InterGlobe Aviation

Result review | Aviation | INDIGO IN

Institutional Equity Research | India

Hurt by ageing fleet, weak INR: Downgrade to HOLD October 24, 2019

 Higher costs for ageing fleet and MTM on forex liability mask Rat ing Target Price (Rs) Upside/ Downside (%)

yield and fuel CASK improvement; reports higher losses HOLD 1,450 (13)
 Impact on slowing economy shows up in domestic market; Change in Reco DOWNGRADE
International a big opportunity to be exploited
M a rk e t da t a
 Deteriorating cost structure, though not structural, will cap C urre nt pric e Rs 1,6 6 5
near-term earnings; Downgrade to HOLD with revised TP of M kt capit alisat ion USDm 9,047
Rs1,450 Average daily value 3M USDm 31.5
Free f loat % 25.1
Pricing remains supportive but cost rises sharply: Yield continues to trend high,
Promot er holding % 74.9
registering YoY growth of 8.3% to Rs3.52/RPKM. RASK, at Rs3.45, was up 4.3%
YoY. Fuel CASK continues to trend down, benefiting from fuel-efficient A320/1 Neos
and higher proportion of capacity on international (lower taxes on ATF). Despite this 1 Y e a r P e rf o rm a nc e
240
improvement, a significant c56% increase in employee cost to Rs12bn (up 24% YoY
to Rs0.50/ASKM) due to salary hikes and hiring of new pilots (those who were 200
undergoing training have not contributed to incremental ASKM), higher provision
towards maintenance of older aircraft and MTM losses for forex liability of USD2.4bn 160
resulted in a loss of Rs10.6bn compared to our/consensus loss estimate of
Rs1.9bn/Rs70mn. 120

Ageing fleet takes a toll on cost structure; to remain elevated for some time: 80
Citing the need to provide for the older A320 CEOs in the fleet (a lot of older aircraft Oct-18 Jan-19 Apr -19 Jul-19 Oct-19
were inducted during FY16-FY19 from the secondary market to meet capacity) IndiGo
witnessed a sharp jump in maintenance cost – from run-rate of US$564/hr to Inte rGlobe Aviation Nifty Index
US$835/hr (Exhibit 2). As IndiGo expects new aircraft deliveries from Airbus to be Source: Bloomberg, SSLe
more gradual, the management has guided for higher maintenance costs in FY20,
some moderation in FY21 and normalization only in FY22.
Domestic market softening; International still a big opportunity: The domestic
market, which benefited from Jet’s closure, has started showing initial signs of
softening. While H1FY20 was healthy with 10% YoY increase in yields, the ongoing
Q3 festive season has witnessed moderation. This despite continued benign capacity
growth in the market. The management attributed this to the broad-based economic
slowdown and higher LCC capacity that has replaced FSC capacity especially on
metro routes. The management, though, reiterated its focus on rapidly expanding the
international footprint with more than 50% of incremental capacity being deployed on
international routes. Moreover, the international market continues be short on capacity
after Jet’s closure and provides a significant opportunity for scale-up especially at a
time when yields across markets are looking up.
Valuation, catalysts and risks: While the domestic market quickly attains normalcy
IndiGo has set its eye on the international market, which continues to offer a good
potential from the vacuum created due to the consolidation. Although the deterioration
in cost structure is not structural it could remain elevated till Airbus is able to expedite
deliveries to replace IndiGo’s older fleet. Given the weak performance we recalibrate
earnings resulting in 41%/9% cut in our FY20/FY21e EPS. While we remain positive
on sector opportunities, the rising cost structure impacting earnings will cloud stock
performance until it starts normalizing. We downgrade InterGlobe Aviation to HOLD
with a revised TP of Rs1,450/share at 9x FY21e EV/EBITDA.

