INDIGO recorded subdued performance in 4QFY22. Its revenue increased by 29% YoY (down 14% QoQ) to Rs80.2bn vs. our estimate of Rs81.9bn, as capacity increased by 6% YoY due to easing of flight capacity restrictions. PAX yields came in at Rs4.4 (up 19% YoY and flat QoQ). Passenger revenue grew by 38% YoY (down 15% QoQ), while ancillary revenue grew by 19% YoY (down 7% QoQ). CASK for the quarter stood at Rs4.79 (up 24% YoY and up 19% QoQ), while RASK stood at Rs3.97 (up 22% YoY and down 3% QoQ). PLF increased by 6.5 p pts YoY to 76.7%. It reported an EBITDAR of Rs1bn (down 83% YoY and down 85% QoQ) and EBITDAR margin of 1.3% (down 861bps YoY and down 1,921bps QoQ), due to sharp jump of 61% YoY in ATF prices. INDIGO recorded a net loss of Rs16.8bn as against net loss of Rs11.5bn in 4QFY21 and Rs1.3bn net profit in 3QFY22 (vs. our estimated net loss of Rs13.3bn), impacted by forex loss of Rs6.1bn. Excluding forex loss, adj net loss stood at Rs10.7bn. We expect a strong revival in the air passenger traffic over the next 2 years and factor 35% CAGR in ASK over FY22-FY24E (vs. 12% CAGR over FY18-21), and an improvement in EBITDAR margin by 2,460bps over FY22-FY24E. We believe that INDIGO’s strong cash position would help in sustaining its market share along with pricing power, going forward, which would drive its overall profitability. Rising Yield and pricing discipline would support turnaround despite higher fuel prices. We expect fuel prices to normalise by 2HFY23E. It is the best play to capitalize in the fastest-growing Indian aviation sector. We maintain our BUY rating on INDIGO, with a revised Target Price of Rs2,550 (vs. earlier Rs2,750).
Improving Load Factor and Higher Yield to Aid Profitability
The aviation industry has witnessed a remarkable jump in load factor as well as higher capacity deployment post government’s relaxation on pandemic norms. Moreover, all players witnessed a stable improvement in yield in 4QFY22. The management has guided for ~2.5x growth in ASKs in 1QFY23 and ~50-60% growth in FY23E which offers comfort. We believe that the recent trend of increasing cargo traffic for Indian players would cushion the overall profitability. We expect cargo movement to record a double-digit growth over the next 2-3 years. International passenger traffic would rise with the government allowing international scheduled flights at FY22-end, vaccination coverage and acceptance by many overseas markets. Air fare has increased significantly in last one year and we expect it to remain firm on the back of strong pent-up demand, increasing leisure travel and corporate booking surpassing pre-Covid level. We believe that the improving affordability and pent-up demand of last 2 years would emerge as a strong travel demand in coming months, and we expect a spike in air travel in FY23. INDIGO, being the market leader, would enjoy this benefit, which in turn shall result in a turnaround in FY23, though we expect higher losses for 1HFY23 due to ongoing challenges. The steady improvement in profitability would result in the net worth turning positive in FY24.
Outlook & Valuation We expect a strong revival in air passenger traffic over the next 2 years and factor 35% CAGR in ASK over FY22-FY24E (vs. 12% CAGR over FY18-21). Considering lower fleet addition, we decrease our revenue estimates by 1%/5% for FY23E/FY24E. We expect the higher fuel prices to impact the company’s performance going forward, hence we reduce our EBITDAR and PAT estimates by 7%/6% and 29%/7% in FY23E/FY24E, respectively. Considering the strong market share position, undisputed leadership, best cost structure and potential in the fastest-growing aviation sector, we maintain our BUY rating on INDIGO, with a revised Target Price of Rs2,550 (vs. earlier Rs2,750), valuing the stock at an unrevised EV/EBITDAR multiple of 7.5x FY24E.