RESULT UPDATE

INTERGLOBE AVIATION (INDIGO)

Yield pressure continues
India Equity Research| Aviation

InterGlobe Aviation (IndiGo) reported a decent 16% YoY growth in Q3FY17 EDELWEISS 4D RATINGS
revenue to INR49.9bn driven by 38.1% YoY spurt in RPKM. However, pax Absolute Rating HOLD
yield pressure sustained in this quarter as well—corrected 16% YoY to Rating Relative to Sector Outperform
INR3.48/RPKM (Q3FY16: INR4.14/RPKM). On the cost front, fuel/ASKM Risk Rating Relative to Sector High
spiked 6% YoY to INR1.18; cost/ASKM (ex-fuel) fell 8% YoY to INR1.90. Sector Relative to Market None
Overall, EBITDAR margin plummeted ~1,000bps YoY to 28.9%. As a result,
PAT at INR4.9bn fell 25% YoY. The company is firm on its aggressive
MARKET DATA (R: , B: INDIGO IN)
expansion plan (25% YoY ASKM increase in Q4) despite engine-related
CMP : INR 845
issues in A320 Neo’s. As we roll over to FY19E, we expect pressure on Target Price : INR 947
yields and increase in fuel cost to cloud performance. Maintain ‘HOLD’ with 52-week range (INR) : 1,095 / 775
revised target price of INR947 (INR932 earlier). Share in issue (mn) : 361.5
M cap (INR bn/USD mn) : 305 / 4,560
Pressure on yields aggravates along with jump in fuel cost Avg. Daily Vol.BSE/NSE(‘000) : 523.7

IndiGo continued to clock healthy volume (RPKM) growth of 38.1% YoY, but capacity
SHARE HOLDING PATTERN (%)
(ASKM) grew only 33.8%, resulting in 270bps YoY improvement in load factor.
Management reiterated strategy to match competition’s fares. This has reflected in Current Q2FY17 Q1FY17
average passenger yield dropping 16% YoY. Ancillary revenue grew 12.5% YoY with Promoters * 85.9 85.9 85.9
overall revenue spurt of 16% YoY to INR49.9bn. On the cost front, fuel/ASKM spiked 6% MF's, FI's & BK’s 1.1 1.8 1.6
YoY to INR1.18 (fuel price up 7.5% YoY). Cost/ASKM (ex-fuel) fell 7.9% YoY due to higher FII's 6.3 5.2 5.9
aircraft utilisation and improved employee productivity. EBITDAR margin plummeted Others 6.7 7.1 6.6
* Promoters pledged shares : NIL
~1,000bps YoY to 28.9%. As a result, PAT at INR4.9bn dipped 25% YoY. (% of share in issue)

Fleet expansion plan intact despite A320 Neo issue PRICE PERFORMANCE (%)
Given the operational issues of A320 Neo engines (though despatch related, the Stock Nifty
promised lower fuel burn delivered), IndiGo has scaled back Neo inductions for the year 1 month (5.6) 5.0
(to 20 from 24 earlier). However, management has maintained guidance of 133 aircrafts 3 months (3.6) 9.2
at FY17 end and estimates ASKM growth of 25% YoY for Q4FY17. Also, it expects to end 12 months (1.3) 24.1
FY18 with more than the initially guided estimate of 154 planes.

Outlook and valuations: Waiting for yield stability; maintain ‘HOLD’

IndiGo’s healthy volume surge (outperforming market, thereby increasing market
share) has been clouded by fall in passenger yields, resulting in profit growth lagging
volume spurt. As we roll over to FY19E, we expect competition and fuel cost rise to
pressurise performance. We value Indigo at 8.0x FY19E EBITDAR yielding target price of
INR947. We maintain ‘HOLD’.
Financials (INR mn) Rohan Gupta
Year to March Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) FY16 FY17E FY18E +91 22 4040 7416
rohan.gupta@edelweissfin.com
Revenue 49,865 42,978 16.0 41,669 19.7 161,399 187,354 233,276
EBITDAR 14,408 16,699 (13.7) 9,677 48.9 56,206 52,448 67,464 Nihal Mahesh Jham
+91 22 6623 3352
Adj. PAT 4,873 6,503 (25.1) 1,398 248.4 19,927 15,697 18,140 nihal.jham@edelweissfin.com
Dil. EPS (INR) 13.5 18.0 (25.3) 3.9 247.3 55.3 43.4 50.2
Dil. P/E (x) 15.3 19.4 16.8
EV/EBITDAR (x) 8.5 10.1 8.7 February 22, 2017
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
 Aviation
Table 1: SOTP valuation
Comments FY19 value Multiple (X) Total Value Per Share
EBITDAR 85,523 8.0 684,182 1,899
Net debt (1,243) (3)
Operating lease rent Capitalized at 7x 49,011 7.0 343,077 952
Equity value (INR mn) 342,348 947
Source: Edelweiss research

