Interglobe Aviation - Initiating Coverage - Centrum 23072019

Initiation
Institutional Research
India I Aviation
23 July 2019
Interglobe Aviation Buy

Target Price: Rs1846
Gaining new altitudes Price: 1519

Forecast return: 22%
On the back of market share gains and its aggressive domestic and international Market Data
expansions we see a robust 25%/18% growth in passenger traffic for Interglobe Bloomberg: INDIGO IN
Aviation (IndiGo) in FY20/21. With the grounding of Jet Airways effectively 52 week H/L: 1716/691
eliminating a significant capacity from the industry, we see load factors remaining Market cap: Rs584.4bn
elevated for the industry as well for IndiGo. This, along with reduced competition and Shares outstanding: 384.7mn
efforts at better revenue management should support yields for IndiGo. With Brent Free float: 24.5%
crude at $60-65/bbl, the fuel price environment remains benign and the industry is Avg. daily vol. 3mth: 2,646,547
geared up to operate at these levels of prices. We expect an exponential earnings Source: Bloomberg
recovery for IndiGo along with further strengthening of the balance sheet. We initiate
with Buy and a target price of Rs1846, based on 7.8x FY21E EV/EBITDAR. IndiGo relative to Nifty50
Market share gains to drive robust traffic growth in an otherwise tepid year 170 INDIGO
After being severely disrupted due to the grounding of Jet Airways, domestic passenger
130
traffic growth has been recovering over the last two months (3%/6.2% in May/June
2019 against decline of 4.5% in April 2019). We expect this growth recovery to continue 90 Nifty 50
through FY20 as the airlines deploy capacity on slots vacated by Jet Airways and
demand recovers due to normalisation of fares. Even as we expect a tepid 4.6% growth 50
in domestic passenger traffic in FY20, we see a robust 22% growth in domestic Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19
Source: Bloomberg
passenger traffic for IndiGo due to 750 bp rise in market share to ~50% in FY20. IndiGo
is also significantly stepping up its international expansion plans and plans to deploy Shareholding pattern
50% of its incremental ASKM in international markets. As a result, we expect a robust Jun-19 Mar-19 Dec-18 Sep-18
25%/18% overall passenger growth for IndiGo in FY20/FY21. Promoter 74.9 74.9 74.9 74.9
High load factors, lower competition and efficiency improvements to support yields FIIs 15.1 14.9 14.9 15.1
The grounding of Jet Airways has also eliminated a significant share of the industry’s DIIs 5.3 5.4 5.4 5.3
capacity (21.7% of total ASKM). As a result, we estimate the combined load factor for Public/oth 4.7 4.7 4.7 4.6
Source: BSE
Indian carriers to expand marginally to ~85% in FY20/FY21 from 83.6% in FY19. For
IndiGo too we expect a marginal rise in load factor to 87-88% from 86.2% in FY19. We
expect a combination of high load factors, lower competition post grounding of Jet
Airways and efforts at better revenue management (likely to drive 5-6% yield
improvement) to support yields & drive a 31% revenue CAGR over FY19-21 for IndiGo.
Expect robust earnings recovery aided by benign fuel price environment
With prices of Brent crude continuing to remain in the $60-65/bbl range, the fuel price
environment for airlines remains benign as the industry is geared up to operate at
these levels of fuel prices. As a such, we expect an exponential recovery in earnings for
IndiGo over FY20/FY21 along with further strengthening of the balance sheet.
Value IndiGo at Rs1846; initiate with Buy
We value IndiGo at 7.8x FY21E EV/EBITDAR on based on 15% discount to its historic 1-
year forward valuation range. Our target price of Rs1846 implies an upside of 22%
from the current levels. At our TP implied PE is 16.5x FY21E EPS. A prolonged delay in
resolution of the on-going dispute between the promoters can be hindrance in
implementation of strategic initiatives and in decision making and remains a key risk.
Financial and valuation summary

YE Mar (Rs mn) Q1FY20 Q1FY19 yoy (%) FY19 FY20E FY21E
Ashish Shah
The Aviation Team
Net sales 94,201 65,120 44.7 284,968 392,601 485,722 Analyst

EBIDTA 25,234 (111) n/a (2,054) 93,599 119,096 +91 22 4215 9021
shah.ashish@centrum.co.in
EBITDA Margin (%) 26.8 (0.2) (0.7) 23.8 24.5
Adj. PAT 12,005 278 1,561 34,718 43,071
Diluted EPS (Rs) 31.2 0.7 4,219.8 4.1 90.3 112.0
PE (x) 374.0 16.8 13.6
Vaibhav Shah
EV/EBITDA (x) n/a 5.2 3.8 Associate
RoE 2.2 40.0 34.3 +91 22 4215 9815
vaibhav.shah@centrum.co.in
Source: Company, Centrum Research estimates
Please see Appendix for analyst certifications and all other important disclosures.
In the interest of timeliness, this document is not edited.
23 July 2019
Thesis Snapshot
InterGlobe Aviation versus Nifty 50 Valuations
1m 6m 1 year We value IndiGo at 7.8x FY21E EV/EBITDAR based on 15%
INDIGO IN (2.1) 37.0 44.0 discount to the median of its historic 1-year forward valuation
Nifty 50 (3.2) 4.8 2.4 range. Our TP of Rs1846 implies an upside of 22% from the
Source: Bloomberg, NSE current levels. At our TP implied PE is 16.5x FY21E EPS.
Key assumptions Valuations Rs/share

YE Mar FY19 FY20E FY21E Business valuation: EV/EBITDAR multiple of 7.8x FY21E 2548
ASKM growth (%) 29.0 30.7 23.0 Less:
Load factor (%) 86.2 87.6 87.7 Rentals (Capitalization of leases) 1114
RASK (Rs) 3.6 3.8 3.8 Net Debt (413)
70.0 65.0 65.0 Target Price 1846
Brent crude ($/bbl)
Source: Centrum Research estimates
EV/EBITDAR mean and standard deviation
Source: Bloomberg, Centrum Research estimates
Centrum Institutional Research 2

Interglobe Aviation 23 July 2019
Fig 1: Detailed quarterly results (standalone)

In Rs mn 1Q19 2Q19 3Q19 4Q19 FY19 1Q20 FY20E Comments
RASK grew 10.7% yoy to Rs4.1 led by strong pax
Revenue from operations 65,120 61,853 79,162 78,833 284,968 94,201 392,601
growth
Aircraft fuel expenses 27,156 30,355 34,104 27,813 119,428 31,361 135,518
Aircraft and engine rentals Sharp reduction due to migration to Ind AS 116
8,080 11,161 13,761 11,067 38,610 1,288 5,576
(net) for accounting of operating leases
Purchase of stock in trade 319 335 393 351 1,398 439 2,134
Change in inventories of
5 (6) (10) 4 (7) (21) 28
stock in trade
Employee expenses 6,536 7,729 8,347 8,766 31,378 10,488 43,984
Other expenses 23,134 22,330 20,375 24,918 96,215 25,411 111,761 MTM forex gain of Rs446m
Total Expenditure 65,230 71,903 76,970 72,919 287,022 68,967 299,001
EBITDA (111) (10,050) 2,193 5,914 (2,054) 25,234 93,599 Not comparable due to migration of Ind AS 116
EBITDA margins -0.2 (16.2) 2.8 7.5 (0.7) 26.8 23.8
EBITDAR 7,969 1,111 15,953 16,980 36,556 26,522 99,176 Not comparable due to migration of Ind AS 116
EBITDAR margins 12.2 1.8 20.2 21.5 12.8 28.2 25.3
Other income 3,064 3,289 3,131 3,765 13,249 3,670 14,309

Depreciation and Higher by Rs6.9bn due to depreciation on ROU
1,553 1,820 2,038 2,185 7,596 9,009 39,429
amortisation assets created post migration to Ind AS 116
Higher by Rs3.4bn due to charge on NPV of lease
Finance costs 1,087 1,300 1,377 1,326 5,090 4,842 20,260
liability post migration to Ind AS116
PBT 313 (9,881) 1,909 6,168 (1,490) 15,053 48,220

