INTERGLOBE AVIATION LTD (INDIGO AIRLINES) : FLYING HIGHER !!!

Scrip Code: 539448 / INDIGO

CMP:  Rs. 864.95; Market Cap: Rs. 441.68 Cr; 52 Week High/Low: Rs. 1,394.85/ Rs. 698.35.

Total Shares: 36,12,03,806 shares; Promoters : 31,04,38,237 shares – 85.95 %; Total Public holding : 5,07,65,569 shares – 14.05 %; Book Value: Rs. 75.93; Face Value: Rs. 10.00; EPS: Rs. 53.74; Dividend: 3516.90 %; P/E: 16.12 times; Ind. P/E: 11.33; EV/EBITDA: 9.85 times.

Total Debt: Rs. 3,200.79 Cr; Enterprise Value: Rs. 33,637.74 Cr.

INTERGLOBE AVIATION LIMITED: Incorporated in 2004, and is based in New Delhi. InterGlobe Aviation Limited, formerly known as InterGlobe Aviation Private Limited, is an India-based company engaged in operating passenger airline. InterGlobe Enterprises Ltd is the holding company of Interglobe aviation Ltd. The Company offers aviation, hospitality and travel related services. It operates through two geographic segments: Domestic, which includes air transportation within India, and International, which includes air transportation outside India. Interglobe aviation came with an public issue of 26,112,000 equity shares of Rs. 10 each at Rs. 765 each 0n October 27, 2015 and got listed on November 10, 2015 at Rs. 855.80 and made day high of 899.50 with low of 849. The object of the issue was to utilize the funds for the retirement of certain outstanding lease liabilities and consequent acquisition of aircraft and for the purchase of ground support equipment for airline operations and general corporate purposes also to receive the benefits of listing of the Equity Shares on the Stock Exchanges. The company has not given any splits in face value of its shares and has not declared any bonus shares. Its business lines include InterGlobe Air Transport, InterGlobe Aviation, InterGlobe Hotels, InterGlobe Technologies, InterGlobe Technology Quotient and InterGlobe Education. InterGlobe Technologies provides integrated information technology and business process outsourcing services. InterGlobe Technology Quotient distributes Travelport in India and Sri Lanka. It has four trademarks, namely, IndiGo Airways, IndiGo Airlines, IndiGo and IndiGo Air. It has around 96 aircrafts, and operates scheduled services to approximately 33 airports in India, with a maximum of around 593 domestic flights per day. INTERGLOBLE AVIATION LTD is locally compared with Jet Airways ltd, SpiceJet Ltd, Kingfisher Airlines, Jagson Airlines Ltd, Bluedart Express, MFL India Ltd, Global Vectra Helicopters Ltd, Patel Integrated Logistics ltd and Globally compared with Southwest Airlines Co of USA, Virgin America Inc ofUSA, JetBlue Airways Corporation of USA, Spirit Airlines Inc ofUSA, American Airlines Group of USA, Delta Airlines Inc, United Continental Holding of USA, Alaska Air Group of USA, Skywest Inc of USA, Etihad Airways of UAE, Iran Air, British Airways Plc of UK, AIR CHINA of China, Cathay Pacific Airways Ltd of Hongkong, Qantas Airways of Australia, Alliance Aviation of Australia, Eva Airways corporation of Taiwan,Transasia Airways of Taiwan, Thai Airways International of Thailand, Bangkok Aviation of Thailand, Asia Aviation Pcl of Thailand, Tiger Airways Holding Of Singapore, Singapore Airlines of Singapore, A-Sonic Aerospace of Singapore, AirAsia of Malaysia.

