Interglobe Aviation rating – Buy: Strengthened balance sheet augurs well

Even if there were to be a Covid impact in FY22 similar to FY21, IndiGo remains well placed in terms of cash on balance sheet.

InterGlobe Aviation (IndiGo) will remain one of the biggest beneficiaries of the eventual recovery of air traffic from the Covid-induced depression. Confidence in balance sheet has been significantly restored with availability of funds from QIP (Rs 30 bn), SLB and credit lines (Rs 45 bn) and the already-existing free cash of Rs 71 bn totalling to Rs 146 bn. This should help IndiGo sail through another challenging year in the event of a strong Covid hit akin to FY21.

The cost structure remains competitive with induction of neos (42%/14% of fleet is A320/321 neos as of FY21 and total neo share could rise to 90% by FY23-end). The cargo freighter initiative (A321ceos) diversifies the revenue stream and can contribute to total revenues in FY23. Upgrade to Buy (from Hold) with a revised TP of Rs 2,000 based on 20x FY23e EPS of Rs 100.

Confidence in balance sheet restored: Cash burn fell from Rs 300 mn per day in Q1FY21 to Rs 250 mn in Q2FY21, Rs 150 mn in Q3FY21 and Rs 190 mn in Q4FY21. However, there will be higher cash burn in Q1FY22 due to the Covid second wave. There are signs of the second wave receding and there is pick-up in vaccination efforts. Even if there were to be a Covid impact in FY22 similar to FY21, IndiGo remains well placed in terms of cash on balance sheet.

We factor in a Covid-hit FY22E and a normal FY23E: Compared to 46 bn ASK in FY21, we factor in 72/96 bn ASK in FY22e/FY23e (FY20 ASK was 96 bn) with PLFs of 80%/88% in FY22e/FY23e. We factor in RASK/CASK (including depreciation/interest) to move from Rs 3.72/3.74 in FY20 to Rs 4.24/3.89 in FY23e. We expect CASK (ex-fuel) to move from Rs 2.45 in FY20 to Rs 2.67 in FY23e. Ancillary revenues are likely to reach 18% of total revenues in FY23e driven by cargo initiatives, which has lifted our FY23 RASK estimates. While crude (factored in at $60/bbl for FY22e/FY23e) remains a risk, there could be higher RASK considering pent-up demand and no major aircraft addition over next 3 years in the overall system.

Upgrade to BUY with a TP of Rs 2,000 (Rs 1,515 earlier) based on 20x (unchanged) FY23E EPS (core EPS earlier) of Rs 100 (unchanged): We now base multiples on normal earnings and not core income (this excludes investment income). This is due to the strategic importance of cash in the business (even more after Covid) and the fact that SLB gains will largely flow through other income in the P&L apart from lower depreciation. Successive Covid waves and increase in crude prices pose risk to earnings.