Tax 36 (3,359) - 272 (3,052) 3,048 13,502
Adjusted PAT 278 (6,521) 1,909 5,896 1,561 12,005 34,718
Add: Exceptional items - - - - - - -
Reported PAT 278 (6,521) 1,909 5,896 1,561 12,005 34,718
Diluted EPS (Rs) 0.7 (17.0) 5.0 15.3 4.1 31.2 90.3
% growth yoy
Revenue from operations 13.2 16.9 28.1 35.9 23.8 44.7 37.8
Aircraft fuel expenses 54.4 84.3 69.2 19.0 53.9 15.5 13.5
EBITDA NA NA (77.9) 355.4 NA NA NA
EBITDAR (59.1) (92.9) (17.6) 51.2 (44.3) 232.8 171.3
Other income 51.2 53.3 15.2 46.1 39.9 19.8 8.0
Depreciation and
57.9 77.5 89.8 69.9 73.9 480.2 419.1
amortisation
Finance costs 41.2 51.8 63.0 43.0 49.8 345.5 298.1
PBT (97.2) NA (82.2) 271.1 NA 4,703.0 NA
Adjusted PAT (96.6) NA (74.9) 401.2 (93.0) 4,219.8 2,123.6
EPS (96.8) NA (75.0) 400.6 (93.0) 4,219.8 2,123.6
Source: Company, Centrum Research

Quarterly results
Strong financial performance
IndiGo reported its highest ever quarterly PAT at Rs12bn led by strong yields and lower
fuel expenses. It was sharply above consensus estimates of Rs7.5bn. Revenues grew 44.7%
yoy to Rs94.2bn (consensus estimate: Rs91.2bn) led by strong pax growth and improved
yields. EBITDAR stood at Rs26.5bn while EBITDAR margins came in at 28.2%. The financials
are not comparable because of the change in accounting standard wrt operating leases.
Yields continue to improve

RASK grew by 10.7% yoy to Rs4.1 in Q1FY20 due to a) improving revenue management by
IndiGo (~5%), b) higher fares due to closure of Jet Airways (~2-3%) and c) higher share of
bookings in the 0-15day booking window (42% in Q1FY20 vs. 38% in Q1FY19). ASKM grew
at a robust pace of 30.6% yoy to 23.3bn with strong capacity induction while RPKM grew
29.9% yoy to 20.7bn. Load factor declined marginally by 50bps yoy to 88.8%. Domestic
passenger traffic grew at a robust pace of 22.2% yoy to 17.2m pax. CASK declined 6.3%yoy
to Rs3.45 led by lower fuel costs. Unit fuel costs declined 11.5% yoy to Rs1.3 due to ~15%
savings in fuel consumption on the A320 neo/ A321 neo fleet. CASK (ex-fuel) declined
2.8%yoy to Rs2.1.
Received 12 international slots of Jet airways

On international front, out of 33 slots opened for distribution, IndiGo got 12 slots of which
7 are already operational. On domestic front, of the 150 slots distributed, IndiGo got 30%
of them against its expectation of 50% (its market share in domestic market in May-19:
49%). The company would look to get even more slots of the remaining lot when it is made
available. Furthermore, International business remains to be a key focus area for the
company as it is looking to gain maximum out of the void created by Jet’s closure. It aims
to deploy 50% of incremental capacity addition in FY20 on international routes.
Consequently, we expect IndiGo’s international ASKM to grow 88% yoy in FY20.
Migration to Ind AS 116 for operating leases

Wef April 1 2019, IndiGo has migrated to Ind AS 116 accounting standard for accounting of
its operating leases for aircrafts and engines. Under this standard, IndiGo has capitalised its
future lease liability payments on assets on operating lease at their present value leading
to recognition of a lease liability of Rs161bn in PV terms. Correspondingly, IndiGo has also
recognized ROU assets and after netting off the deferred incentives outstanding in respect
of these assets, there is a net addition of Rs89bn to the assets. This has resulted in
additional interest costs due to recognition of finance charge on the lease liability,
additional depreciation on the ROU assets and a reduction in aircraft rentals as the lease
payments are no longer reflected in the P&L.
Fig 2: Impact of change in lease accounting treatment on financials
Particulars Value (Rsm)
Increase in Depreciation and amortisation expenses (6,929)
Increase in Finance costs due to interest accrued on outstanding lease liability (3,437)
Foreign exchange gain on account of revaluation of lease liability 802
Reduction in aircraft and engine rentals 9,741
Net impact on PBT 177
Strong guidance for the year

The management has guided for a strong ASKM growth of 28%/ 30% for Q2FY20/ FY20 led
by strong capacity addition envisaged for the year. This aggressive growth guidance comes
on the back of market share gains by the company in absence of Jet Airways.

Quarterly call highlights

 Fleet induction: Added 18 planes in Q1FY20. Current fleet at 235.
 Slot distribution: On international front, out of 33 slots, IndiGo got 12 slots per day
while SpiceJet got 11, GoAir got 5 and Vistara got 4. On domestic front, of the 150
slots distributed, IndiGo got 30% of them.
 International business focus: To deploy 50% of the incremental capacity on
international routes. Currently serving 17 international destinations. 20 more with
codeshare with Turkish Airlines.
 Higher Employee expenses: It was higher due to a) Salary increments to all
employees, b) IndiGo hired large number of pilots who are currently undergoing
training and as a result, while it is incurring salary expenses it does not have the
related ASKMs and c) IndiGo has insourced ground handling at most of the domestic
airports through the wholly owned subsidiary, Agile Airport Services Private Limited.
These services were previously outsourced and were recorded under the other
expenses. So, while this resulted in an increase in the employee cost line item there is
a corresponding reduction in other expenses.
 Debt: IndiGo has capitalized its operating leases in accordance with Ind AS 116. The
capitalized lease liability as on June 30, 2019 was Rs160.7bn. The debt (excluding the
capitalized lease liability) was Rs23.6bn.
 New destinations: IndiGo is servicing 70 destinations including 17 international cities
as on June-19. The company added 1 international and 1 domestic destination during
the quarter
Fig 3: Centrum Quarterly monitor

Centrum Quarterly monitor Q1FY20 Q4FY19 Our Views
Internal revenue enhancement
Guided for 30% ASKM growth in
ASKM Guided for 30% ASKM growth in FY20E measures and high load factors
FY20E
support the yield improvement
We believe it is possible due to several
Guided for a 5% improvement in RASK Guided for a 5% improvement in internal measures taken by the
RASK
for FY20E RASK for FY20E company for better revenue
management
To purchase new aircrafts based on IndiGo would follow this strategy as it
Sale and leaseback model cash availability but sale and leaseback To start purchasing few aircrafts has a strong cash balance to support
will remain the dominant model few aircraft purchases
IndiGo will follow its aggressive
To deploy 50% of incremental capacity To deploy 50% of incremental
International business international expansion plans, given
on international routes capacity on international routes
the presence of strong opportunities

Growth recovery underway

 Growth impacted due to supply disruption and demand destruction due to higher
fares; recovery underway
 Airlines fast filling in the supply void created by Jet Airways grounding while
deepening their presence through addition of new routes/destinations
 Indian players materially stepping their international market expansions; to benefit
from the space vacated by Jet Airways
 Fleet and capacity additions (on net basis) aligned with tepid near term growth
outlook; high load factors and reduced competition support yields
 Crude prices environment of $60-65/bbl benign and supports profitability
Moderation in traffic growth accentuated by supply disruption