Investment Rationale:

Interglobe Aviation Limited was incorporated in 2006, Interglobe Aviation Ltd is India based aviation, hospitality and travel related service provider. Company own and operate 'IndiGo', India's largest airline with over 33 % of domestic passenger market share. IndiGo Airline, the low-cost airline carries the brand message of providing "low fares, on-time flights and a hassle-free experience" to air travellers in India. IndiGo has scheduled services to 33 cities within India and 5 cities like Bangkok, Dubai, Kathmandu, Muscat and Singapore internationally with 623 daily flights. Company also has a joint venture with Accor Asia Pacific since 2004 to develop a network of 'ibis' hotels throughout India, Nepal, Sri Lanka and Bangladesh. With 10 ibis hotels open and 9 under development, the company shall have a portfolio of 19 operational hotels with room inventory of about 3500 rooms by 2017. The company have maintained its discipline in execution of the low-cost carrier business model with single aircraft type, high aircraft utilization, high operational reliability, no-frills product and low distribution costs. Company enjoys a structural cost advantage. Large Airbus aircraft orders enable favorable terms on aircraft, engines and components. Company has Young, modern and fuel-efficient fleet, Strong brand recognition, maintained consistent profitability and strong cash flow generation, balance sheet and liquidity position. Interglobe Aviation Ltd (IAL) has an ordered 430 aircrafts and expects delivery of 14 aircrafts before this fiscal end. IAL’s domestic passenger volume increased at a CAGR of 25.8 % during fiscal 2011-2015 from 95 lakhs to 2.37 Cr. India is one of the world’s largest and fastest-growing air travel markets, according to the report by Centre for Asia Pacific Aviation India Private Limited (CAPA) Report. Historically, the Indian air travel market was comprised of individuals in relatively high income brackets as well as corporate travellers. Additionally, many members of the Indian middle class did not have a viable option to meet their long distance travel requirements as surface transportation infrastructure was relatively poor and air travel was relatively expensive. Starting in 2003, the Indian government introduced several measures to further liberalize the air travel market, including a reduction in fuel excise taxes, elimination of the 15 % Inland Travel Tax and the awarding of new airline licenses to private operators, which is reflected in the growth of domestic passenger volume at a CAGR of 19.4 %. Since then a large number of Low Cost Carriers (LCCs) have entered the Indian air travel market and stimulated prices through their low-cost business models. By using price stimulation as a core business strategy, LCCs were able to cater to India’s middle class segment. In the decade that followed, Indian air travel entered a period of considerable growth. By 2014, India’s air travel market had become the sixth largest in the world as measured by total domestic seats of approx. 9.73 Cr and ninth largest in the world by total domestic and international seats of approx. 15.59 Cr. Going forward, the domestic Indian aviation market is forecast to be the world’s fastest growing aviation market with Revenue Passenger Kilometers (RPKs) growing at a CAGR of 9.5 % between 2013 and 2033. Going forward, the Indian air travel market is expected to enter a period of accelerated growth. Between FY2015 and FY2020, domestic ASKs are forecast to grow at a CAGR of 12.7 %, while domestic passenger volume is forecast to grow at a CAGR of 12.8 %, according to the CAPA Report. India is expected to be one of the fastest growing major economies in the world over the next four years, with Real GDP expected to grow at a CAGR of 7.1 % between CY2014 and CY2019. This rate of Real GDP growth exceeds that of China, APAC, and the world over the same period, which is forecast to grow at a CAGR of 6.4 %, 4.5 %, and 3.0 %, respectively. The IMF expects India to surpass China’s Real GDP growth rate in CY2015 and CY2016, with respective growth rates of 7.5 % compared to 6.8 % and 7.5 % as compared to 6.3 %. India is the second most populous country in the world with 1.26 billion people through CY2014, according to the IMF. The IMF projects that