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 InterGlobe Aviation (IndiGo)

Financial snapshot (INR mn)

Year to March Q3FY17 Q3FY16 % change Q2FY17 % change YTD17 FY17E FY18E
Total operating Income 49,865 42,978 16.0 41,669 19.7 137,323 187,354 233,276
Aircraft Fuel Expenses 17,041 11,973 42.3 15,857 7.5 46,916 64,907 81,712
Employee expenses 5,273 4,663 13.1 5,080 3.8 15,143 20,656 23,754
Selling and Dist. Exp. 3,252 2,291 42.0 2,875 13.1 8,836 12,274 15,008
Other expenses 9,890 7,351 34.5 8,180 20.9 27,063 37,069 45,337
EBITDAR 14,408 16,699 (13.7) 9,677 48.9 39,365 52,448 67,464
Aircraft Lease Rentals 8,164 6,563 7,721 23,012 31,444 40,089
Depreciation 1,184 1,316 (10.0) 1,189 (0.4) 3,521 4,741 5,205
EBIT 5,061 8,821 (42.6) 768 559.3 12,832 16,264 22,170
Other income 1,719 1,204 42.8 1,608 6.9 4,953 6,355 4,204
Interest 759 802 (5.4) 610 24.4 2,531 3,155 2,188
Add: Exceptional items
Profit before tax 6,021 9,223 (34.7) 1,766 241.0 15,254 19,464 24,186
Total Tax 1,149 2,719 (57.8) 367 213.0 3,063 4,116 6,047
Reported net profit 4,873 6,503 (25.1) 1,398 248.4 12,191 15,348 18,140
Adjusted Profit 4,873 6,503 (25.1) 1,398 248.4 12,539 15,697 18,140
No. of shares (mn) 361 360 360 361 361 361
Adjusted Diluted EPS 13.5 18.0 (25.3) 3.9 247.3 34.7 43.4 50.2
Diluted P/E (x) - - - - 19.4 16.8

As % of net revenues
Aircraft fuel expenses 34 28 38 34 35 35
Employee cost 10.6 10.8 12.2 11.0 11.0 10.2
Selling and Dist. Exp. 6.5 5.3 6.9 6.4 6.6 6.4
Other operating expenses 19.8 17.1 19.6 19.7 19.8 19.4
EBITDAR 28.9 38.9 23.2 28.7 28.0 28.9
Depreciation 2.4 3.1 2.9 2.6 2.5 2.2
Aircraft lease rentals 16.4 15.3 18.5 16.8 16.8 17.2
Interest expenditure 1.5 1.9 1.5 1.8 1.7 0.9
Reported net profit 9.8 15.1 3.4 8.9 8.2 7.8

Change in Estimates
FY17E FY18E
New Old % change New Old % change Comments
Net Revenue 187,354 193,009 (2.9) 233,276 239,185 (2.5)
EBITDAR 52,448 60,484 (13.3) 67,464 75,186 (10.3) Change in fuel and yield
assumptions
EBITDAR margins 28.0 31.3 28.9 31.4
Adjusted PAT 15,697 20,612 (23.8) 18,140 24,983 (27.4)
Net Profit Margin 8.4 10.7 7.8 10.4
Capex 2,701 2,517 7.3 4,000 4,000 0.0

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Aviation

Company Description
IndiGo, operated by Interglobe Aviation Limited, having commenced operations in August
2006 with a single aircraft has grown its fleet over the years and is now leader in the
domestic airline industry with 35.6% market share (December 2015). The airline, with a
modest beginning, has significantly outpaced market and its peers since 2008 having
clocked 29.5% CAGR in passenger growth versus industry CAGR of 6.7% and has been the
only profitable airline in India for the past seven years.