Domestic passenger traffic grows by a meagre 1.5% during April-June 2019
Domestic air passenger traffic grew at a rapid pace of 18% CAGR over FY14-19 led by rising
incomes, changing preferences, lower fuel prices and competitive fares. Increased
geographic penetration by the airline players by connecting destinations which were
earlier unconnected or under-connected also helped in expanding the addressable market
and add to the demand momentum. While we would have surely expected a moderation
in growth rates (to 12-14%) on the back of a prolonged high growth phase, the slowdown
in domestic traffic growth over the last few months (1.5%yoy in April-June 2019) has been
pronounced led by supply disruption and higher fares caused by grounding of Jet Airways.
Fig 4: Several domestic players gain market share after Jet’s closure with IndiGo being major beneficiary
FY14-19 yoy
Domestic passengers (m) FY14 FY15 FY16 FY17 FY18 Q1FY19 FY19 Q1FY20
CAGR% growth %
IndiGo 18.1 23.7 31.5 41.6 49.0 14.1 59.9 27 17.2 22.2
SpiceJet 11.5 13.7 10.7 13.2 16.1 4.3 17.7 9 5.1 20.3
Vistara 0.0 0.1 1.4 2.9 5.0 1.4 5.4 56 1.7 25.8
Air India 11.1 12.2 13.3 14.5 15.5 4.5 18.1 10 4.7 5.5
Go Air 5.3 6.5 7.2 8.6 10.3 3.1 12.6 19 3.9 25.1
Jet Airways 14.7 12.5 18.4 19.0 21.3 5.4 19.6 6 0.1 (98.1)
Others 0.1 1.3 2.8 4.3 6.5 2.0 7.2 146 2.4 20.6
Total 60.7 70.1 85.2 104.2 123.7 34.7 140.5 18 35.2 1.5
yoy growth % 16 22 22 18.7 13.6
Market share % FY14 FY15 FY16 FY17 FY18 Q1FY19 FY19 Q1FY20
IndiGo 30 34 37 40 40 41 43 49
SpiceJet 19 20 13 13 13 12 13 15
Vistara 0 0 2 3 4 4 4 5
Air India 18 17 16 14 13 13 13 13
Go Air 9 9 8 8 8 9 9 11
Jet Airways 24 18 22 18 17 16 14 0
Others 0 2 3 4 5 6 5 7
Source: DGCA, Centrum Research
Fig 5: Recovery underway in passenger traffic data

Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19
Domestic pax (m) 11.3 11.6 11.4 11.4 11.8 11.6 12.7 12.5 11.3 11.6 11.0 12.2 12.0
yoy growth (%) 18.4 20.8 17.2 18.6 13.0 11.0 12.9 9.1 5.2 0.1 -4.5 3.0 6.2

Jet Airways’ closure has added materially to the growth moderation

Jet Airways’ operations, burden by a severe liquidity crisis, had been disrupted since Jan-19
and the airline finally shut operations in Apr-19. Jet Airways had a fleet of 118 planes and a
domestic market share of 13.8% as on Dec-18, just before the disruption started. Further,
Jet Airways had a dominant presence on India’s trunk routes, especially on routes
connecting hubs of Mumbai and Delhi. As a result, the closure of Jet Airways led to a
material disruption in overall supply and connectivity between hubs and from smaller
routes to their hubs. This disruption also resulted in abnormally high fares in the months
leading to Jet Airways’ grounding and immediately after it thereby also causing some
demand destruction. The government has partially reallocated Jet Airways’ slots (though
only till September 2019 pending outcome of revival efforts for the airline) and the
recipient airlines have started filling the supply void. This has led to normalisation of fares
and some improvement in growth is underway.
Airlines fast filling in the supply void while deepening presence

Reallocation of Jet Airways’ slots and aggressive fleet adds filling the void
The government has reallocated (albeit on temporary basis) nearly 150 of the ~200
domestic slots of Jet Airways at Delhi & Mumbai airports. IndiGo and SpiceJet have been
major recipients of these slots together accounting for ~75% of the reallocated slots.
Simultaneously, both these airlines have also significantly added to their operating fleet for
deployment on these newer slots. IndiGo added 18 A320/A321 neo aircrafts between
March-June 2019 as compared to 58 aircrafts in FY19. SpiceJet has absorbed 30 nos of Jet
Airways’ B737 aircrafts in Q1FY20 taking its fleet to 105 and as compared to addition of 18
aircrafts in FY19.
Focus on deepening presence through connectivity to smaller destinations
An analysis of route wise traffic patterns indicates a material slowdown in top 60 domestic
routes even as the relatively smaller routes continue to post sustained growth. The top 60
routes which together account for 62% of the domestic passenger traffic witnessed a 6.4%
traffic decline during Jan-May’19. These are also the routes wherein Jet had a dominant
presence and have been impacted by its closure. The routes beyond top 60 account for
remaining 38% of domestic traffic & grew at a robust pace of 22% during this period. The
conclusion from the above data is quite clear that the growth on routes between
metros/Tier I cities and Tier II/III cities as well as within the Tier II and III cities continues to
be robust. As such we are witnessing a rapid expansion in route networks by all airlines,
especially by IndiGo and SpiceJet through introduction of new routes or through additional
frequencies on existing routes.
Fig 6: Top routes impacted by supply disruption; smaller routes growing rapidly*
40% 38%
30%
30%
22%
20% 15%
10%
10% 7%
0%
-3%
-6% -7%
-10% -8%
Top 15 routes 16-30 routes 31-45 routes 46-60 routes >60 routes
Share of domestic pax % growth yoy
Source: DGCA, Centrum Research *growth pertains to Jan-May’19

Fig 7: Step-up in domestic connectivity for leading players
Vistara 24
19
Tru Jet 11
9
Spice Jet 53
39
Indigo 56
39
Go Air 24
23
Alliance Air 54
33
Air India 55
53
Air Carnival 4
4
Air Asia India 25
15
0 10 20 30 40 50 60
Mar-19 Mar-17
Indian carriers stepping up focus on international markets

Jet Airways’ grounding has materially impacted international traffic growth
As of Dec 2018, prior to the start of groundings of Jet Airways’ fleet, the airline had a
market share of 29.2% in the total international passengers carried by the scheduled
Indian carriers. Jet Airways had a dominant presence on routes connecting Middle-Eastern
destinations as well as a strong presence on mid and long haul routes connecting India
with Far East destinations like Singapore, Hong Kong and European destinations of
Amsterdam, Paris, London and Manchester. Through its code shares, Jet Airways provided
further connectivity to various other destinations across Europe and North America. Given
this, the grounding of Jet Airways has had a material impact of international passenger
traffic growth, leading to a decline of 14% in international passengers carried by Indian
carriers during April-May 2019 vis-à-vis a growth of 9.6% CAGR over the past five years.
Fig 8: International passenger traffic disrupted by Jet Airways grounding
International pax (m) FY18 Apr-May 18 FY19 Apr-May 19 yoy growth%
Air India 6.4 1.1 6.8 1.2 4
Air India Express 3.8 0.7 3.1 0.9 22
SpiceJet 2.0 0.4 2.2 0.4 15
Jet Airways 8.5 1.3 8.0 0.1 (95)
IndiGo 2.9 0.7 4.7 1.0 51
GoAir 0.0 0.0 0.1 0.1 n/a
Air Asia 0.0 0.0 0.0 0.0 n/a
Vistara 0.0 0.0 0.0 0.0 n/a
Total 23.5 4.2 24.9 3.6 (14)
Market share % FY18 Apr-May 18 FY19 Apr-May 19 share gains

Air India 27 27 27 33 6
Air India Express 16 17 12 24 7
SpiceJet 8 9 9 11 3
Jet Airways 36 32 32 2 -30
IndiGo 12 16 19 27 12
GoAir 0 0 1 3 3
Air Asia 0 0 0 0 0
Vistara 0 0 0 0 0

Reallocation of Jet Airways slots underway

According to media articles, the government has so far allocated 33 international slots of
Jet Airways out of the airlines’ total pre-grounding slots of 132. Of this IndiGo has received
12 slots and SpiceJet has received 11 slots. According to the IndiGo management, the
government will shortly allocate some more of international slots of Jet Airways. The
reallocation of these slots and deployment of capacity on them by the recipient airlines
should lead to improvement in growth momentum on these routes in our view.
Fig 9: Slot distribution of Jet Airways
Airline no
IndiGo 12
SpiceJet 11
Go Air 5
Vistara 4
Air Asia 1
Total allocated 33
Source: Company, Media articles
IndiGo and SpiceJet leading the expansions in international markets

