Aviation

Apr-Jun'20 Earnings Preview

July 10, 2020 Long and Bumpy path to recovery

Truncated ops/ Travel restrictions to impact profitability

With domestic air travel resuming only from May 25 th at 1/3rd of approved 2020
summer schedule (nearly 2 months after being grounded), we expect 1Q
performance to be adversely impacted due to 1) loss of peak summer travel days
2) truncated size of operations 3) little to no ancillary revenues (except for cargo
operations) and 4) travel restrictions by state governments adding to confusion,
thereby further denting consumer confidence.

With the introduction of price brands based on flying time, we expect yields to
remain stable (estimate 2.5% increase for both IndiGo and SJET), however, unit
revenues will be adversely impacted (IndiGo/SJET – down 9% / 7.7%) due to lower
load factors and ancillary revenues. Benefits accruing from 52% decline in ATF
prices & MTM gains due to appreciating rupee (up Rs0.12 over 31 st March closing)
are likely to be more than offset by higher operating cost on reduced scale of
operations. We expect LCCs under our coverage i.e IndiGo/SJET to report
93%/89% YoY decline in sales and a loss of Rs32bn/Rs10.6bn respectively.

ATF prices were down 52% YoY in 1Q21 Rupee appreciated by Rs0.12 over 31st Mar closing

Aviation Turbine Fuel (Rs/ltr) 80 USD/INR

74
80 67 70 66 64 65 63 75
70 62 61
53 50 56
60
70
50
40 32
30 65
20
10 60
-
30-06-2017
31-08-2017
31-10-2017
31-12-2017
28-02-2018
30-04-2018
30-06-2018
31-08-2018
31-10-2018
31-12-2018
28-02-2019
30-04-2019
30-06-2019
31-08-2019
31-10-2019
31-12-2019
29-02-2020
30-04-2020
30-06-2020

Source: Company, PL Source: Company, PL

Industry operating below 30% domestic capacity

At the time of resumption of services in May, airlines were allowed to operate only
1/3rd of the approved 2020 domestic summer schedule while later increasing this
limit to 45% on 26th June. However, over the month of June-20, airlines operated
~723 daily flights averaging 90 pax (50-55% load factors) which has improved to
~769 daily flights averaging 91 pax in 1 st week of July. Over the weekend, there is
a spike in number of flights as well as load factors. With the industry averaging
Paarth Gala ~2900/3100 daily flights in June19/Feb20, currently utilization levels are only 25-
paarthgala@plindia.com | 91-22-66322242 30% of pre-Covid capacity. We expect demand for air travel to remain suppressed
in FY21 due to 1) low consumer confidence 2) travel restrictions imposed by State
Govts and 3) gradual scale up of operations.

July 10, 2020 1

 Aviation

Industry operating at 25-30% of pre-Covid level; higher number of flights and load factors during the weekend

Departures/day No of Pax/flight

102
101
100
900 120

99

97
97
97

96
94
94
93

93

93
93
92

92
91

91
90
90

90
89

89

88
87

87
86
86

86
86

85
84

84

83
83
83
100

82
81
800

78
78
77
75
72
71

80
700
60
600
40
494
445
460

500 20
428

529

657

671

664

712

723

730

749

797

718

765

738

785

779

752
513

501
692

641

697
688

703
655

697

715
714

706
725

784

773
826

737
772

761

751
723

754

781
817

715
400 -
01-Jun

03-Jun
04-Jun

06-Jun

09-Jun

11-Jun

14-Jun

17-Jun

19-Jun

22-Jun

25-Jun

27-Jun

30-Jun
02-Jun

05-Jun

07-Jun
08-Jun

10-Jun

12-Jun
13-Jun

15-Jun
16-Jun

18-Jun

20-Jun
21-Jun

23-Jun
24-Jun

26-Jun

28-Jun
29-Jun

02-Jul
03-Jul

05-Jul
01-Jul

04-Jul

06-Jul
07-Jul
26-May
27-May

29-May
25-May

28-May

30-May
31-May

Source: MoCA, PL

Daily pax around 70,000 per day; Various state Govt restrictions leading to volatility

Pax/day (in '000)

Pax/day (in '000)

90 76 79
80 69 71 72 73 68 71 71 69 68
65 67 64 65 68 67 65 69 68 66 65 62
70 60 59 60 65 61 62 62 63 60 61 63 64 59 62
60
46 45
50 38 40
40 31 32 34
30
20
10
-
01-Jun