Financial Summary
Y/E Mar (Rs m n) FY18 FY19 FY20e FY21e
Net sales 230,209 284,968 380,572 463,240
EBITDAR margin (%) 28.5 16.8 17.7 20.2
Adjusted net profit 22,423 1,562 15,800 26,013
Free Cash flow 26,831 14,538 (149,194) 45,636
EPS (Rs) 58.3 4.1 41.1 67.7
growth (%) 32.4 (93.0) 911.7 64.6
P/E (x) 28.5 409.8 40.5 24.6
Santosh Hiredesai
P/B (x) 9.0 9.2 7.9 6.3
Analyst - Power, Aviation, Infrastructure
EV/EBITDAR (x) 12.0 18.0 13.9 9.1
+91 22 4227 3450
D/E 0.3 0.3 2.4 1.7
santosh.hiredesai@sbicapsec.com
RoE (%) 41.3 2.2 20.9 28.5
RoCE (%) 19.5 (2.4) 12.9 12.7 Chalasani Teja
Dividend yield (%) 0.4 0.3 0.5 0.8 Associate - Power, Aviation
Source: Company, SSLe +91 22 4348 7195
Note: prior period numbers are not as per new accounting standards chalasani.teja@sbicapsec.com
SBICAP Research on Bloomberg SBICAP <GO>, www.emis.com Please refer to our disclaimer given at the last page.
InterGlobe Aviation SBICAP Securities Ltd

Exhibit 1: Quarterly Financials

Y/E Mar (Rs m n) 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) 2QFY20e Var (%) Consensus
Net sales 81,052 61,853 31.0 94,201 (14.0) 86,708 (6.5) 84,814
Fuel cost 31,557 30,684 31,779 34,088
Employee benefits exp. 12,063 7,742 10,488 11,008
Other Expenses 36,464 24,577 25,411 31,362
EBITDAR 968 (1,149) (184.2) 26,522 (96.4) 10,250 (90.6)
EBITDARM (%) 1.2 (1.9) 28.2 11.8
Aircraft Lease Rentals 1,110 8,891 1,288 1,288
EBITDA (142) (10,040) 25,234 8,963 11,562
EBITDAM (%) (0.2) (16.2) 26.8 10.3
Depreciation and amort. 10,287 1,820 9,009 9,964
EBIT (10,430) (11,859) 16,225 (164) (1,001) 941.9
EBITM (%) (12.9) (19.2) 17.2 (1.2)
Other income 4,346 3,288 3,669 3,548
Interest expenses 4,235 1,300 4,842 5,149
Profit before tax (10,318) (9,872) 4.5 15,052 (168.6) (2,602) 296.6 1,298
Tax expense 302 (3,359) 3,048 (650)
Effective tax rate (%) (3) 34 20 25
PAT (10,620) (6,512) 63.1 12,004 (188.5) (1,951) 444.2 (70)
Minority Interest
Reported net profit (10,620) (6,512) 63.1 12,004 (188.5) (1,951) 444.2 (70)
Non-recurring items - - -
Adj. net profit (10,620) (6,512) 63.1 12,004 (188.5) (1,951) 444.2 (70)
NPM (%) (13.1) (10.5) 12.7 (2.3) (0.1)
EPS (Rs) (27.6) (16.9) 63.1 31.2 (188.5) (5.1) 444.2 (0.2)
Source: Company, SSLe

Per unit comparison 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) 2QFY20e Var (%)
Revenue 3.35 3.21 4.3 4.05 (17.3) 3.35 0.0
Fuel cost 1.30 1.59 (18.1) 1.37 (4.6) 1.32 (0.9)
Employee Exp 0.50 0.40 24.0 0.45 10.5 0.43 17.3
Other Expenses 1.51 1.28 18.1 1.09 37.9 1.21 24.4
EBITDAR/ASKM 0.04 -0.06 (167.0) 1.14 (96.5) 0.40 (89.9)
Lease rent/ASKM 0.05 0.46 (90.1) 0.06 (17.2) 0.05 (7.8)
Dep exp/ASKM 0.43 0.09 350.0 0.39 9.8 0.38 10.5
EBIT/ASKM -0.43 -0.62 NM 0.70 (161.8) -0.04 10.0
Interest/ASKM 0.17 0.07 159.2 0.21 (15.9) 0.20 (12.0)
PBT/ASKM -0.43 -0.51 (16.8) 0.65 (165.9) -0.10 324.3
Source: Company, SSLe

Operational snapshot 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) 2QFY20e Var (%)
ASKMs mn Kms 24,200 19,263 25.6 23,261 4.0 25,894 (6.5)
RPKMs mn Kms 20,200 16,284 24.0 20,686 (2.3) 21,890 (7.7)
Passenger Load Factor % 83% 85% (1.1) 89% (5.5) 85% (1.3)
Passengers (mn) 18.3 15.5 17.8 18.7 (2.3) 19.7 (7.3)
Source: Company, SSLe

santosh.hiredesai@sbicapsec.com I chalasani.teja@sbicapsec.com October 24, 2019 | 2