India’s population will grow at a CAGR of 1.3 % to reach 1.34 billion by the end of CY2019. The expected growth in India’s population between CY2014 and CY2019 is higher than the average growth in population of the top 20 domestic air travel markets in the world. The increase in the Indian population is expected to be a continuing driver of growth in the Indian air travel market. India’s annual per capita income has grown at a CAGR of 12.6 %, from Rs. 46,249 in FY2010 to Rs. 74,380 in FY2015. India’s growth in per capita income and overall population has caused the rapid expansion in the size of India’s middle class, defined as households with a disposable income of more than USD 5,000 per year (more than approximately Rs. 3,35,000 per year). The number of Indian middle class households is expected to increase from 5.36 Cr in CY2014 and reach 10.79 Cr households by 2019 implying a CAGR of 15.0 %. In addition, Mumbai and New Delhi are expected to have the 25th and 30th highest increase in household disposable income globally between 2013 and 2030. The tourism industry in India is fast-growing and an increasingly significant contributor to India’s economy, according to the CAPA Report. The total contribution of travel and tourism to India’s GDP was Rs. 7,642.5 billion in CY2014 which was 6.7 % of GDP and is forecast to rise by 7.3 % per annum to Rs. 16,587.2 billion which is 7.6 % of GDP by CY2025, according to the World Travel and Tourism Council. According to the Ministry of Tourism of India, India witnessed 7.7 million foreign tourist arrivals in CY2014, which had grown at a CAGR of 8.3 % during the period from CY2009 to CY2014. According to the EIU, the number of foreign tourist arrivals is expected to increase at a CAGR of 9.2 % during the period from CY2015 to CY2019 to reach 12.0 million in CY2019. This is due to, among other factors, government initiatives to promote India as a tourist destination, such as successful implementation of the e-Tourist Visa program for passport holders of 113 countries, as well as the government’s plan to make electronic visas available eventually to visitors from over 150 countries. India has a very large rail travel market in terms of passengers carried, and India’s domestic air travel market of 70 million passengers carried in FY2015 represents a very small percentage of the total rail passengers carried, according to the CAPA Report. While the size of the rail travel market is not indicative of the potential addressable market for air travel, and while only a portion of rail travel can reasonably be expected to be substituted by air travel in the near future, the substitution of rail travel by air travel presents a significant growth opportunity, according to the CAPA Report. Rising income levels are expected to cause the Indian middle class to increasingly prefer air travel to rail and road travel because of its convenience, shorter duration and competitive pricing, according to the CAPA Report. The Indian air travel market is serviced by domestic and international LCCs and full-service carriers (FSCs). Domestic carriers in India include LCCs such as IndiGo, SpiceJet, GoAir, Air India Express, and AirAsia India, as well as FSCs such as Jet Airways, Air India, Air Costa, Alliance Air and Vistara, according to the CAPA Report. These domestic carriers also compete with international and regional carriers, new entrants in the airline industry, Indian Railways, the state-owned railway company of India, and with different forms of road transportation, according to the CAPA Report. The competitive landscape of the Indian air travel market has undergone meaningful change as carriers have entered and exited the market and current carriers have undergone considerable changes, such as in their composition, market share, load factors, and cities served, according to the CAPA Report. It is expected that the growth to be driven by numerous factors like strong economic growth; continued population growth; expansion of the middle class; strong growth in tourism; rail travel substitution; increasing aircraft penetration from currently low penetration levels; expansion in aviation infrastructure; and an increasingly favourable regulatory environment. Looking at these InterGlobe Aviation Ltd is best placed to be benefited.