Investment Theme
Indian domestic aviation market has been clocking healthy growth rates driven by the
changing socio-economic profile of the Indian consumers with increasing income levels
amidst low level of air travel penetration in India. We expect robust growth to continue
owing to competitive pricing of air travel vs the substitutes, growth in tourism and leisure
travel and the need for air travel driven by geographical distribution of the Indian working
population.

With a uniform AirBus A320 fleet having average age of 3.2 years (100 numbers, as of
December, 2015), IndiGo has reaped multiple benefits. IndiGo has been taking big bets of
placing bulk purchase orders for aircraft/engines helping it negotiate favourable terms with
the OEMs. The airline flies limited point-to-point destinations selected based on
attractiveness of market. All this has helped company have the lowest cost structure in the
highly competitive industry.

The company has been delivering best in class performance thereby gaining market share.
Despite being largely domestic focused IndiGo has aircraft utilization levels being the best in
the industry at 11.6 Hrs/aircraft/day consistently. Further, its comfortable liquidity position
and healthy B/S enables IndiGo to take delivery of aircrafts and grow in a competitive
scenario.

Key Risks
Sharp uptick in ATF prices (accounted for 50% of revenues in past) and INR depreciation
(bulk of cost is USD denominated) will impact profitability given high price sensitivity of the
Indian consumer leaving limited ability to pass on costs.

Uncertainty and unpredictability of the policy/ regulatory framework continues to be a

concern. Adverse taxation structure will drive up cost of doing business hurting profitability

Economic slowdown putting pressure on demand for corporate / leisure travel will impact
load factors and hence profitability given the high operating leverage structure of the airline
business.

Existing airports at the Indian metros like Mumbai, Chennai and Kolkata running at peak
capacity could prove to be bottlenecks for growth.

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 InterGlobe Aviation (IndiGo)

Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY16 FY17E FY18E FY19E Year to March FY16 FY17E FY18E FY19E
Macro Net revenue 161,399 187,354 233,276 270,203
GDP(Y-o-Y %) 7.2 6.5 7.1 7.7 Aircraft fuel expenses 48,930 64,907 81,712 85,867
Inflation (Avg) 4.9 4.8 5.0 5.2 Employees Costs 17,899 20,656 23,754 27,555
Repo rate (exit rate) 6.8 6.3 6.3 6.3 Selling and Dist. Exp. 9,366 12,274 15,008 18,197
USD/INR (Avg) 65.0 67.5 69.0 69.0 Operating expenses 28,998 37,069 45,337 53,061
Sector Total operating expenses 105,193 134,906 165,811 184,680
Domestic pax growth(%) 22.0 21.0 18.0 16.0 EBITDAR 56,206 52,448 67,464 85,523
Domestic ASKM growth(%) 15.2 20.0 18.0 16.0 Aircraft Lease Rentals 26,122 31,444 40,089 49,011
Domestic oil price(INR/Ltr) 47.9 47.6 52.0 53.0 Depreciation 5,031 4,741 5,205 5,525
Company EBIT 25,053 16,264 22,170 30,986
Average fleet size(No) 98.4 117.6 141.5 163.5 Add: Other income 4,613.93 6,355.14 4,203.72 4,352.58
Avg. flying hours (Hrs) 12.4 13.2 13.2 13.2 Less: Interest Expense 1,349 3,155 2,188 2,098
Employee Exp. Growth(%) 50.6 15.4 15.0 16.0 Profit Before Tax 28,319 19,464 24,186 33,241
S&D Exp/pax (INR) 283 275 275 285 Less: Provision for Tax 8,392 4,116 6,047 8,310
Airport chg/dep (INR) 59,647 61,665 63,000 64,500 Reported Profit 19,927 15,348 18,140 24,931
Maint. Cost/B Hr (USD) 182 200 200 200 Adjusted Profit 19,927 15,697 18,140 24,931
Lease rent/Aircrart (USDmn) 5.6 5.6 5.7 5.8 Shares o /s (mn) 360 361 361 361
Pax growth (%) 31.4 34.9 22.3 17.0 Diluted shares o/s (mn) 360 361 361 361
Pax yield/RPKM 3.9 3.4 3.4 3.3 Adj. Diluted EPS (INR) 55.3 43.4 50.2 69.0
Cargo rev as % of pax 12.8 14.4 14.4 14.4 Adjusted Cash EPS 72.3 55.6 64.6 84.3
Tax rate (%) 25.8 21.2 25.0 25.0 Dividend per share (DPS) 42.8 34.7 40.1 55.2