InterGlobe Aviation SBICAP Securities Ltd

Exhibit 2: Maintenance cost up from US$564/hr in Q2FY19 to US$835/hr in Q2FY20

900 835

675
675 608
564
($/hr)

450

225

0
Q1 Q2
FY19 FY20
Source: Company, SSL

Exhibit 3: Change in estimates - IndiGo

Revised OLD Change(%)
(Rs m n)
FY20e FY21e FY20e FY21e FY20e FY21e
Sales 380,572 463,240 384,633 450,090 (1.1) (15.4)
EBITDAR 67,491 93,497 90,178 105,986 (25.2) (36.3)
EBITDAR margin (%) 17.7 20.2 23.4 23.5 (571) bps (336) bps
Adj PAT 15,800 26,013 26,853 28,601 (41.2) (9.0)
EPS (Rs/ Share) 41.1 67.7 69.9 74.4 (41.2) (9.0)
Source: SSLe

Valuation
Com m ents FY21 value Multiple (X) Total Value Per Share
EBITDA 93,497 9.0 841,471 2,189
Less: Net debt 284,108 739
Equity value (INR m n) 557,363 1,450
Source: Company, SSLe
Note: We have assumed higher debt considering the need to keep renewing/signing the/new leases as
ongoing basis

santosh.hiredesai@sbicapsec.com I chalasani.teja@sbicapsec.com October 24, 2019 | 3

InterGlobe Aviation SBICAP Securities Ltd

Concall takeaways
Financial performance
 IndiGo reported a net loss of Rs10.6bn in the seasonally weak quarter for the industry.
The loss was driven by cost headwinds such as
o MTM loss due to capitalization of operating lease liabilities: During the quarter,
the rupee depreciated from Rs68.90/$ to Rs70.71/$; as a result, the company had a
negative impact of Rs4.3bn on MTM of the capitalized operating leases
o Reassessment of accrual estimates for future maintenance cost - Rs3.2bn of
supplementary lease rentals due to existing old aircraft and 50 used aircraft from the
secondary market. Further, the management has guided for it to be similar in the next
2 quarters.
o One-time adjustment owing to adoption of lower tax rates
 IndiGo reported an EBITDAR of Rs2.6bn with an EBITDAR margin of 3.2% compared to
an EBITDAR of Rs2.2bn with an EBITDAR margin of 3.6% during Q2FY19.
 All the mentioned cost items are non-cash in nature and do not reflect on the cash flows
the company generates
 Excluding the impact of these cost items, the loss before tax would have been Rs2.8bn, a
significant improvement over the Rs9.9bn loss the company posted in the same period
last year.
 During H1FY20, post servicing the debt and lease obligations, IndiGo has generated a
very healthy cash of Rs33bn through operating activities.
 The company has guided for flattish YoY unit revenue performance in Q3FY19. The
management mentioned that it was seeing declines in yield in metro-to-metro markets
where LCC players have replaced former Jet airways (FSC) capacity and a stronger
performance in cities where Jet had had no presence.
 RASK for Q2FY19 was Rs3.42/ASKM compared to Rs3.23/ASKM during Q2FY19, an
increase of 5.7%.
 For the quarter, the yields increased by 9.4% to 3.52 rupees while PLFs were down by 0.9
points at 83.5%
 Fuel CASK decreased by 17.3% YoY compared to 8.7% decrease in ATF prices on a YoY
basis
 CASK for the quarter was Rs3.85/ASKM compared to Rs3.74/ASKM during the same
period last year, an increase of 2.8%.
 CASK ex fuel was Rs2.56/ASKM, an increase of 17.2% from the same period last year.
Excluding the impact of MTM loss on capitalized operating leases and reassessment of
accrual estimates for future maintenance cost, CASK ex fuel would have increased by
3.1%. This CASK increase was primarily driven by higher employee cost and lower aircraft
utilization.
 Balance sheet continues to be strong, cash balance at the end of the period was Rs187bn
comprised Rs87bn of free cash and Rs100bn of restricted cash.
 The capitalized lease liability by end of Q2FY20 is Rs175bn. Total debt, including the
capitalized lease liability, was Rs198bn.
Operational performance:
 IndiGo has opened seven new domestic stations and entered six new international
markets.
 Cargo has maintained its rapid growth during the quarter in both domestic and
international sectors. As per the DGCA reports, IndiGo now has 39% market share in the
domestic cargo business, a significant increase from 28% from the same period last year.
 International cargo capacity has grown by more than 80% YoY.
 IndiGo is now also focusing on inbound cargo business from Southeast Asia and the
Middle East
 In international markets, despite the significant increase in capacity, unit revenue is
holding up rather well, especially China performing well ahead of plan
 Jet Airways slots: Got 22 slots in Delhi, higher than SpiceJet but comparatively slightly
lower in Mumbai
Capacity guidance
 FY20, YoY capacity increase in ASKM is expected to be 25%.
 Q3FY20, YoY capacity increase in ASKM is expected to be 22%.

