

The recovery last year was much stronger in tier-2 and tier-3 cities since the impact of Covid-19 was less there but the impact this year is much more severe across India. We expect around 80m domestic passengers in FY22e, down 44% from pre-Covid-19 levels. Most of the international borders remain closed, however European countries are considering opening borders to leisure travellers from the US and within Europe who have been vaccinated. However, European airlines see recovery in demand to/from Asia as at least a few quarters away.

Macro factors unfavourable: (1) The supply/ demand equation is highly unfavourable. While the fleet growth seems low, the industry is taking delivery of large-sized narrow body aircraft that means the capacity growth could still be in low double digits. On the other side, the jet fuel price has risen sharply, up almost 32% since the start of the year, while INR has depreciated against USD by c2% and is trading at 73.8. However, one-year forward INR/ USD is trading at 77.6 which could add significant pressure on costs.

Adjust forecasts, earnings momentum set to turn negative: We forecast Indigo’s net loss at around Rs 41bn in FY22e as we incorporate the latest demand trend while the consensus is far too bullish as it forecasts net profit of Rs 780m in FY22. So we believe that the earnings momentum is set to fall sharply and that could be negative for the stock.

Retain a Reduce rating. TP cut to Rs 1,200: Following changes to our forecasts, our TP moves down to Rs 1,200 (from Rs 1,430). Its net worth could turn negative soon. The company reported equity of Rs 18bn at the end of Sep 2020. It reported a loss of Rs 6bn in Q3 and we forecast its loss at Rs 9bn during Q4.