Common size metrics

Year to March FY16 FY17E FY18E FY19E
Aircraft fuel expenses 30 35 35 32
Non-fuel expenses 34.9 37.4 36.1 36.6
EBITDAR margins 34.8 28.0 28.9 31.7
EBIT margins 15.5 8.7 9.5 11.5
Net Profit margins 12.3 8.4 7.8 9.2

Growth ratios (%)

Year to March FY16 FY17E FY18E FY19E
Revenues 15.9 16.1 24.5 15.8
EBITDAR Growth 47 (7) 29 27
Adjusted Profit 52.8 (23.0) 18.2 37.4
EPS 45.7 (23.2) 18.2 37.4

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 Aviation

Balance sheet (INR mn) Cash flow metrics

As on 31st March FY16 FY17E FY18E FY19E Year to March FY16 FY17E FY18E FY19E
Share capital 3,604 3,615 3,615 3,615 Operating cash flow 30,991 5,474 25,059 25,978
Reserves & Surplus 14,739 11,763 12,437 12,698 Investing cash flow (13,262) 10,449 204 266
Shareholders' funds 18,343 15,378 16,051 16,313 Financing cash flow (12,200) (22,945) (20,654) (22,288)
Long term borrowings 29,499 24,812 23,812 23,562 Net cash Flow 5,529 (7,021) 4,609 3,956
Total Borrowings 29,499 24,812 23,812 23,562 Capex (3,540) (2,701) (4,000) (4,000)
Sources of funds 47,841 40,190 39,863 39,875 Dividend paid (18,540) (15,114) (17,466) (19,122)
Tangible assets 46,755 44,645 43,440 43,088
Intangible Assets 200 318 318 318 Profitability and efficiency ratios
CWIP (incl. intangible) 320 272 272 272 Year to March FY16 FY17E FY18E FY19E
Total net fixed assets 47,275 45,235 44,030 43,678 ROAE (%) 176.3 91.0 115.4 154.1
Non current investments - - - - ROACE (%) 56.9 36.9 55.4 77.7
Current Investments 9,741 15,904 15,904 15,904 Inventory Days 3 3 3 3
Cash and Equivalents 37,187 20,446 25,055 27,215 Debtors Days 3 3 3 3
Inventories 1,267 1,946 2,356 2,571 Payable Days 14 15 14 13
Sundry Debtors 1,571 1,668 2,020 2,204 Cash Conversion Cycle (8) (9) (8) (7)
Loans & Advances 14,179 8,027 8,027 8,027 Net Debt/Equity (1.0) (0.8) (1.1) (1.2)
Other Current Assets 18,971 18,872 18,872 18,872
Current Assets (ex cash) 35,988 30,512 31,275 31,674 Operating ratios
Trade payable 7,412 8,211 9,442 9,924 Year to March FY16 FY17E FY18E FY19E
Other Current Liab 74,937 63,696 66,957 68,673 Total Asset Turnover 3.7 4.3 5.8 6.8
Total Current Liab 82,350 71,907 76,399 78,596 Fixed Asset Turnover 3.4 4.1 5.2 6.2
Net Curr Assets-ex cash (46,361) (41,395) (45,125) (46,922) Equity Turnover 14.3 11.1 14.8 16.7
Uses of funds 47,841 40,190 39,863 39,875
BVPS (INR) 50.9 42.5 44.4 45.1 Valuation parameters
Year to March FY16 FY17E FY18E FY19E
Free cash flow (INR mn) Adj. Diluted EPS (INR) 55.3 43.4 50.2 69.0
Year to March FY16 FY17E FY18E FY19E Y-o-Y growth (%) 45.7 (23.2) 18.2 37.4
Reported Profit 19,927 15,697 18,140 24,931 Adjusted Cash EPS (INR) 72.3 55.6 64.6 84.3
Add: Depreciation 26,122 31,444 40,089 49,011 Diluted P/E (x) 15.3 19.5 16.8 12.2
Deferred tax 1,088 (2) - - P/B (x) 16.6 19.9 19.0 18.7
Others (28,343) (29,903) (36,899) (50,897) EV / Sales (x) 3.0 2.8 2.5 2.4
Gross cash flow 18,794 17,236 21,329 23,045 EV/EBIDTAR 8.5 10.1 8.7 7.5
Less: Changes in WC (12,197) 11,761 (3,730) (2,934) Dividend Yield (%) 5.1 4.1 4.8 6.5
Operating cash flow 30,991 5,474 25,059 25,978
Less: Capex 3,540 2,701 4,000 4,000
Free Cash Flow 27,450 2,773 21,059 21,978

