Interglobe Aviation Ltd operates Indigo, which is the largest passenger airline in
India with a market share of 37.4% (as of August 31, 2105). It is a low-cost
carrier (LCC) with an asset light business model which enables it to have lowest
cost and highest profitability amongst Indian airline companies.
Cost competiveness vs its peers: Interglobe Aviation (Interglobe) has been the only
passenger aircraft operator in India to post consistent profits over the past seven
years. The magnitude of the aircraft orders placed by the company has enabled it
to negotiate favorable terms with Airbus, as well as with other suppliers and
service providers. This has created a structural cost advantage for the company in
terms of operations and maintenance of aircrafts compared to its peers.
Capitalizing on highly underpenetrated Indian air travel industry: The Indian air
travel industry is underpenetrated in comparison to other countries with
penetration levels of 0.08 annual domestic carrier seats per capita against other
other developing markets such as Brazil, Turkey, Indonesia and China, where
penetration rates are between 0.35 and 0.65. The Industry is growing at ~12.0%
CAGR over the past nine years and is expected to grow at a similar pace. Going
forward, we expect that improving penetration level will provide an opportunity to
Indigo to capture market share as it is expanding its fleet size from currently 97 to
158 by FY2108E. Indigo is better placed compared to its peers to leverage on the
anticipated growth in the industry as the competition would face constraints in
adding capacity owing to stressed balance sheet and low or no profitability.
Soft Crude prices to benefit the Aviation Industry: Aviation Turbine Fuel (ATF)
forms a major cost component for all airline operators. Soft ATF prices have
boosted the operating performance of airline operators, including Indigo. ATF
prices are expected to continue to be tepid in the near future, mainly due to
higher global inventory levels of crude and owing to the subdued demand
scenario. We expect lower crude prices and consequently lower ATF prices to lead
to a decline in airfares, which should boost air traffic volume growth in the
country. Load factors will resultantly head higher, while the same has already
been witnessed in 1QFY2016 for all airline companies.
Outlook and Valuation: At the upper end of the price band, Interglobe is valued
at 2.1x EV/Sales and at a P/E of 21.3x (FY2015). The company is not comparable
to domestic peers on P/E basis as most of them are loss making while the
premium on EV/Sales basis is warranted due to Interglobe’s superior operating
performance and profitability. We have compared Interglobe to its like to like
international peer Ryanair, which trades at 3.2x EV/Sales and at a P/E multiple of
20.6x (FY2015). We believe that the valuation of Interglobe is justified,
considering the opportunity present in the vastly underpenetrated Indian air travel
market. Interglobe is better placed than its peers to capture higher market share
on the back of its proven Management track record, continuous fleet addition and
with its sustainable profitable business model. Hence we recommend a
“Subscribe” to the issue at the higher end of the price band.

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