Analyst Corner: Upgrade InterGlobe to ‘Buy’ from ‘Sell’ with FV of Rs 1520

We also expect Indigo to benefit from uptick in fuel-cost savings with increasing share of A320neos in the fleer over FY2021-23 and reduction in maintenance cost related to retiring of the old A320ceos.

Better spreads ahead; upgrade to ‘buy’. We expect pressures on cost and yield to recede for the airlines sector beyond a tough FY2021, Indigo to re-establish its lead over peers in terms of spread and the company to continue driving double-digit growth for air travel for long. We upgrade the stock to ‘buy’ (from sell) with FV of Rs 1,520 (from Rs 900) as we bake in modest growth over FY2020-23 over low FY2020 base, Rs 0.33 per ASK spread by FY2023E and roll-forward.

The past few years have seen the sector and the market leader making losses due to the twin impact of higher fuel prices and eagerness of airlines to increase their network coverage to explore new growth opportunities. We envisage airlines to retain meaningful share of benefits of a low crude oil price regime in order to turn into black after three years of losses over FY2019-21E. We also note limited scope of the sector expanding coverage with the top-two private players — Indigo and Spicejet — already covering ~90% or more of current traffic through the destinations they serve. We also expect Indigo to benefit from uptick in fuel-cost savings with increasing share of A320neos in the fleer over FY2021-23 and reduction in maintenance cost related to retiring of the old A320ceos.

Limited scope to expand coverage does not necessarily mean low growth. Our assessment of route-wise traffic suggests a steady 8% CAGR over FY2016-20 in metro-metro routes and a higher 14% CAGR driven by other routes. We estimate an 11% CAGR in air travel demand over the next decade as a combination of base 8% growth and 3% add-on support from other airport cities catching up with metro city airports in terms of trips per capita. Currently metro city airports (top-six) witness 1.6 trips per capita per annum versus 1X for all aggregate city airports. We expect Indigo to be a key beneficiary of such a trend.