Peer comparison valuation

Market cap Diluted P/E (X) EV/EBIDTAR ROAE (%)
Name (USD mn) FY17E FY18E FY17E FY18E FY17E FY18E
InterGlobe Aviation (IndiGo) 4,560 19.5 16.8 10.1 8.7 91.0 115.4
Jet Airways (India) 719 5.5 5.0 6.7 5.8 (18.2) (24.1)
SpiceJet 650 7.2 9.0 6.3 6.3 (471.0) 81.1
Median - 7.2 9.0 6.7 6.3 (18.2) 81.1
AVERAGE - 10.7 10.3 7.7 6.9 (132.7) 57.5
Source: Edelweiss research

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 InterGlobe Aviation (IndiGo)

Additional Data
Directors Data
Mr. Devadas Mallya Chairman and Nonexecutive Independent Director Mr. Rahul Bhatia Non-executive Director
Mr. Rakesh Gangwal Non-executive Director Dr. Anupam Khanna Non-executive Independent Director
Ms. Rohini Bhatia Non-executive Director Mr. Aditya Ghosh President and Whole-time Director

Auditors - B S R & Co. LLP, Chartered Accountants

*as per last annual report

Holding – Top10
Perc. Holding Perc. Holding
IGE Mauritius 0.9 Jupiter Invst Mgmt 0.72
Motilal Oswal Asset Mgmt 0.65 Pictet Funds 0.33
Norges Bank 0.33 FMR 0.32
Vanguard Group 0.3 Davis Selected Advisors 0.27
BNP Paribas 0.24 BNP Paribas Asset Mgmt 0.19
*in last one year

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*in last one year

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
14 Dec 2016 Sanjay Kumar Sell 91360.00
14 Dec 2016 VINEET MITTAL Sell 26071.00
28 Sep 2016 Sanjay Kumar Sell 20000.00
13 Jul 2016 Sanjeev Ramdas Sell 39000.00
13 Jul 2016 Alphonso Dass Sell 33590.00
*in last one year

7 Edelweiss Securities Limited

 RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
InterGlobe Aviation (IndiGo) HOLD SO H Jet Airways (India) BUY None None
SpiceJet BUY SO L

ABSOLUTE RATING
Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

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 InterGlobe Aviation (IndiGo)

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

Manoj Bahety
Deputy Head Research
manoj.bahety@edelweissfin.com

Coverage group(s) of stocks by primary analyst(s): Aviation

InterGlobe Aviation (IndiGo), Jet Airways (India), SpiceJet

Recent Research
Date Company Title Price (INR) Recos

28-Nov-16 Spice Jet Prudent cost management 65 Buy

drives profitability ;
Result Update
16-Nov-16 Jet Airways Skids on sharp spurt in non- 379 Buy
fuel costs ;
Result Update
08-Nov-16 Interglobe In-line performance; 927 Hold
Aviation Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1 stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11

One year price chart

1,100

1,020

940
(INR)

860

780

700
Dec-16
Aug-16

Oct-16
Apr-16

May-16

Nov-16
Feb-16

Sep-16

Jan-17

Feb-17
Mar-16

Jun-16

Jul-16

Interglobe Aviation

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Aviation

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 InterGlobe Aviation (IndiGo)
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