IndiGo to deploy 50% of incremental capacity on international routes
IndiGo has significantly enhanced its focus on International expansion over the past few
years. IndiGo’s international pax grew at a robust pace of 56% CAGR over FY17-19 to
4.9mn. IndiGo has guided for an ASKM growth of 30% in FY20 with 50% of the incremental
capacity to be deployed on international routes. This implies 90% growth in IndiGo’s
international ASKM in FY20. Currently, IndiGo is catering to 17 international destinations
and will continue to expand in future. The company does not have any wide body aircrafts
which restricts it to operate on long haul international routes. However, it has mentioned
that wide body operations are inevitable eventually though not likely in the near term.
Code share with Turkish Airlines to benefit in international routes
IndiGo has partnered with Turkish Airlines as a part of international expansion strategy.
This partnership will help it add 12 additional destinations across Europe. Apart from
supporting its direct services to Istanbul, this strategic partnership will expand the choices
available for customers for journeys beyond Istanbul, using Turkish Airlines’ network.
Through this codeshare, customers will get the simplicity of purchasing connecting flights
and seamless travel to these destinations.
SpiceJet, Go Air to expand, Vistara & Air Asia to begin international operations
SpiceJet currently flies to 9 international destinations currently and plans to expand
operations further to destinations like Dhaka, Jeddah and Riyadh. Also, SpiceJet has
entered into a code share agreement with Emirates in Apr-19. This would enable a wider
connectivity to SpiceJet passengers on the Emirates' network across US, Europe, Africa and
Middle East. Emirates has presence in 159 destinations across 86 countries globally. GoAir,
Vistara and Air Asia too are ramping up their expansions in international markets.

Fig 10: Indian carriers aggressively expanding in international markets

Airlines International business plans
To enter into markets like China, Vietnam, Myanmar. Middle East will also be a focus. To deploy
IndiGo 50% of the incremental capacity addition in FY20 on international routes. Direct flight to Istanbul
and code share with Turkish Airlines gives meaningful presence in Europe
To expand international operations with new destinations like Dhaka, Jeddah and Riyadh by Jul-
SpiceJet Aug'19. Code share with Emirates gives access to destinations across US, Europe, Africa and
Middle-East
Started international operations in FY19, to add 12 new flights on international sector and 3 new
GoAir
international destinations namely: Bangkok, Kuwait and Dubai.
To begin international operations with first flight to Singapore in Aug-19. To also expand
Vistara
international operations later.
To launch international services by Sep-Oct'19 with flights to destinations in South East Asia,
Air Asia
including Malaysia and Thailand.
Near term growth to remain tepid; expect recovery in FY21

Market share gains to drive FY20 growth for leading players despite overall weakness
Despite an overall tepid growth in domestic passenger traffic in FY20, key players like
IndiGo, SpiceJet and GoAir are likely to grow at a robust pace led by market share gains
from the grounding of Jet Airways. These players are in a position to add significant
capacity given their on-going fleet inductions or by way of absorption of part of Jet
Airways’ fleet as is the case with SpiceJet. These players also benefit from the fact that Air
India with a domestic market share of 13% in FY19 is unable to step up and make
significant capacity additions given its weak financial health. On an adjusted base of FY19
(ex of Jet Airways), we estimate domestic passenger traffic to grow by 23% yoy.
Fig 11: Tepid growth in FY20, to improve substantially in FY21
Domestic passengers (m) FY18 FY19 FY20E yoy growth% FY21E
IndiGo 49.0 59.9 73.2 22 83.5
SpiceJet 16.1 17.7 22.6 28 27.8
Vistara 5.0 5.4 7.0 28 8.6
Air India 15.5 18.1 18.1 0 17.1
Go Air 10.3 12.6 16.3 30 19.9
Jet Airways 21.3 19.6 0.1 (100) 0.0
Others 6.5 7.2 9.6 33 13.9
Total 123.7 140.5 146.9 170.8
yoy growth % 18.7 13.6 4.6 16.2
Market share % FY18 FY19 FY20E % gain FY21E

IndiGo 40 43 50 8 49
SpiceJet 13 13 16 3 16
Vistara 4 4 4 1 5
Air India 13 13 12 0 10
Go Air 8 9 11 2 11
Jet Airways 17 14 0 (14) 0
Others 5 5 6 1 8
Expect growth recovery in FY21 on improved supply and fare normalisation

We expect domestic passenger growth in FY20 to remain impacted by the weak start to
the year with Q1FY20 growth of only 1.5%. With the supply situation now stabilising,
normalisation of fares and aggressive route expansions by Indian carriers we expect
improved growth momentum in the residual part of the year (4.5% during July-Mar’20)
leading to a tepid growth of 3.7% in FY20. For FY21 we factor a 16% domestic passenger
growth on the back of growth consolidation in FY20 and gains from airlines’ on-going
aggressive route expansion plans.

Fig 12: Jet Airways’ 209 slots at 31 airports are still lying unused
Airports Vacant Slots
Chennai 34
Indore 18
Guwahti 12
Ahmedabad 8
Lucknow 12
Jodhpur 10
Pune 10
Vadodara 10
Kolkata 8
Others 87
Total 209
Source: Company, Media articles
International passenger growth to be exponential for key players

Jet Airways was a dominant player in India’s international passenger traffic market with a
share of 29.2% in the total international traffic carried by Indian carriers in December
2018. However, the impact of grounding of Jet Airways is likely to be significantly offset by
aggressive international growth plans of carriers like IndiGo, SpiceJet and Go Air. As a case
in point, IndiGo has guided for an overall ASKM growth of 30% in FY20 with 50% of the
incremental ASKM being deployed in international markets. On a base of 13.4bn ASKM in
FY19, this implies a growth of 90% in its international ASKM in FY20. GoAir, which began
international operations in FY19 also has aggressive international expansion plans. Further,
Air Asia and Vistara would be commencing their international operations starting Aug-19
and Oct-19, respectively. This should restrict the decline in the international passenger
traffic carried by Indian carriers to 6% in FY20.
Fig 13: Strong international traffic growth on the cards for players in expansion mode
International pax (m) FY18 FY19 FY20E yoy growth % FY21E
Air India 6.4 6.8 7.1 5 7.5
Air India Express 3.8 3.1 3.2 5 3.4
SpiceJet 2.0 2.2 3.8 70 6.7
Jet Airways 8.5 8.0 0.1 (99) 0.0
IndiGo 2.9 4.7 7.8 66 12.1
GoAir 0.0 0.1 0.6 353 0.9
Air Asia 0.0 0.0 0.4 n/a 0.7
Vistara 0.0 0.0 0.4 n/a 0.7
Total 23.5 24.9 23.4 (6) 31.9
yoy growth 13.0 5.7 (5.9) 36.3
Market share % FY18 FY19 FY20E share gains% FY21E

Air India 27 27 30 3 23
Air India Express 16 12 14 1 11
SpiceJet 8 9 16 7 21
Jet Airways 36 32 0 (32) 0
IndiGo 12 19 33 14 38
GoAir 0 1 3 2 3
Air Asia 0 0 2 2 2
Vistara 0 0 2 2 2

