INTERGLOBE AVIATION Yield plunge spoils the party

Transcription

1 RESULT UPDATE INTERGLOBE AVIATION Yield plunge spoils the party India Equity Research Aviation InterGlobe Aviation s (IndiGo) Q4FY18 EBITDAR at INR11bn missed estimate 25% as 11% yield miss offset robust pax growth. Key highlights: 1) Yield plunged 6% YoY to INR3.3/km on muted industry pricing environment in the lucrative last minute (0-15 days) booking period. While yield stress continued in April, some signs of recovery are visible; 2) robust 25% YoY RPKM surge & healthy PLF of 89% despite severe shortterm engine disruption, which led to grounding of ~9% capacity. With the issue now resolved, IndiGo expects industry-leading capacity addition of 25% in FY19, likely augmenting its dominant position. The company expects yields to recover as it believes low pricing cannot sustain in a high fuel cost environment. Also, industry-leading cost structure (CASK ex-fuel 20% lower than SJ) and strong balance sheet (USD2bn net cash) provide cushion against short-term stress. We have revised down FY19E EBITDAR 10% assuming 10% higher fuel CASK, but maintained FY20E. Maintain BUY with revised TP of INR1,651 (INR1,655 earlier). Yield disappoints; volumes & cost surpass estimates PAT at INR1.2bn fell 73% YoY and 85% QoQ (69% miss) due to depressed yield, higher fuel cost and adverse forex impact INR0.9bn versus forex gain of INR1bn in Q4FY17. RPKM grew 25% YoY (8% ahead) and RASK fell 3% YoY (13% below). Overall CASK at INR3.3/km rose 7% YoY as fuel CASK grew 10% YoY. Hence, RASK-CASK at INR0.1/km plunged 77% YoY (70% miss). During Q4FY18, IndiGo added six planes three ATRs and three A320s on ST lease. It projects Q1/FY19 capacity growth at 18%/25% YoY. ATRs commence operations IndiGo launched turboprop operations from December 21, 2017, and has introduced six ATRs so far. It is planning to ramp up ATR fleet to 21 by January 2019 and own bulk of these aircraft. The company has been awarded 20 routes under round 2 of UDAN. EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market MARKET DATA (R:, B: INDIGO IN) BUY Outperform High None CMP : INR 1,343 Target Price : INR 1, week range (INR) : 1,520 / 1,004 Share in issue (mn) : M cap (INR bn/usd mn) : 516 / 8,075 Avg. Daily Vol.BSE/NSE( 000) : SHARE HOLDING PATTERN (%) Current Q4FY12 Q3FY12 Promoters * MF's, FI's & BK s FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock Nifty : NIL EW FMCG Index 1 month months 21.6 (3.1) months Outlook and valuations: On revival path; maintain BUY We estimate robust 20% volume CAGR over FY While rising oil price is a concern, ramp up of 15% fuel-efficient NEOs moderates the impact. We, therefore, estimate RASK-CASK to clock 23% CAGR over the next two years. We have revised down FY19E EBITDAR 10% assuming 10% higher fuel CASK, but maintained FY20E. We maintain BUY with TP of INR1,651, based on 9x FY20E EV/EBITDAR. Financials Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. (INR mn) Year to March Q4FY18 Q4FY17 % Chg Q3FY18 % Chg FY18 FY19E FY20E Total operating Income 57,991 48, ,779 (6.1) 230, , ,808 EBITDAR 11,229 13,322 (15.7) 19,357 (42.0) 65,667 81, ,055 Adjusted Profit 1,176 4,403 (73.3) 7,620 (84.6) 22,424 26,319 40,025 Adjusted Diluted EPS (74.9) 19.8 (84.6) Diluted P/E (x) EV/EBITDAR (x) Jal Irani jal.irani@edelweissfin.com Yusufi Kapadia yusufi.kapadia@edelweissfin.com May 2, 2018 Edelweiss Securities Limited

