Markets
IndiGo’s Q1 is stellar, but the skies are turbulent
Summary
IndiGo expects yield to sequentially drop in mid-teens range this quarter. In Q1, while yield rose 6.8% sequentially to ₹5.18, it was down 1.2% year-on-year. Adding to the woes is the rise in prices of aviation turbine fuelInterGlobe Aviation Ltd. began the new year on a strong note, clocking record revenue and profit for the quarter ended June (Q1FY24). But the outlook is cloudy, as headwinds loom for the company that runs IndiGo airline, India’s largest by market share.
In its Q1 earnings call, IndiGo’s management said that some of its aircraft would be grounded as Pratt & Whitney has recalled certain engine models for testing. As things stand, grounded aircraft as of now number 40 due to supply chain issues.
Also, the September quarter is seasonally weak, thus weighing on yield, a measure of pricing. “According to our airfare tracker, the 30-day domestic forward prices are down 15% quarter-on-quarter in Q2FY24 till date and the 15-day prices are also down 15% quarter-on-quarter during the same period," said analysts at Motilal Oswal Financial Services in a report on 3 August. The same for IndiGo is down 10% for 30-day domestic forward booking, and down 11% for 15-day domestic forward booking, they added.
IndiGo expects yield to sequentially drop in mid-teens range this quarter. In Q1, while yield rose 6.8% sequentially to ₹5.18, it was down 1.2% year-on-year.
Adding to the woes is the rise in prices of aviation turbine fuel (ATF). “We cut our Ebitdar (earnings before interest, tax, depreciation, amortization and lease rentals) estimates by about 7% each for FY24/FY25E as yields are witnessing higher pressure on sequential basis (as compared to past) while ATF prices have increased by about 11% in last 2 months," said analysts at Prabhudas Lilladher in a report on 2 August. In Q1, IndiGo’s Ebitdar margin was at 31% versus 20.4% in Q4.
Against this backdrop, shares of IndiGo fell more than 3% on Thursday on the National Stock Exchange. However, there are bright spots. The airline has guided for a 25% year-on-year and a 6% sequential growth in capacity in Q2. Also, passenger load factor is expected to increase year-on-year. This measure was strong in Q1 at 88.6%. The suspension of Go First’s operations helped IndiGo’s load factor.
Meanwhile, given IndiGo’s strong liquidity position, the airline plans to invest in some aircraft and related assets.
It augurs well that the demand environment is robust, but one needs to keep an eye on the competitive intensity. “Despite the positive outlook and strong current demand in India’s aviation industry, we still see several challenges to be addressed, making it not yet a perfect picture for IndiGo," said the Motilal Oswal report. The broking firm has a Neutral rating on the IndiGo stock.
Shares of IndiGo are down nearly 10% from their 52-week high of ₹2,745.10 apiece seen last month.