Net capacity additions aligned with growth; to support pricing

Net fleet additions in FY20 to be aligned with market growth
As on Mar-19, the industry fleet stood at 685 planes which grew by 18% yoy in FY19. Of
this, Jet Airways had a fleet of 118 planes. As such the grounding of Jet Airways in Apr-19
has eliminated a significant portion of the industry capacity. As a result, we expect the only
a marginal growth of 2.2% in the industry fleet in FY20 to 700 planes despite the aggressive
expansion by two major airlines IndiGo and SpiceJet. For FY21 we estimate net addition
109 planes implying a growth of 15.6% yoy.
Fig 14: Estimate net fleet addition of only 15 (2.2% yoy) in FY20
Fleet FY16 FY17 FY18 FY19 FY20E FY21E
IndiGo 109 131 159 217 267 317
SpiceJet 37 49 58 76 120 140
Vistara 11 13 17 22 32 42
Air India 147 154 168 171 179 187
Go Air 20 24 32 49 61 73
Jet Airways 106 111 119 118 0 0
Others 16 16 26 32 41 50
Total 446 498 579 685 700 809
Growth % 11.7 16.3 18.3 2.2 15.6
Net Incremental addition 52 81 106 15 109
Source: Company, DGCA, Centrum Research
Elevated load factors and reduced competitive intensity to support pricing and yields
On the basis of our estimate of net fleet addition of 15 and 109 in FY20/21, implying
4%/15.4% growth in these years we estimate ASKM growth of (3%)/22% in FY20/FY21. We
estimate traffic (RPKM) growth of (3%)/21% in FY20/21 on the back of our combined
(domestic + international) passenger traffic growth of 3.8%/20.8%. The implied load
factors over FY20 and FY21 are likely to remain elevated (over FY19) in the 85% range.
Further the competitive intensity in the industry has come down with the grounding of Jet
Airways. Players like Go Air which have a sizeable market presence (7.7% domestic market
share) and are expanding aggressively have historically been very profit focussed. As such
we expect elevated load factors and lower competitive intensity to support pricing/yields.
Fig 15: Key operating metrics of industry
FY18 FY19 FY20E FY21E
Domestic pax (m) 123.7 140.5 146.9 170.8
International pax (m) 23.5 24.9 23.4 31.9
Total pax (m) 147.2 165.4 170.4 202.7
Growth % 17.2 13.2 3.1 19.0
ASKM (bn) 235.4 265.9 257.3 308.7
Growth % 13 13 -3 20
RPKM (bn) 198.8 222.2 218.6 263.2
Growth % 17 12 -2 20
Load Factor % 84.5 83.6 85.0 85.3
Crude prices in the $60-65/ barrel range support profitability

We observe that historically airlines have been able to pass-on the impact of increase in
crude prices till levels of $65-70/bbl leading to a relatively stable gross spread (RASK-Fuel)
range of Rs2.6-2.8. Beyond crude price of $70/bbl the burden of incremental fuel costs
becomes difficult to pass on the profitability starts getting impacted materially (dip to Rs2-
2.4 between $70-75/bbl. In this context the current Brent crude price range of $60-65/bbl
offers a benign cost environment for the airlines and supports their profitability.

Fig 16: Impact of fluctuating crude on profitability
120 4.0
2.9 2.8
2.6 2.7 2.6 2.7 3.0
2.4 2.4 2.5
90 2.4
2.0
$/ barrel
Gross margins remained stable 2.0
Rs
till crude price levels of $65-70/
75 75
bbl 60 67
67 63
62 61 1.0
34 54 51 51
30 0.0
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Crude price RASK - Fuel
Gross margins dip sharply

beyond crude price levels of
$70/bbl

IndiGo: Gaining further dominance

 LCC with the most efficient cost structure; gives a huge competitive edge in an
otherwise tough industry
 Jet Airways’ grounding has left a big void; IndiGo rapidly expanding domestic and
international presence to further cement its position
 Visibility on fleet additions coupled with a strong balance sheet to help maintain
dominance
 Expect exponential improvement in earnings led by 33%/23% RPKM growth in
FY20/21, 3% CAGR in yield improvement over FY19; benign fuel prices to help
 Value IndiGo at 7.8x FY21E EV/EBITDAR, which implies a TP of Rs1846 and an upside
of 22% from the current levels
Efficient cost structure a big edge

IndiGo has the lowest cost structure compared with its full-service and low-cost peers and
strives to maintain this edge. Some of the attributes that help IndiGo maintain its cost
leadership are (i) no-frills product offering, (ii) single aircraft (for narrow body operations),
and class configuration iii) Young and fuel efficient fleet (iv) low distribution costs, amongst
others.
No-frills product offering: IndiGo neither offers a frequent flyer program nor includes cost
of food/beverages in the ticket price for its non-corporate passengers. This helps reduce
operating costs and ticket prices.
Fleet homogeneity (for narrow body operations) and single class configuration: IndiGo
currently operates a fleet of 235 aircraft, comprising of 217 narrow body aircrafts of Airbus
A320family (includes 5 A321 neos) which are used for its narrow body operations and 18
ATR aircrafts for its turboprop operations on smaller/regional routes. This largely
homogenous fleet configuration gives IndiGo higher bargaining power with Airbus and
lowers initial purchase costs. IndiGo also reduces recurring operating costs through lower
maintenance, spare parts, operations, crew training and labour costs. For its A320/A321
neo aircrafts IndiGo has entered into ‘power by the hour’ maintenance contracts wherein
IndiGo pays a contracted rate per hour of aircraft flown towards its maintenance contracts
in return for guaranteed availability of spares and replacements whenever they are
required. This lowers the maintenance costs and ensures higher aircraft availability.
Furthermore, IndiGo operates with a single-class configuration (all economy) giving it
maximum seating capacity of 180 seats/aircraft (222 for A321 neo). This helps it maximise
load factor and improve yield/aircraft.
Fig 17: IndiGo Fleet details
Type no seats
A320 ceo 129 180
A320 neo 83 180/186
A321 neo 5 222
ATR 18 74
Total Fleet 235
Young and fuel efficient fleet: For its narrow body operations IndiGo predominantly uses a
sale and lease back model with average lease period of just about 6 years. At the end of
the lease period the aircrafts are usually retired from the fleet and replaced with newer
aircrafts. This helps IndiGo a young fleet of aircrafts which helps lower maintenance costs.
Additionally, IndiGo’s incremental narrow body fleet additions comprise the A320
neo/A321 neo aircrafts which consume ~15% lower fuel as compared to their previous
generation of aircrafts (88 of the 217 narrow body aircrafts are A320 neo/A31 neo).

Low distribution costs: IndiGo, like other airlines, focusses on reducing its distribution
costs by increasing the share of direct sales (e.g., through its website, mobile app, etc.).
Fig 18: IndiGo: Efficient cost structure a key advantage
FY19 (Rs/ASK) IndiGo SpiceJet
Aircraft and engine rentals 0.5 0.6
Employee expenses 0.4 0.5
Aircraft maintenance 0.1 0.7
Selling expenses 0.2 0.1
Other expenses 0.5 0.4
Fuel expenses 1.5 1.5
Interest 0.1 0.1
Depreciation 0.1 0.1
Less: Finance income 0.1 0.1
CASK 3.6 4.2
CASK ex-fuel 2.1 2.6
Rapidly expanding domestic and international presence

IndiGo has significantly stepped up its domestic and international expansion strategy over
the last two years. The airline covers 56 domestic destinations currently as against 39
domestic destinations in March 2017. Addition of 17 domestic destinations over this
period is a significant acceleration over its historical pace of expansion. Similarly, IndiGo
has added 9 international destinations since March 2018 as compared to a total of 8
international destinations covered in March 2018. In a very significant step towards
becoming a serious international player, IndiGo has commenced regular flight operations
to Turkey (Istanbul) and has entered into a code share agreement with Turkish Airlines,
expanding its reach to 12 additional destinations in Europe.
Fig 19: Expansion in domestic and international destinations
Destinations FY17 FY18 FY19
Domestic 39 42 56
International 7 8 17
Total 46 50 73
Fig 20: Recent domestic route expansions

Origin Destination Aircraft Type Effective Date Frequency
Ahmedabad Bagdogra A320 05-Jul-19 1st Frequency
Ahmedabad Guwahati A320 05-Jul-19 1st Frequency
Ahmedabad Jodhpur A320 05-Sep-19 1st Frequency
Delhi Jodhpur A320 05-Sep-19 1st Frequency
Gaya Kolkata ATR 08-Aug-19 1st Frequency
Gaya Varanasi ATR 08-Aug-19 1st Frequency
Gaya Varanasi ATR 08-Aug-19 1st Frequency
Jabalpur Kolkata ATR 28-Jun-19 1st Frequency
Prayagraj Kolkata ATR 28-Jun-19 1st Frequency
Raipur Prayagraj ATR 28-Jun-19 1st Frequency
Shillong Kolkata ATR 20-Jul-19 1st Frequency