Outlook and Valuation: 

Incorporated in 2004, Indigo commenced operations in Aug’06 with a single aircraft, and has grown its fleet to 97 aircraft, all Airbus A320. It placed an order for 180 A320 neo aircraft with Airbus in Jun’11. The purchase agreement determined a series of scheduled deliveries from Nov’15 to Nov’23. Indigo improved its fleet from 25 aircraft in FY10 to 97 in FY16. This has resulted in an increase in market share to almost one-third that of the industry, placing it as the market leader. It operates on a low-cost-carrier (LCC) business model and focuses on the domestic Indian air travel market. It caters to 35 airports in India and five international destinations. The increase in the number of LCCs combined with macroeconomic factors such as India’s relatively low per capita income and price-sensitive consumers have led LCCs to dominate India’s air travel market. LCCs’ share of the Indian air travel market has increased from 40.5 % in FY2010 to 62.2 % in FY2015, according to DGCA data. This represents an approximate 55 % increase in LCCs’ market share over FSCs’ market share between FY2010 and FY2015. In addition to macroeconomic and India consumer factors, the following factors have also contributed to the success of LCCs in India, the LCC business model, characterized by such features as single aircraft type fleets, aircraft with greater fuel efficiency and lower maintenance costs, faster turnaround times to increase aircraft utilization, and low debt positions; access to capital, when required, through promoter funding and, in some cases, sale-and-leaseback transactions; superior execution through sound management and strong delivery systems; competitive aircraft pricing and favourable maintenance and support contracts; structured systems, processes, and training; and liberalization of the Indian market. LCCs are expected to maintain a domestic market share of 65 % to 70 % of passenger volume, and LCC ticket price is expected to remain a key driver of demand as India is an extremely price sensitive market. In addition to leisure travelers, LCCs have also gained acceptance among corporate travelers in India by meeting corporate market expectations for network density, frequency (particularly at peak hours), schedules offering same-day returns, on-time performance, reliability, new aircraft and quality service. LCCs have also been able to gain traction in the corporate market through the strategic decision to focus on increasing flight frequencies on metro routes, rather than seeking to stimulate untested, virgin markets. Indigo has improving Operating metrics, which includes on-time departures and arrivals, flight cancellations, and number of complaints, are often used in the air travel industry to evaluate operating performance of carriers. In aviation maintenance costs are one of the main cost components for any carrier. The maintenance costs of a carrier are impacted by its business model, fleet composition and overall fleet management. The maintenance cost per Available Seat Kilometre (ASK) of the various Indian carriers for FY2015 was US¢0.18 for IndiGo, US¢0.34 for Air India, US¢0.35 for GoAir, US¢0.90 for SpiceJet and US¢0.95 for Jet Airways. IndiGo’s maintenance costs are the lowest among Indian carriers. The fuel cost per ASK for FY2015 was US¢2.94 for SpiceJet, US¢3.07 for IndiGo, US¢3.23 for Jet Airways, US¢3.37 for GoAir and US¢3.47 for Air India. The ownership cost per ASK of the Indian carriers for FY2015 was US¢0.97 for IndiGo, US¢1.20 for SpiceJet, US¢1.23 for GoAir, US¢2.01 for Jet Airways and US¢2.62 for Air India. IndiGo’s ownership costs are lowest and fuel costs are second lowest, on per ASK basis, among Indian carriers. The Cost Available Seat Kilometer (CASK) measures the unit costs of a carrier and is calculated as total costs divided by ASK. The CASK of the Indian carriers for FY2015 was US¢5.95 for IndiGo, US¢6.37 for GoAir, US¢6.68 for SpiceJet, US¢9.05 for Jet Airways and US¢9.82 for Air India, according to the SAP Report. IndiGo’s CASK is lowest among Indian carriers. Air India has the largest fleet of aircraft of an Indian carrier followed by Jet Airways and IndiGo. IndiGo maintains the largest orderbook of any Indian carrier with 430 aircraft on order and is seventh largest LCC in the world by total seats for FY2015. IndiGo was the fastest growing carrier in India in terms of ASK growth between FY2011 and FY2015, followed by GoAir and SpiceJet. The average age of a carrier’s fleet is impacted by its business model, fleet composition and overall fleet management. The Fleet age can impact the operating costs of a carrier, including fuel costs and maintenance costs, among Indian carriers with at least six months of operating history as of March 31, 2015, AirAsia India had the youngest fleet age of 2.7 years and IndiGo had the second youngest average fleet age of 3.2 years, followed by GoAir at 3.9 years, Air Costa at 3.9 years, SpiceJet at 4.1 years, Jet Airways at 5.9 years, and Air India at 8.9 years, as of March 31, 2015, respectively. The Revenue Availability Seat kilometers (RASK), is a measurement of unit revenue, minus CASK, is a measure of a carrier’s unit