santosh.hiredesai@sbicapsec.com I chalasani.teja@sbicapsec.com October 24, 2019 | 4

InterGlobe Aviation SBICAP Securities Ltd

Financials
Income Statement Balance Sheet
Y/E Mar (Rs m n) FY18 FY19 FY20e FY21e Y/E Mar (Rs m n) FY18 FY19 FY20e FY21e
Net sales 230,209 284,968 380,572 463,240 Cash & Bank balances 65,806 86,064 105,829 117,889
growth (%) 24 24 34 22 Other Current assets 17,070 29,804 31,347 32,516
Operating expenses 164,542 237,028 313,081 369,743 Investments 63,440 65,167 65,166 65,166
EBITDAR 65,667 47,940 67,491 93,497
Aircraft Lease Rentals 36,102 49,994 2,398 0 Net fixed assets 45,642 56,536 189,757 183,296
Depreciation &amortisation 4,369 7,596 43,553 56,861 Goodw ill & intangible assets 471 321 321 321
EBIT 25,196 (9,650) 21,540 36,636 Other non-current assets 18,864 12,226 12,228 12,228
Other income 9,469 13,249 16,372 16,567 Total assets 211,293 250,117 404,647 411,416
Interest paid 3,398 5,090 18,763 18,520
Extraordinary/Exceptional items 0 0 0 0 Current liabilities 61,230 79,984 88,475 100,854
PBT 31,266 (1,490) 19,150 34,684 Borrow ings 22,414 21,937 197,089 171,729
Tax 8,843 (3,052) 3,350 8,671 Other non-current liabilities 56,875 78,748 37,638 37,638
Effective tax rate (%) 28.3 205 17.5 25.0 Total liabilities 140,519 180,669 323,203 310,221
Net profit 22,423 1,562 15,800 26,013
Minority interest 0 0 0 0 Share capital 3,844 3,844 3,844 3,844
Reported Net profit 22,423 1,562 15,800 26,013 Reserves & surplus 66,930 65,604 77,600 97,351
Non-recurring items 0 0 0 0 Shareholders' funds 70,774 69,448 81,444 101,195
Adjusted Net profit 22,423 1,562 15,800 26,013 Minority interest 0 0 0 0
Growth (%) 32.4 (93.0) 912 64.6 Total equity & liabilities 211,293 250,117 404,647 411,416
583 41 677
Key Financials ratios Cash Flow Statement
Y/E Mar FY18 FY19 FY20e FY21e Y/E Mar (Rs m n) FY18 FY19 FY20e FY21e
Profitability and return ratios (%) Pre-tax profit 31,266 (1,490) 19,150 34,684
EBITDARM 28.5 16.8 17.7 20.2 Depreciation 4,369 7,596 43,553 56,861
EBITM 10.9 (3.4) 5.7 7.9 Chg in w orking capital 15,097 (28,786) (34,163) 11,210
NPM 9.7 0.5 4.2 5.6 Total tax paid (8,843) 3,052 (3,350) (8,671)
RoE 41.3 2.2 20.9 28.5 Other operating activities (2,858) 51,228 2,390 1,952
RoCE 19.5 (2.4) 12.9 12.7 Operating CF 39,031 31,600 27,580 96,036
RoIC 31.4 1.9 10.7 12.9
Capital expenditure (12,200) (17,062) (176,774) (50,400)
Per share data (Rs) Chg in investments 578 (110,132) - -
O/s shares (mn) 384.4 384.4 384.4 384.4 Other investing activities (29,971) 101,833 16,372 16,567
EPS 58.3 4.1 41.1 67.7 Investing CF (41,593) (25,361) (160,402) (33,833)
FDEPS 58.3 4.1 41.1 67.7 FCF 26,831 14,538 (149,194) 45,636
CEPS 69.7 23.8 154.4 215.6
BV 184.1 180.7 211.9 263.3 Equity raised/(repaid) 25,076 - - -
DPS 6.0 5.0 8.2 13.5 Debt raised/(repaid) (1,879) (2,078) 175,153 (25,361)
Dividend (incl. tax) (2,776) (2,313) (3,803) (6,262)
Valuation ratios (x) Other financing activities (12,762) (1,530) (18,763) (18,520)
P/E 28.5 409.8 40.5 24.6 Financing CF 7,660 (5,922) 152,587 (50,142)
P/BV 9.0 9.2 7.9 6.3
EV/EBITDA 12.0 18.0 13.9 9.1 Net chg in cash & bank bal. 5,097 318 19,765 12,061
EV/Sales 2.3 1.8 2.4 1.8 Closing cash & bank bal 65,806 86,064 105,829 117,889