Fig 21: International route expansions/destinations added

Origin Destination Aircraft Type Effective Date Frequency
Hong Kong Kolkata A320 04-Sep-19 1st Frequency
Kuwait Mumbai A320 05-Aug-19 1st Frequency
Jeddah Delhi A320 26-Jul-19 1st Frequency
Dhaka Delhi A320 25-Jul-19 1st Frequency
Kuala Lumpur Chennai A320 15-Jul-19 1st Frequency
Abu Dhabi Delhi A320 06-Jun-19 1st Frequency
Abu Dhabi Mumbai A320 05-Jun-19 1st Frequency
Delhi Abu Dhabi A320 05-Jun-19 1st Frequency
Jeddah Mumbai A320 05-Jun-19 1st Frequency
Mumbai Jeddah A320 05-Jun-19 1st Frequency
Fleet addition coupled with strong financials to help maintain dominance

IndiGo has aggressively added capacity over the last couple of years sensing strong
opportunities. IndiGo’s fleet grew at 28.7% CAGR over FY17-19 to 217 aircrafts, much
better than industry fleet growth of 17.3% CAGR over the same period. This timely fleet
augmentation helped the company to capture market share from the void created in the
market post the closure of Jet Airways. Consequently, IndiGo’s market share improved
substantially from 42.5% in Jan-19 to 48% in Jun-19 led by gains from closure of Jet
Airways. Given the healthy opportunities in front, the company has an aggressive fleet
addition plan to support strong growth ahead. It is looking to add 50 aircrafts each over
the next two years to maintain its market share in the range of 47-48% in FY20/21E. IndiGo
has a healthy flight induction plan in place which will help it meet its capacity addition
requirements. IndiGo has placed an order with Airbus of 430 aircrafts in Dec-17 (274 A320
Neos and 156 A321 Neos).
Fig 22: IndiGo fleet addition to remain strong
FY17 FY18 FY19 FY17-19 CAGR % Jun-19 FY20E FY21E
Fleet 131 159 217 28.7 235 267 317
addition 22 28 58 18 50 50
Market Share % 35 36 39 48 48 47
Industry Fleet 498 579 685 17.3
Source: DGCA, Company, Centrum Research
This aggressive expansion plan is being backed up by strong financials of the company.
IndiGo has a lean balance sheet with D/E of 0.3x and a free cash balance of Rs77bn as on
June-19. Timely capacity addition along with strong financial position will help IndiGo to
maintain its dominant position in the industry over the next couple of years.
Fig 23: Lean balance sheet to support strong capacity addition
FY18 FY19 FY20E FY21E
Debt 24,527 21,937 19,999 17,735
Cash 65,806 86,064 118,261 147,529
Net debt (41,279) (64,127) (98,262) (129,793)
D/E 0.3 0.3 0.2 0.1
Debt/ EBIITDA 0.8 NA 0.2 0.1
Fast spreading wings in international markets

IndiGo is looking to expand its international presence aggressively, given the strong set of
opportunities post closure of Jet airways. As a part of its strategy, the company would be
deploying 50% of its incremental capacity addition on international routes in FY20.
Currently IndiGo covers 17 international destinations, of which 9 have been added in FY19
itself. IndiGo already received 12 slots of Jet of which 7 are operational. It is looking to get
more slots of Jet which will help it expand international operations faster. IndiGo entered
into a code share with Turkish Airlines to expand its reach in Europe. Through this
partnership IndiGo will be able to expand its reach by 12 more international destinations.

Fig 24: International Destinations under code share with Turkish airlines
Amsterdam Budapest Malta Tel Aviv
Athens Copenhagen Paris Vienna
Brussels Dublin Prague Zurich
Market share gains and yield improvement key growth drivers

Estimate 33%/23% RPKM growth in FY20/FY21 led robust international growth
We estimate IndiGo’s domestic market share to increase to ~50% in FY20 as compared to
42.6% in FY19 due to additional capacity deployment and market share gains post
grounding of Jet Airways. As a result, while we estimate the domestic passenger traffic for
Indian carriers to grow by a tepid 4.6% in FY20, we estimate IndiGo’s domestic passenger
traffic to grow by 22% in FY20. For FY21 we expect 14% growth in IndiGo’s domestic
passenger traffic on the back of 16% growth in domestic passenger traffic for the industry
with relatively smaller players like Go Air, Vistara and Air Asia India ramping up their fleet
additions and gaining some market share. We expect IndiGo’s aggressive international
expansion plans to drive a 66%/55% growth international passengers in FY20/FY21. Overall
we estimate a 33% / 23% RPKM growth for IndiGo in FY20/FY21.
Operational improvements and higher load factors support yields
IndiGo’s RASK witnessed a strong growth of 10.7%yoy to Rs4.1 on the back of better
revenue management (5-6% impact), a favourable revenue mix (increased share of
bookings in the 0-15day ticket booking window) and reduced competitive intensity (2-3%
impact) post grounding of Jet Airways. The management in Q1FY20 earnings call indicated
that the tailwinds to the yields from the Jet Airways grounding have ceased in Q2FY20 and
in-fact there appears to be some pressure on yields in Q2FY20 (also a seasonally weak
period). However, the management remains confident of still generating a 5-6% RASK
improvement during FY20 based on its revenue management efforts. Meanwhile we
expect load factors for industry and IndiGo to improve in FY20/FY21 which add further
support to the yields. We expect 5.8%/0.3% improvement in RASK for IndiGo in FY20/FY21.
Fig 25: Load factors to remain elevated
Industry (%) FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
Overall 76 79 81 82 84 84 85 85
Domestic 73 80 84 85 87 86 88 88
International 78 79 79 78 81 80 80 81
IndiGo (%)
Overall 77 80 84 85 88 86 88 88
Domestic 76 79 84 85 88 87 89 89
International 82 82 83 81 83 83 83 84
Source: DGCA, Company, Centrum Research
Earnings to derive further support from benign fuel prices

We expect 31% revenue CAGR for IndiGo led by a 28% CAGR in RPKM and a 3% CAGR
improvement in RASK over FY19-21. We assume average Brent crude prices of $65/bbl
over FY20 and FY21 which should keep the fuel costs contained around the current levels
of Rs1.3. We note that parameters like EBITDA/EBITDAR and EBITDAR margins for
FY20/FY21 are not comparable to FY19 due to migration of Ind AS 116 in respect of
accounting for operating leases, which has sharply reduced the aircraft and engine lease
rentals recognized in the P&L while leading to a sharp increase in the interest (finance
charges) on capitalised lease liabilities and depreciation charges on Right of Use (ROU)
assets recognised in the balance sheet. We expect an EPS of Rs90 and Rs112 for FY20/FY21
as compared to an EPS of Rs4.1 in FY19.

Fig 26: Key financial and operating highlights *

(Rs bn) FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY19-21E CAGR %
ASKM (bn) 35.3 42.8 54.6 62.7 80.8 105.6 129.9 26.8
RPKM (bn) 28.2 36.0 46.3 54.9 69.6 92.5 113.8 27.8
Load factor (%) 79.8 84.0 84.8 87.6 86.2 87.6 87.7
Revenue 139.3 161.4 185.8 230.2 285.0 392.6 485.7 30.6
EBITDAR 38.2 56.2 52.7 65.7 36.6 99.2 128.0
EBITDAR margins (%) 27.4 34.8 28.4 28.5 12.8 25.3 26.3
EBITDA 18.7 31.2 21.4 29.6 -2.1 93.6 121.5
EBITDA margins (%) 13.4 19.3 11.5 12.8 -0.7 23.8 25.0
Adjusted PAT 13.0 19.9 16.6 22.4 1.6 34.6 43.2
EPS (Rs) 42.5 55.1 45.9 58.3 4.1 89.9 112.3 425.9
RoE (%) 307.6 129.3 50.7 41.3 2.2 39.9 34.4
Source: Company, Centrum Research *-financials for FY20/FY21 are not comparable to previous due to migration of Ind AS 116 wef 1 April 2019 in respect of operating leases
Price target of Rs1846; initiate with Buy

IndiGo is set to witness an exponential recovery in earnings and return ratios with our
estimate for ROE for FY20/FY21 being 40%/34%. IndiGo’s balance sheet will continue to
strengthen further with strong cash generation leading to net cash position of Rs214bn by
FY21 (inclusive of restricted cash) as compared to Rs131bn as on March 2019. We value
IndiGo at 7.8x FY21E EV/EBITDAR, based on 15% discount to its historic 1 year forward
valuation range. Accordingly, we have a price target of Rs1846, which implies an upside of
22% from the current levels.
Fig 27: SOTP Valuation of Rs1846
Rsm Valuation basis FY21E base value Multiple (x) Value
Business valuation EV/EBITDAR (x) 125,567 7.8 979,420
Less:
Rentals Capitalization of leases 428,324
Net Debt (158,580)
Equity value 709,676
Target price 1,846