05-Jun
06-Jun

10-Jun
11-Jun

15-Jun
16-Jun

19-Jun
20-Jun

24-Jun
25-Jun

29-Jun
30-Jun
02-Jun
03-Jun
04-Jun

07-Jun
08-Jun
09-Jun

12-Jun
13-Jun
14-Jun

17-Jun
18-Jun

21-Jun
22-Jun
23-Jun

26-Jun
27-Jun
28-Jun

04-Jul
05-Jul
01-Jul
02-Jul
03-Jul

06-Jul
07-Jul
26-May
27-May

31-May
25-May

28-May
29-May
30-May

Source: MoCA, PL

Focus now on cash flows; liquidity management

With the reduced scale of operations and passenger revenues drying up, airlines
are looking at alternate revenue streams like operating more charter / cargo flights.
Additionally, in their quest for survival, airlines are taking a hard look at all expense
items wanting to better liquidity/ cash flow management by 1) right sizing fleet size
in sync with demand 2) seeking early return of inefficient older aircrafts 3)
renegotiating lease rentals as well as maintenance and other major expenses 4)
workforce rationalization/ salary cuts or leave without pay policy. Despite near term
challenges, IndiGo continues to remain better placed than its peers and is likely to
emerge stronger from the current crisis given 1) strong balance sheet with Rs203bn
cash & equivalents (Rs89bn in free cash) 2) industry leading cost structure (to
improve further with replacing older A320ceos with A320neo family) and 3) strong
management team. We currently have an Accumulate rating and given the
unprecedented environment, we shall revisit our rating after further clarity on rate
of demand recovery and cost initiatives at the time of results.

July 10, 2020 2

 Aviation

Q1FY21 Result Preview

YoY gr. QoQ gr.
Company Name Q1FY21E Q1FY20 Q4FY20 Remark
(%) (%)
Sales 6,256 94,201 (93.4) 82,991 (92.5)
EBITDAR -18,694 26,522 NM -127 NM IndiGo inducted ~7 aircrafts while retired ~4 A320ceos post
InterGlobe resumption of service in May. We expect IndiGo to report a
Margin (%) -298.8 28.2 -0.2
Aviation yield expansion of 2.5%. Suboptimal scale of operations to
PBT -32,156 15,053 NM -12,934 NM adversely impact profitability
Adj. PAT -32,156 12,005 NM -8,735 NM
Sales 3,279 30,021 (89.1) 29,299 (88.8)
EBITDAR -3,866 6,842 NM -636 NM
We expect SJET to report revenue de-growth of 89% YoY.
SpiceJet* Margin (%) -117.9 22.8 -2.2 We estimate yields to grow 2.5%. Suboptimal scale of
operations to adversely impact profitability
PBT -10,666 1,525 NM -7,567 NM
Adj. PAT -10,666 1,525 NM -7,567 NM

Source: Company, PL *SpiceJet is yet to declare 4Q earnings

Q4FY20 Review*
Sales EBITDAR PBT Adj. PAT
(Rs mn)
Q4FY20 YoY gr. QoQ gr. Q4FY20 YoY gr. QoQ gr. Q4FY20 YoY gr. QoQ gr. Q4FY20 YoY gr. QoQ gr.
INDIGO IN 82,991 5.3% -16.4% -127 NM NM -12,934 NM NM -8,735 NM NM
Source: Company, PL *SpiceJet is yet to declare 4Q earnings

Management Commentary
Company Commentary

1) Jan & Feb unit revenues were up by 2.6% YoY. Covid-19 led disruption led to Rs3.8bn loss in March
2) Cargo business performed well. Have dedicated 10 aircrafts for cargo operations
3) IndiGo to return 123 A320ceo in next 2 years. Pace of induction of A320/321neo to depend on demand environment
4) Post reopening of skies, seeing reasonable load factors
INDIGO
5) Next 9M looking to optimize costs to the tune of Rs30-40bn through savings from supplementary lease rentals, dividends, SLB
and negotiations with various vendors.
6) Longer term international opportunity remains very attractive given the fragile hub model around India
7) Lease liability as on 31st March 2020 stands at Rs202bn

July 10, 2020 3

 Aviation

Valuation Summary

CMP TP Sales (Rs bn) EBITDAR (Rs bn) PAT (Rs bn) EPS (Rs) RoE (%) PE (x)
Company Names Rating
(Rs) (Rs) FY20* FY21E FY22E FY32E FY20* FY21E FY22E FY32E FY20* FY21E FY22E FY32E FY20* FY21E FY22E FY32E FY20* FY21E FY22E FY32E FY20* FY21E FY22E FY32E
InterGlobe Aviation Acc 1,020 995 357.6 161.2 316.0 352.7 45.3 17.9 81.1 94.0 -2.5 -30.2 20.9 26.8 -6.4 -78.5 54.3 69.8 -3.9 -69.5 53.8 42.8 -158.2 -13.0 18.8 14.6
SpiceJet HOLD 51 48 124.3 85.3 135.3 143.6 10.8 10.2 29.6 32.4 -14.1 -17.0 2.8 3.5 -23.6 -28.3 4.7 5.9 205.2 90.5 -10.8 -15.6 -2.1 -1.8 10.8 8.5
Source: Company, PL *SpiceJet is yet to declare 4Q earnings

July 10, 2020 4

 Aviation
Analyst Coverage Universe
Sr. No. Company Name Rating TP (Rs) Share Price (Rs)
1 InterGlobe Aviation Accumulate 995 946
2 SpiceJet Hold 48 49

PL’s Recommendation Nomenclature

Buy : > 15%
Accumulate : 5% to 15%
Hold : +5% to -5%
Reduce : -5% to -15%
Sell : < -15%
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly

July 9, 2020 5
 Aviation

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Date: 2020.07.10 12:14:09 +05'30'