Analyst Corner: Downgrade InterGlobe Aviation to ‘add’ with TP of Rs 1,800

Revenue progress during the quarter was spread among Rs 15.4bn in April, Rs 6.7 bn in May and Rs 9.6bn in June.

InterGlobe Aviation (IndiGo) remains one of the biggest potential beneficiaries of the eventual recovery of air traffic from the covid-induced depression. However, the impact of Covid 2.0 has been profound with average cash burn of Rs 334mn per day in Q1FY22. The total gross free cash balance has shrunk from Rs 71bn in Q4FY21 to Rs 56bn in Q1FY22, debt excluding capital lease obligation increased from Rs 41bn in Mar’21 to Rs 58bn in Jun’21, and the available untapped liquidity (SLB and credit lines) declined from Rs 45bn in Mar’21 to Rs 39bn in Jun’21. Proposed QIP (Rs 30bn) will be an incremental available fund. The cost structure remains competitive with induction of neos (44%/15% of fleet is A320/321 neos as of Q1FY22 and total neo share could rise to 90% by FY23-end). The cargo freighter initiative (A321 ceos) diversifies the revenue stream and can contribute materially to total revenues in FY23E. We adjust for the lower interest income (Rs 1.6bn in Q1FY22 vs Rs3.8bn in Q1FY21) and higher losses in full year FY22E. Downgrade to ADD (from Buy) with a revised target price of Rs 1,800 (earlier Rs 2,000) based on 20x FY23E EPS of Rs 90 (Rs 100 earlier).

Big impact of Covid 2.0 in Q1FY22: Revenue progress during the quarter was spread among Rs 15.4bn in April, Rs 6.7 bn in May and Rs 9.6bn in June. The July revenue trend has been similar to April. While visibility on international travel resumption remains unclear, management expects to return to pre-covid levels in the domestic segment by FY22-end.

The binary between huge profit and huge loss makes traffic recovery a vital investment thesis: IndiGo’s huge fleet (277 aircraft split between 122 A320 neos, 85 A320 ceos, 41 A321 neos and 29 ATRs) creates a massive fixed cost base, which will lead to huge cash inflows (profits and forward sales) when in operations and huge outflows when operations are suboptimal as seen in FY21. As such, traffic recovery is a big driver of earnings. Current total domestic daily passengers in July-TD is ~159k. Even with >250k per day, IndiGo made Rs 10bn loss in Q4FY21. Cash burn is therefore likely to continue in the near term, especially with a seasonally weak Q2 and higher crude prices.