2 Aviation Table 1: Key annual operational summary* FY17-20 FY16 FY17 FY18E FY19E FY20E CAGR (%) Yield (INR/km) Indigo Spicejet Jet RPKM (bn km) Indigo Spicejet Jet RPKM growth (%) Indigo Spicejet Jet ASKM (bn km) Indigo Spicejet Jet PLF (%) Indigo Spicejet Jet EBITDAR/ASKM Indigo Spicejet Jet RASK (INR/km) Indigo Spicejet Jet CASK (INR/km) Indigo Spicejet Jet Fuel CASK (INR/km) Indigo Spicejet Jet CASK ex fuel (INR/km) Indigo Spicejet Jet RASK-CASK (INR/km) Indigo Spicejet Jet NM Source: Edelweiss research *JAL s figures are Standalone 2 Edelweiss Securities Limited

3 InterGlobe Aviation (IndiGo) Table 2: Quarterly performance Yields revived significantly Q4FY18 Q4FY17 YoY (%) Q3FY18 QoQ (%) Edel estimates vs. estimates ASKM (mn) 17,072 14, , , RPK (mn) 15,182 12, , , Load factor (%) (0.3) Yield (INR) (5.6) 3.70 (10.6) 3.7 (10.9) RASK (INR) (3.4) 3.84 (11.5) 3.9 (13.3) CASK (INR) (8.1) Fuel CASK (INR) (4.2) CASK ex-fuel (INR) (10.6) EBITDAR/ASKM (INR) (3.3) Lease/ASKM (INR) (0.3) (10.2) Depreciation/ASKM (INR) Interest/ASKM (INR) (1.2) RASK - CASK (INR) (77.3) 0.66 (84.8) 0.3 (69.8) Source: Edelweiss research Table 3: SOTP valuation Comments FY20 value Multiple (X) Total Value Per Share EBITDAR 1,11, ,99,499 2,774 Net debt (27,687) (77) Operating lease rent Capitalized at 7x 56, ,92,635 1,090 Equity value (INR mn) 6,34,551 1,651 CMP 5,16,201 1,343 Upside (%) 22.9% 22.9% Source: Edelweiss research 3 Edelweiss Securities Limited

4 Aviation Q4FY18 conference call: Key highlights RASK declined: 3% YoY due to sharp correction in yields. Yields fell 6% YoY and came 11% below estimate as the industry faced pricing pressure in the relatively inelastic 0-15 days booking period. PLF improved 280bps. Management stated that it is seeing some improvement in yields at April end. CASK (ex fuel): Increase in landing charges at certain airports as well as adverse impact of forex movement. IndiGo continues to maintain cost leadership in the industry. Load factor: Focus is on maximising RASK versus PLFs and not maximise PLFs alone. ASKM guidance: In Q4FY18, an increase of 21% YoY. The company added six aircrafts in Q4, which included three ATRs. Furthermore, there were four aircrafts under short-term damp lease. Management guided for 18%/25% capacity increase in Q1FY19/FY19, respectively, as it expects on-track addition of ATRs as well as A320 NEOs. CASK spike: Overall cost jumped following 12% increase in fuel cost and forex loss of INR900mn (INR1.2bn gain in corresponding quarter last year). Induction of A321s (234 seats versus 186 in A320 NEOs) and resolution of A320 NEO issues will enhance productivity and lower cost. ATRs: will help increase network coverage and improve connectivity to international markets from regional routes. Three ATRs bought through internal accruals. Pilots and cabin crew are separately managed, viz., narrow body operations, while corporate structure synergies are maintained. Turboprop operations are still being ramped up, but initial signs are encouraging. NEOs operations smoothened: Received adequate spare engines; all grounded aircrafts are running smoothly now. International plans: Air India option scrapped as Indigo was only interested in International operations and AI express. Indigo will progressively chart out the company s international foray with respect to business model, fleet optimization, induction of wide-body aircrafts etc. Buy versus sale & lease back: Purchased three ATRs with cash. Yet to start buying A320 NEOs in cash, but will start to use internal accruals for A320s as well. Fuel cost increased QoQ: During fog season in Q3FY18, same flights burnt more fuel (higher fuel volume/askm) due to greater number of block hours. Yield pressure to sustain: Current pressure on yield is broad based. However, certain metro airports are seeing lower pressure. Seeing some uptick in yields in the past week, given current yields are unsustainable in the current fuel price environment. 4 Edelweiss Securities Limited

