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Interglobe Aviation Limited IPO Views - 16th Dec 2015

Airlines | Published on Oct 23rd 2015


Interglobe Aviation Ltd operates Indigo, which is the largest passenger airline in India with a market share of 37.4% (as of August 31, 2105). It is a low-cost carrier (LCC) with an asset light business model which enables it to have lowest cost and highest profitability amongst Indian airline companies. Cost competiveness vs its peers: Interglobe Aviation (Interglobe) has been the only passenger aircraft operator in India to post consistent profits over the past seven years. The magnitude of the aircraft orders placed by the company has enabled it to negotiate favorable terms with Airbus, as well as with other suppliers and service providers. This has created a structural cost advantage for the company in terms of operations and maintenance of aircrafts compared to its peers. Capitalizing on highly underpenetrated Indian air travel industry: The Indian air travel industry is underpenetrated in comparison to other countries with penetration levels of 0.08 annual domestic carrier seats per capita against other other developing markets such as Brazil, Turkey, Indonesia and China, where penetration rates are between 0.35 and 0.65. The Industry is growing at ~12.0% CAGR over the past nine years and is expected to grow at a similar pace. Going forward, we expect that improving penetration level will provide an opportunity to Indigo to capture market share as it is expanding its fleet size from currently 97 to 158 by FY2108E. Indigo is better placed compared to its peers to leverage on the anticipated growth in the industry as the competition would face constraints in adding capacity owing to stressed balance sheet and low or no profitability. Soft Crude prices to benefit the Aviation Industry: Aviation Turbine Fuel (ATF) forms a major cost component for all airline operators. Soft ATF prices have boosted the operating performance of airline operators, including Indigo. ATF prices are expected to continue to be tepid in the near future, mainly due to higher global inventory levels of crude and owing to the subdued demand scenario. We expect lower crude prices and consequently lower ATF prices to lead to a decline in airfares, which should boost air traffic volume growth in the country. Load factors will resultantly head higher, while the same has already been witnessed in 1QFY2016 for all airline companies. Outlook and Valuation: At the upper end of the price band, Interglobe is valued at 2.1x EV/Sales and at a P/E of 21.3x (FY2015). The company is not comparable to domestic peers on P/E basis as most of them are loss making while the premium on EV/Sales basis is warranted due to Interglobe’s superior operating performance and profitability. We have compared Interglobe to its like to like international peer Ryanair, which trades at 3.2x EV/Sales and at a P/E multiple of 20.6x (FY2015). We believe that the valuation of Interglobe is justified, considering the opportunity present in the vastly underpenetrated Indian air travel market. Interglobe is better placed than its peers to capture higher market share on the back of its proven Management track record, continuous fleet addition and with its sustainable profitable business model. Hence we recommend a “Subscribe” to the issue at the higher end of the price band.

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