Fig 28: Key operating metrics of IndiGo

Key operating metrics FY17 FY18 FY19 FY20E FY21E CAGR % (FY19-21)
Year-end fleet 131 159 217 267 317 20.9
Domestic passenger (m) 41.6 49.0 59.9 73.2 83.5 18.0
International passenger (m) 1.9 2.9 4.7 7.8 12.1 60.5
Total passenger (m) 43.5 51.9 64.6 81.0 95.6 20.9
Average USD/INR rates 67 64 69 70 70
Year-end USD/INR rates 65 65 69 70 70
Brent crude ($/bbl) 49 58 70.0 65.0 65.0
Aircraft utilization (hrs/day) 13.0 12.4 12.4 12.1 12.3
Total ASKM (bn) 54.6 62.7 80.8 105.6 129.9 26.8
Total RPKM (bn) 46.3 54.9 69.6 92.5 113.8 27.8
Total load factor (%) 84.8 87.6 86.2 87.6 87.7
Average fare (Rs) 3,719 3,845 3,895 4,245 4,564 8.2
RASK (Rs) 3.4 3.7 3.6 3.8 3.8 3.1
Fuel exp (Rs) 1.2 1.2 1.5 1.3 1.2 -8.1
RASK-Fuel exp (Rs) 2.3 2.4 2.1 2.5 2.5 10.3
CASK (Rs) 3.0 3.2 3.6 3.3 3.3 -4.2
CASK ex fuel (Rs) 1.9 1.9 2.1 2.0 2.0 -1.6
RASK-CASK (Rs) 0.4 0.5 (0.0) 0.5 0.5
Revenue yield (Rs) 3.5 4.2 3.6 3.8 3.8 3.0
% growth yoy
Year-end fleet 22.4 21.4 36.5 23.0 18.7
Domestic passenger 32.3 17.7 22.4 22.2 14.0
International passenger 17.1 50.7 61.2 66.1 55.0
Total passenger 31.5 19.1 24.5 25.4 17.9
Average USD/INR rates 3.2 (3.9) 7.8 0.2 0.6
Year-end USD/INR rates (1.5) (0.2) 6.1 1.2 -
Brent crude 2.9 17.8 21.6 (7.2) -
Aircraft utilization 7.1 (4.7) 0.4 (2.6) 1.7
Total ASKM 27.4 14.8 29.0 30.7 23.0
Total RPKM 28.7 18.6 26.9 32.8 23.0
Average fare per pax (12.4) 3.4 1.3 9.0 7.5
RASK (9.4) 7.3 (3.5) 5.8 0.4
Fuel exp 4.1 6.6 19.3 (13.2) (2.7)
RASK-Fuel expense (15.1) 7.7 (15.0) 19.2 2.0
CASK (3.0) 4.8 12.2 (7.6) (0.7)
CASK-ex fuel (6.9) 3.6 7.6 (3.6) 0.5
RASK-CASK (40.3) 27.0 NM NM 8.7
Revenue yield (10.5) 20.3 (14.2) 4.4 1.6

Key Risks
Prolonged delay in promoter feud could impact execution of strategic initiatives and
decision making
Certain disagreements between the promoters of IndiGo Mr. Rahul Bhatia (group holding
of 38.3%) and Mr. Rakesh Gangwal (group holding of 36.7%) have surfaced since May
2019. Primarily they relate to handling of related party transactions between IndiGo and
the Rahul Bhatia group and on certain aspects of the Shareholders’ Agreement between
the two promoter groups and the Articles of Association (AoA) of the company. The
shareholders’ agreement and the AoA give rights to the Rahul Bhatia Group to i) appoint 3
out of 6 directors of IndiGo ii) nominate the Chairman of the Board iii) nominate and
appoint the Managing Director iv) nominate and appoint the CEO and v) nominate and
appoint the President. Mr. Gangwal has highlighted that these rights are not being
exercised in the right spirit and may compromise interests of minority shareholders in the
long run. He has requested SEBI to look into these issues make necessary amendments if
deemed fit. Mr. Gangwal has also pointed out that IndiGo is in violation of the SEBI
Regulations, 2015 as it does not have an independent woman director on its board.
On the issue of the related party transactions, the Rahul Bhatia Group has emphasized that
an independent audit to look into the same had not revealed any substantive irregularities
except for certain procedural issues. In any case the quantum of these transactions are
miniscule (0.7% of revenue) and continue to decline further. The Rahul Bhatia Group has
also highlighted that these transactions infact treated IndiGo favourably and helped the
company in its formative years. On the issue of the dominant rights of appointment of
directors and senior management, the Rahul Bhatia group has articulated that these need
to be seen in the context of the disproportionate risks borne by the Rahul Bhatia Group
(vis-à-vis the limited liability of the Rakesh Gangwal Group) and have been very clearly
articulated and disclosed in the company’s IPO prospectus and agreed to by the Rakesh
Gangwal group at the time of signing the shareholders agreement.
In the context of the above issues, IndiGo has received a communication from the Ministry
of Corporate Affairs requiring the company to furnish certain information/explanations in
regard to the complaint received from Mr Rakesh Gangwal. Meanwhile, the Board of
Directors of IndiGo in its meeting held on July 20, 2019 have decided to amend the AoA for
expanding the Board upto a maximum of 10, including 4 independent Directors. This
amendment will be subject to approval of the shareholders at the forthcoming AGM of the
company.
No immediate threat but decision making can be impacted if resolution is prolonged
Prima facie there appears to be no immediate disruption to IndiGo’s operations on
account of the on-going dispute between the promoters. However, we note that the
Rakesh Gangwal group holds a substantial and almost an equivalent stake in the company
as the Rahul Bhatia Group and a prolonged delay in arriving at a resolution can be a
hindrance in implementation of the company’s strategic initiatives and in decision making.
It also risks creating some amount of uncertainty and instability in the company’s senior
management team. At this time, we believe the promoters will be able to resolve the
issues between them before any of the above risks start to materialise.

Higher fuel costs/weaker INR

In FY19, fuel costs accounted for 42% of total costs for IndiGo. About 65% of IndiGo’s total
cost was either denominated or pegged to foreign currency (mainly USD). Aviation being a
very competitive industry, IndiGo may not be able to fully pass on the impact of higher fuel
costs and/or a weaker INR. This could impact earnings and valuations.
Surge in competitive intensity can dent profitability significantly
The airline industry is very competitive and has been historically prone to intense price-
based competition. A price war could typically be triggered by a slowdown in traffic growth
or by predatory-pricing by a new entrant keen on increasing market share. Airlines’
profitability is sensitive to changes in pricing/yields as they have little or no control on
most costs.
Geopolitical issues could lead to slowdown in passenger traffic
The airline industry is sensitive to geopolitical instability. Any distress globally could have a
direct impact on passenger traffic - both tourists and business.