5 InterGlobe Aviation (IndiGo) Financial snapshot (INR mn) Year to March Q4FY18 Q4FY17 % change Q3FY18 % change FY18 FY19E FY20E Total operating Income 57,991 48, ,779 (6.1) 230, , ,808 Aircraft Fuel Expenses 23,677 17, , , , ,082 Employee expenses 6,566 5, , ,550 28,233 32,468 Selling and Dist. Exp. 3,945 3, , Other expenses 12,574 8, , ,800 54,056 64,977 EBITDAR 11,229 13,322 (15.7) 19,357 (42.0) 65,667 81, ,055 Aircraft Lease Rentals 9,931 8,242 9,442 36,102 45,473 56,091 Depreciation 1,286 1, , ,369 5,026 5,314 EBIT 12 4,028 (99.7) 8,841 (99.9) 25,196 31,445 49,650 Other income 2,577 2,938 (12.3) 2,719 (5.2) 9,469 7,301 8,031 Interest ,398 2,191 2,091 Add: Exceptional items Profit before tax 1,662 6,190 (73.1) 10,716 (84.5) 31,267 36,554 55,590 Total Tax 486 1,786 (72.8) 3,096 (84.3) 8,843 10,235 15,565 Reported net profit 1,176 4,403 (73.3) 7,620 (84.6) 22,424 26,319 40,025 Adjusted Profit 1,176 4,403 (73.3) 7,620 (84.6) 22,424 26,319 40,025 No. of shares (mn) Adjusted Diluted EPS (74.9) 19.8 (84.6) Diluted P/E (x) As % of net revenues Aircraft fuel expenses Employee cost Selling and Dist. Exp Other operating expenses EBITDAR Depreciation Aircraft lease rentals Interest expenditure Reported net profit Edelweiss Securities Limited

6 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. 6 Edelweiss Securities Limited

7 InterGlobe Aviation (IndiGo) Financial Statements Key Assumptions Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Sector Domestic pax growth(%) Domestic ASKM growth(%) Domestic oil price(inr/ltr) Company Average fleet size(no) Avg. flying hours (Hrs) Employee Exp. Growth(%) S&D Exp/pax (INR) Airport chg/dep (INR) 62,158 65,000 65,000 65,000 Maint. Cost/B Hr (USD) Lease rent/aircrart (USDmn) Pax growth (%) Pax yield/rpkm Cargo rev as % of pax Tax rate (%) Income statement (INR mn) Net revenue 185, , , ,808 Aircraft fuel expenses 64,651 78, , ,082 Employees Costs 20,482 24,550 28,233 32,468 Selling and Dist. Exp. 11,971 14,339 17,689 21,226 Operating expenses 36,015 46,800 54,056 64,977 Total operating expenses 133, , , ,753 EBITDAR 52,687 65,667 81, ,055 Aircraft Lease Rentals 31,254 36,102 45,473 56,091 Depreciation 4,573 4,369 5,026 5,314 EBIT 16,860 25,196 31,445 49,650 Add: Other income 7, , , , Less: Interest Expense 3,308 3,398 2,191 2,091 Profit Before Tax 21,443 31,267 36,554 55,590 Less: Provision for Tax 4,852 8,843 10,235 15,565 Reported Profit 16,592 22,424 26,319 40,025 Adjusted Profit 16,592 22,424 26,319 40,025 Shares o /s (mn) Diluted shares o/s (mn) Adj. Diluted EPS (INR) Adjusted Cash EPS Dividend per share (DPS) Common size metrics Aircraft fuel expenses Non-fuel expenses EBITDAR margins EBIT margins Net Profit margins Growth ratios (%) Revenues EBITDAR Growth (6) Adjusted Profit (16.5) EPS (16.8) Edelweiss Securities Limited

