After strong Q3, IndiGo faces virus, crude oil risks

The reduced restrictions resulted in a 45% increase in sequential capacity in available seat kilometers (ASK). The load factors were high and the available seat kilometer (CASK) cost, excluding fuel, was low. The combination of these factors helped the airline’s Q3 spread, which is revenue from lower CASK per available seat kilometer (RASK), after seven consecutive quarters, turn positive, albeit by a whisker.

Result: IndiGo reports a standalone net profit of Rs. 128 crores even as many analysts expected a loss. What’s more, the company believes that Q3 performance would have been better if it were not for the adverse impact of the Omicron version of the coronavirus, which curbed travel in late December 2021.

IndiGo has now curtailed operations due to fall in demand as a result of rising COVID-19 cases. Management expects capacity to decline 10%-15% sequentially in the current March quarter in terms of ASK. It doesn’t help that oil prices are on fire, with Brent crude now over $90 a barrel. Given such adversities, the company is likely to incur losses in the fourth quarter.

“We see IndiGo’s FY22 loss up 6.8%, given the disruption in the demand and yield environment due to the third COVID wave,” Parth Gala, analyst at Prabhudas Lilladher Pvt Ltd, said in a report on February 4. Brokerage firm expects IndiGo’s net loss to be FY22 6,564 crore, which would mean a growth of 12.6% y-o-y (y-o-y).

As on September 30, IndiGo’s negative net worth was around 4,500 crores. But, there is enough cash. As of December 31, the company’s free and restricted cash was 7,814 crore and 9,505 crores respectively. This is also a factor that has kept sentiments up for IndiGo stock despite the pandemic and the resulting losses. The airline also saw an increase in domestic market share. Little wonder then, that IndiGo shares have risen 31% in January 2020 from pre-Covid highs.

“Management comments in the Q3 earnings call will ensure that sentiment for IndiGo stock is favorable from a near-term outlook. Q4 could be soft due to Omicron effect, but assuming the pandemic subsides, the direction of Q1FY23 looks good,” said Ashish Shah, analyst at Centrum Broking Ltd.

The outlook on yields is also not bad. “Q3 yields are higher than expected. Yields may not expand further, but there is no reason they should decline, especially given the sharp rise in crude oil prices. Also, as things stand, the market is absorbing higher yields,” Shah said.

The induction of new engine option (Neo) aircraft in the fleet will result in increased fuel efficiency and savings in fuel costs. In its Q3 call, management said that aircraft usage during the quarter increased from 7.7 hours/day in Q3FY21 to 10.7 hours/day.

As restrictions on international flight gradually ease, the airline expects to reach 13-13.7 hours/day. “We carry forward our target multiplier to FY24 and value the stock at 9x adj. Coming to the target price of EV/Ebitdar, 2,050,” said Prabhudas Lilladher.

EV is enterprise value and Ebitdar is earnings before interest, taxes, depreciation, amortization and rental. IndiGo shares close up 1.7% ahead of Q3 results 1,974 on the NSE on Friday.