IndiGo: Lower yields clip wings in Q3


Pricing pressures weighed on InterGlobe Aviation Ltd’s (which runs IndiGo) financial results in the June and September quarters. They were expected to clip the airline’s wings in the December quarter (Q3) as well. While that has come through, the extent of decline in IndiGo’s yield is more than anticipated and that can come as a rude shock to investors.

For the December quarter, its yield dropped 16% year-on-year, more than the 11% decrease seen in the September quarter. Yield is passenger ticket revenue divided by revenue passenger kilometre. In fact, the spectacular increase in load factor to 87.3% during the December quarter compensates for the decline in yield only just a bit. Accordingly, IndiGo’s RASK declined 13% for the December quarter. RASK is total revenue net of finance income per available seat km.

Demonetisation did play a part. In a post-results conference call, IndiGo said yield declined 20% and 17%, respectively, in November and December, in the backdrop of demonetisation. Analysts hadn’t anticipated such a sharp fall in yields during those months.

Another factor that weighed on the airline’s profitability last quarter was high fuel costs. But there weren’t any nasty surprises on this front. Fuel costs expressed as a percentage of revenue increased to 33.5% from 27% in the previous year’s December quarter. Other expenses were higher too.

The upshot: IndiGo’s profit came in below Street expectations. Ebitdar declined 13.7% to Rs1,440.8 crore. The decline in Ebitdar comes despite the fact that operating revenue increased 16% (helped by better volume). Ebitdar stands for earnings before interest, tax, depreciation, amortization, and aircraft and engine rentals.

While the airline’s Ebitdar margin is sequentially higher, the measure declined to 29% for the December quarter from 39% in the same quarter in the previous year.

For the industry, passenger traffic growth is encouraging. Directorate General of Civil Aviation data shows that for calendar year 2016, passengers carried by domestic airlines increased 23% year-on-year.

Unfortunately for investors, pricing pressures are expected to continue. IndiGo says the yields performance in January is better than November and December. But that may not be enough to boost investor sentiment considering November and December were really tough months. Further, crude oil prices are relatively firmer and any increase would be detrimental.

Currently, one IndiGo share trades at 17 times estimated earnings for this fiscal year. The stock has underperformed the benchmark Sensex in the past six months. In the near future, given pricing dynamics, there is little to suggest a reversal of that trend.