8 Aviation Balance sheet (INR mn) As on 31st March FY17 FY18 FY19E FY20E Share capital 3,615 3,844 3,844 3,844 Reserves & Surplus 34,177 66,930 71,075 77,378 Shareholders' funds 37,792 70,774 74,919 81,222 Long term borrowings 23,957 22,414 21,414 20,414 Total Borrowings 23,957 22,414 21,414 20,414 Sources of funds 61,749 93,188 96, ,636 Tangible assets 37,475 45,348 44,321 43,007 Intangible Assets CWIP (incl. intangible) Total net fixed assets 38,190 46,113 45,087 43,772 Non current investments Current Investments 37,134 63,439 63,439 63,439 Cash and Equivalents 46,325 65,806 49,101 61,207 Inventories 1,632 1,832 2,904 3,515 Sundry Debtors 1,587 2,263 2,489 3,013 Loans & Advances 9,581 13,327 13,327 13,327 Other Current Assets 17,648 18,512 18,512 18,512 Current Assets (ex cash) 30,448 35,934 37,232 38,367 Trade payable 7,746 10,002 11,816 13,899 Other Current Liab 82, ,104 86,711 91,251 Total Current Liab 90, ,105 98, ,151 Net Curr Assets-ex cash (59,901) (82,171) (61,295) (66,784) Uses of funds 61,749 93,188 96, ,636 BVPS (INR) Free cash flow (INR mn) Reported Profit 16,592 22,424 26,319 40,025 Add: Depreciation 31,254 36,102 45,473 56,091 Deferred tax (60) 2, Others (29,451) (39,957) (45,556) (56,716) Gross cash flow 18,334 20,722 26,236 39,400 Less: Changes in WC (19,486) (21,692) 20,876 (5,489) Operating cash flow 37,821 42,414 5,359 44,889 Less: Capex (5,031) 12,291 4,000 4,000 Free Cash Flow 42,852 30,122 1,359 40,889 Cash flow metrics Operating cash flow 37,821 42,414 5,359 44,889 Investing cash flow (30,379) (2,244) 3,301 4,031 Financing cash flow (14,012) (4,712) (25,366) (36,813) Net cash Flow (6,570) 35,458 (16,705) 12,107 Capex 5,031 (12,291) (4,000) (4,000) Dividend paid (14,886) - (22,174) (33,722) Profitability and efficiency ratios ROAE (%) ROACE (%) Debtors Days Payable Days Cash Conversion Cycle (9) (8) (8) (7) Net Debt/Equity (1.6) (1.5) (1.2) (1.3) Operating ratios Total Asset Turnover Fixed Asset Turnover Equity Turnover Valuation parameters Adj. Diluted EPS (INR) Y-o-Y growth (%) (16.8) Adjusted Cash EPS (INR) Diluted P/E (x) P/B (x) EV / Sales (x) EV/EBIDTAR Dividend Yield (%) EV 463, , , ,407 Peer comparison valuation Market cap Diluted P/E (X) EV/EBIDTAR ROAE (%) Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E InterGlobe Aviation (IndiGo) 8, Jet Airways (India) 1, (8.4) (41.1) SpiceJet 1, Median AVERAGE Source: Edelweiss research 8 Edelweiss Securities Limited

9 Additional Data InterGlobe Aviation (IndiGo) 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 Acquire services ltd 37.9 Gangwal rakesh Chinkerpoo family tr 13.6 Gangwal shobha 8.41 Sbi funds management 2.78 Icici prudential ass 1.48 Motilal oswal asset 1.37 Mawer investment man 1.12 Fmr llc 1.03 Jupiter inv mgmt gro 0.74 *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 21 Mar 2018 Riyaz Haider Peer Mohamed Sell Mar 2018 Riyaz Haider Peer Mohamed Sell Mar 2018 Riyaz Haider Peer Mohamed Sell Mar 2018 Sanjay Kumar Sell Mar 2018 Riyaz Haider Peer Mohamed Sell *in last one year 9 Edelweiss Securities Limited

10 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk InterGlobe Aviation (IndiGo) BUY 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 Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return 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 Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 10 Edelweiss Securities Limited

11 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 (INR) InterGlobe Aviation (IndiGo) Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Aditya Narain Head of Research 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 02-Apr-18 SpiceJet Flying High; Company Update 15-Feb-18 Jet Airways Subdued quarter; cost rationalisation on course; Result Update 08-Feb-18 SpiceJet Firing on all cylinders ; Result Update 125 Buy 756 Buy 140 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * 1stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period One year price chart 1,550 1,400 1,250 1, Interglobe Aviation 11 Edelweiss Securities Limited

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