profitability. Excluding fuel cost from the analysis provides an indicator of a carrier’s unit profitability before taking in to account fuel costs, which can vary significantly from region to region. IndiGo had the highest RASK minus CASK of any carrier in India and a level in line with LCCs operating in Asia during FY2015. IndiGo’s RASK minus CASK excluding fuel was the highest in India and higher than all of the LCCs operating in Asia. Indigo follows the pure low-cost principle which is intended to provide it with an advantage over some of other LCC competitors in India who operate hybrid business models between low-cost and full-service airlines, such as the inclusion of meals and beverages in the ticket prices for non-corporate passengers, offering business class seats and operating multiple aircraft types. They have employed a single type of airframe and engine within their current fleet, which helps them to reduce their expenses related to maintenance, spare parts, operation, crew training and labor, as well as helping them to more efficiently manage crew rosters. Indigo’s aircraft utilization in block hours was 11.4 hours per day per aircraft in fiscal 2015, which, was among the highest of any airline in India.  They have maintained high aircraft utilization rates by keeping a low turnaround time between their flights. Additionally, they operate a point-to-point route network with no code-sharing with other airlines for passenger traffic, which further helps to reduce turnaround time. Indigo has reduce their distribution costs by increasing direct sales via their website, airport, call center and mobile app and scaling down commissions paid to online and traditional travel agents. Approximately 20.6 % and 22.0 % of their ticket sales were made through these direct channels. IndiGo management has highlighted that earlier they were largely passive towards low competitive fares on key routes. However, the management hinted that they are might become more aggressive in responding to competitive pressures going ahead. Management highlighted that yields were lower YoY due to competitive headwinds. IndiGo continues to look at India as a highly attractive market and is confident that the market can profitably absorb additional capacity. IndiGo management highlighted that they are maintaining their FY17 fleet guidance. Last quarter it had guided for 34 % YoY ASK addition. And expects to get in all 24 neo planes by March 2017 they currently have five neo planes. However, the deliveries will be slowed down to give Pratt & Whitney time to catch up with the delivery schedule. Management indicated that they are facing operational issues in neo which include some software hiccups. For 1QFY17, management guides ASK growth of 25 % and updated that A320Neos have proven to be 14.5 % fuel efficient vs. A320Ceos. The Rentals on neos are 15 % higher than ceo planes. On financial side of Q1 FY17 they have added 2 aircraft in 1Q including 1 A320Neo and now the fleet size is 109. Its Interest expenses for the quarter included a one-off of Rs. 4.40 Cr due to redelivery of airplane which resulted in renegotiation of ECB financing. Their employee costs included Rs. 2.10 Cr related to issue of ESOPs. Management highlighted that the excess bench strength earlier is being absorbed now with the delivery of planes. Employee to aircraft has declined from 121 in 3QFY16 to 112 in 1QFY17. Management guided that tax rate was lower during the quarter due to a writeback of tax credit which had been written off earlier. Going ahead management guided normalized tax rates. Indigo’s superior economics versus peers should lead to premium valuation. However, management’s recent admission that it has/intends to respond to competitor’s fares, indicates change in its pricing stance. This coupled with its planned capacity addition will put pressure on load factors as well as yields in the near term. Sustained low oil price is strengthening airlines’ balance sheets and emboldening competition to announce fleet expansion. IndiGo is the most profitable carrier in India, & as measured by EBITDAR margins, with a margin of 19.8 %, while GoAir with 16.9 %, Jet Airways with 5.9 %, SpiceJet with 2.3 % and Air India with (9.0 %) during the same period. Going forwards the stock can trade at 14 times the EV/EBITDAR which could be around 20 % premium to its global LCC’s. At the current market price of Rs. 864.95, the stock is trading at a PE of 13.72 x FY17E and 11.45 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 63 in FY17E and Rs. 75.50 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also .

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	13,925.30	16,140.00	20,800.00	27,340.00
NET PROFIT (₹ Cr)	1,304.20	2,000.00	2,270.00	2,720.00
EPS (₹)	42.50	55.50	63.00	75.50
PE (x)	19.10	17.60	15.50	12.90
P/BV (x)	83.40	19.10	16.00	13.40
EV/EBITDA (x)	13.00	11.40	10.30	8.50
ROE (%)	309.60	177.20	112.70	113.10
ROCE (%)	33.60	43.00	49.80	56.90

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*As the author of this blog I disclose that I do not hold INTERGLOBE AVIATION LTD in my any of the portfolios.

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