Other key ratios

D/E (x) 0.3 0.3 2.4 1.7
DSO (days) 2.5 2.5 2.8 3.2

Du Pont Analysis - RoE

NPM (%) 9.7 0.5 4.2 5.6
Asset turnover (x) 1.3 1.2 1.2 1.1
Equity multiplier(x) 3.3 3.3 4.3 4.5
RoE (%) 41.3 2.2 20.9 28.5
Source: Company, SSLe

santosh.hiredesai@sbicapsec.com I chalasani.teja@sbicapsec.com October 24, 2019 | 5

InterGlobe Aviation SBICAP Securities Ltd

Recommendation History
Date Stock Price TP Rec.
BUY HOLD SELL
24-Jan-18 1,238 1,347 BUY
2000 Stock Price Target Price
9-Feb-18 1,259 1,347 BUY
1800
2-May-18 1,348 1,324 BUY
1600
30-Jul-18 1,005 1,043 BUY
1400
20-Aug-18 1,086 1,043 BUY
(Rs)

1200
24-Oct-18 811 881 BUY
1000
23-Jan-19 1,109 1,234 BUY
800 4-Apr-19 1,432 1,577 BUY
600 27-May-19 1,662 1,719 BUY
May-18

May-19
Jan-18

Mar-18

Jun-18

Jan-19

Mar-19

Jun-19
Feb-18

Feb-19
Jul-18

Jul-19
Apr-18

Apr-19

Oct-19
Oct-18
Aug-18
Sep-18

Aug-19
Sep-19
Nov-18
Dec-18

19-Jul-19 1,463 1,775 BUY

24-Oct-19 1,665 1,450 HOLD
s

Source: Bloomberg, SSLe

SBICAP Securities Limited

(CIN): U65999MH2005PLC155485 | Research Analyst Registration No INH000000602
SEBI Registration No.: Stock Broker INZ000200032 | DP: IN-DP-314-2017 | IRDA: CA0103

Corporate Office:
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KEY TO INVESTMENT RATINGS

Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points);
2=HOLD (expected to give absolute returns between -10 and 15 percentage points); 3=SELL (expected to give absolute returns
less then -10 percentage points)

DISCLOSURES &DISCLAIMERS

Analyst Certification
The views expressed in this research report (“Report”) accurately reflect the personal views of the research analysts (“Analysts”) employed by
SBICAP Securities Limited (SSL) about any and all of the subject issuer(s) or company(ies) or securities. This report has been prepared based
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directly or indirectly related to the specific recommendation(s) or view(s) in this report.
The Analysts engaged in preparation of this Report or his/her relative:-
(a) do not have any financial interests in the subject company mentioned in this Report; (b) do not own 1% or more of the equity securities of the
subject company mentioned in the report as of the last dayof the month preceding the publication of the research report; and (c) do not have any
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The Analysts engaged in preparation of this Report:-
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Name Qualification Designation Sector

Santosh Hiredesai B.E, PGDM Lead Analyst Power, Aviation, Infrastructure
Chalasani Teja B.E, MBA Associate Power, Aviation

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InterGlobe Aviation SBICAP Securities Ltd
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guide for future performance. Actual results may differ materially from those set forth in projections. SSL has reviewed the Report and, the current or historical
information included here is believed to be reliable, the accuracy and completeness of which is not guaranteed. SSL does not have any obligation to update the
information discussed in this Report.
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The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this
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Legal Entity Disclosure

Singapore: This Report is distributed in Singapore by SBICAP (Singapore) Limited (Registration No. 201026168R), an Associate of SSL incorporated in Singapore.
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santosh.hiredesai@sbicapsec.com I chalasani.teja@sbicapsec.com October 24, 2019 | 7