P&L Balance sheet

YE March (Rs mn) FY17 FY18 FY19 FY20E FY21E YE March (Rs mn) FY17 FY18 FY19 FY20E FY21E
Revenues 185,805 230,209 284,968 392,601 485,722 Equity Share Capital 3,615 3,844 3,844 3,844 3,844
Operating expenses 114,513 137,074 189,018 173,680 208,489 Reserves & surplus 34,177 66,930 65,604 100,322 143,393
% of revenues 61.6 59.5 66.3 44.2 42.9 Shareholders' fund 37,792 70,774 69,448 104,166 147,237
Employee cost 20,482 24,550 31,378 43,984 55,981 Total Debt (incl. pref shares if
23,957 24,527 21,937 19,999 17,735
its thr)
% of revenues 11.0 10.7 11.0 11.2 11.5
Liability on operating leases - - - 152,244 144,155
Other expenses 29,377 39,019 66,627 81,338 102,156
Def tax liab. (net) 1,618 3,695 644 1,126 1,771
% of revenues 15.8 16.9 23.4 20.7 21.0
Total Liabilities 63,367 98,997 92,029 277,536 310,899
EBITDA 21,433 29,565 (2,054) 93,599 119,096
Gross Block 55,521 67,739 86,167 230,041 299,871
EBITDA margin (%) 11.5 12.8 (0.7) 23.8 24.5
Less: Acc. Depreciation (17,582) (21,951) (29,547) (68,975) (118,477)
EBITDAR 52,687 65,667 36,556 99,176 125,567
Net Block 37,938 45,788 56,620 161,066 181,394
EBITDAR margin (%) 28.4 28.5 12.8 25.3 25.9
Capital WIP 252 325 220 325 325
Depreciation & Amortisation 4,573 4,369 7,596 39,429 49,502
Net Fixed Assets 38,190 46,113 56,841 161,391 181,719
EBIT 16,861 25,196 (9,650) 54,171 69,594
Investments 37,134 63,440 65,167 65,167 65,167
Interest expenses 3,308 3,398 5,090 20,260 20,040
Inventories 1,632 1,832 2,114 2,283 2,731
Other income 7,891 9,469 13,249 14,309 14,875
Sundry debtors 1,587 2,263 3,625 3,860 4,775
PBT 21,444 31,267 (1,490) 48,220 64,429
Cash 46,325 65,806 86,064 118,261 147,529
Taxes 4,852 8,843 (3,052) 13,502 21,358
Loans & Advances 5,480 8,746 10,509 14,916 18,454
Effective tax rate (%) 23 28 205 28 33
Other assets 21,749 23,092 25,782 34,257 41,911
Adjusted PAT 16,592 22,424 1,561 34,718 43,071
Total Current Asset 76,773 101,740 128,094 173,577 215,399
Extraordinary Items (109) - (25) - -
Trade payables 7,746 10,002 14,552 12,370 14,849
Reported PAT 16,483 22,424 1,536 34,718 43,071
Other current Liab. 79,093 99,294 139,148 106,055 131,466
Adj EPS 45.9 58.3 4.1 90.3 112.0
Provisions 1,891 3,001 4,372 4,174 5,072
Ratios Net Current Assets (11,957) (10,556) (29,979) 50,978 64,012
YE March FY17 FY18 FY19 FY20E FY21E
Total Assets 63,367 98,997 92,029 277,536 310,899
Growth Ratio (%)
Revenue 15.1 23.9 23.8 37.8 23.7 Cash flow
EBITDA (31.3) 37.9 nm nm 27.2 YE March (Rs mn) FY17 FY18 FY19 FY20E FY21E
Adjusted PAT (19.0) 36.0 (93.2) 2,160.5 24.1 Operating profit before working
26,016 35,636 6,105 55,521 70,842
Margin Ratios (%) capital changes
Trade and other receivables (16) (676) (1,362) (235) (915)
Gross 38.4 40.5 33.7 55.8 57.1
Trade payables 334 2,256 4,551 (2,183) 2,480
EBITDA 11.5 12.8 (0.7) 23.8 24.5
Net change - WC 22,211 18,080 39,680 22,611 33,733
Adjusted PAT 8.9 9.7 0.5 8.8 8.9
Direct Taxes (4,912) (6,690) - (13,019) (20,714)
Return Ratios (%)
Cash flow from operations 43,316 47,025 45,786 65,113 83,861
ROE 50.7 41.3 2.2 40.0 34.3
Net Capex 5,031 (12,291) (18,323) (30,979) (52,330)
ROCE 30.2 25.1 (4.1) 26.7 19.2
Long term Investments (27,273) (26,306) (1,727) - -
ROIC 76.6 54.4 169.5 24.5 28.5
Others 40 (71) (119) - -
Turnover Ratios (days)
Cash flow from investing
Gross block turnover ratio (x) 3.2 3.7 3.7 2.5 1.8 (22,202) (38,668) (20,169) (30,979) (52,330)
activities
Solvency Ratio (x) FCF 21,114 8,357 25,616 34,134 31,531
Net debt-equity (0.6) (0.6) (0.9) (0.9) (0.9) Issue of share capital 644 25,301 - - -
Debt-equity 0.6 0.3 0.3 0.2 0.1 Increase/(decrease) in debt (6,114) 570 (2,591) (1,937) (2,264)
Interest coverage ratio 6.5 8.7 (0.4) 4.6 5.9 Dividend (6,506) (14,748) (2,768) - -
Gross debt /EBITDA 1.1 0.8 (10.7) 1.8 1.4 Cash flow from financing (11,975) 11,124 (5,358) (1,937) (2,264)
Per share Ratios (Rs) Net change in cash 9,139 19,481 20,258 32,197 29,267
Adjusted EPS 45.9 58.3 4.1 90.3 112.0 Source: Company, Centrum Research
BVPS 104.6 184.1 180.7 271.0 383.0
CEPS 58.6 69.7 23.8 192.9 240.8
DPS 15.0 32.0 6.0 - -
Dividend payout % 33 55 148 - -
Valuation (x)
P/E (adjusted) 33.1 26.0 374.0 16.8 13.6
P/BV 14.5 8.3 8.4 5.6 4.0
EV/EBITDA 24.6 18.4 nm 5.2 3.8
Dividend yield % 1.0 2.1 0.4 - -

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Interglobe Aviation
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Interglobe Aviation
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Interglobe Aviation - Initiating Coverage - Centrum 23072019

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Initiation

Interglobe Aviation Buy

Gaining new altitudes Price: 1519

Financial and valuation summary

Net sales 94,201 65,120 44.7 284,968 392,601 485,722 Analyst

Key assumptions Valuations Rs/share

Source: Bloomberg, Centrum Research estimates

Centrum Institutional Research 2

Fig 1: Detailed quarterly results (standalone)

Other income 3,064 3,289 3,131 3,765 13,249 3,670 14,309

PBT 313 (9,881) 1,909 6,168 (1,490) 15,053 48,220

Centrum Institutional Research 3

Yields continue to improve

Received 12 international slots of Jet airways

Migration to Ind AS 116 for operating leases

Strong guidance for the year

Centrum Institutional Research 4

Quarterly call highlights

Fig 3: Centrum Quarterly monitor

Centrum Institutional Research 5

Growth recovery underway

Moderation in traffic growth accentuated by supply disruption

Fig 5: Recovery underway in passenger traffic data

Centrum Institutional Research 6

Jet Airways’ closure has added materially to the growth moderation

Airlines fast filling in the supply void while deepening presence

Share of domestic pax % growth yoy

Source: DGCA, Centrum Research *growth pertains to Jan-May’19

Centrum Institutional Research 7

Fig 7: Step-up in domestic connectivity for leading players

Source: Company, Centrum Research

Indian carriers stepping up focus on international markets

Market share % FY18 Apr-May 18 FY19 Apr-May 19 share gains

Centrum Institutional Research 8

Reallocation of Jet Airways slots underway

IndiGo and SpiceJet leading the expansions in international markets

Centrum Institutional Research 9

Fig 10: Indian carriers aggressively expanding in international markets

Near term growth to remain tepid; expect recovery in FY21

Market share % FY18 FY19 FY20E % gain FY21E

Expect growth recovery in FY21 on improved supply and fare normalisation

Centrum Institutional Research 10

International passenger growth to be exponential for key players

Market share % FY18 FY19 FY20E share gains% FY21E

Centrum Institutional Research 11

Net capacity additions aligned with growth; to support pricing

Crude prices in the $60-65/ barrel range support profitability

Centrum Institutional Research 12

Fig 16: Impact of fluctuating crude on profitability

Source: Company, Centrum Research

Gross margins dip sharply

Centrum Institutional Research 13

IndiGo: Gaining further dominance

Efficient cost structure a big edge

Centrum Institutional Research 14

Rapidly expanding domestic and international presence

Fig 20: Recent domestic route expansions

Centrum Institutional Research 15

Fig 21: International route expansions/destinations added

Fleet addition coupled with strong financials to help maintain dominance

Fast spreading wings in international markets

Centrum Institutional Research 16

Market share gains and yield improvement key growth drivers