We expect Indigo’s near-term financial performance will be impacted by two ongoing P&W (Pratt & Whitney) issues from FY2024-26 and high crude oil prices with the latter primarily impacting the second quarter of FY2024. We cut our estimates by 10-16% largely on the back of these transient issues—P&W-powered aircraft are expected to phase out of the fleet by FY2028. We thus lower fair value (FV) by a smaller 6% quantum to `3,200 (includes roll-forward as well). We find current market price (CMP) attractive trading at sub-13X September 2024E EPS, a period that will see peaking out of P&W issues based on our understanding.
Pricing woes unlikely to continue much beyond 2QFY24
In 2QFY24 we anticipate a loss due to weak demand patterns and elevated crude oil prices, which have yet to be passed on to consumers. We expect price hikes to be taken by airlines starting 3Q as the ability to pass on cost increase improves with strong seasonality of demand. In such a context, we highlight airlines having inferior profitability versus Indigo—(i)Vistara incurred a higher loss per available seat kilometer (ASK) than Indigo in FY2023 and (ii) SpiceJet reported a loss per ASK in 1Q, while Indigo achieved significant profitability per ASK. We also highlight the improving trajectory of forward prices, reflecting the case of airlines passing on the cost increase.
Ambuja promoters to raise $500mn through sale of 2.84% stake Mining stocks NMDC, Vedanta, Hind Zinc, MOIL, Coal India plunge as much as 5% after SC allows states to collect past dues on royalties Akums Drugs and Pharmaceuticals makes positive debut, lists at 7% premium; Read to know more Vinod Cookware acquires Healux International, aims to expand its B2C stronghold within borders
Also Read
P&W woes now likely to impact profitability over FY2024-26, a transitory issue
The latest P&W advisory anticipates a peak grounding of approximately 650 aircraft between January 2024 and June 2024. This should impact 70-75 of Indigo’s aircraft during this peak period. It’s important to note that a portion of these grounded aircraft is already included in the 45 currently grounded within Indigo’s fleet. Additionally, Indigo has mitigated some of this impact by placing orders for 22 new aircraft.
10-16% lower estimates factor extension of P&W issues and related margin hit
We have reduced our FY2024E EPS estimate by 16%. This decrease is primarily due to a loss that we anticipate in the second quarter of the fiscal year. However, we anticipate that EPS estimates for the second half of FY2024 will remain relatively stable. Come from Sports betting site VPbet
Our FY2025E EPS estimate has been revised downward by 10%. This adjustment is a result of the impact on profitability, which is attributed to high groundings and the introduction of 22 additional aircraft, accounting for 7% of the fleet, with an inferior cost structure.
We have made a more significant reduction of 16% in our FY2026E EPS estimate to account for the additional impact of a decrease in available seat kilometers. This decrease reflects the extension of challenges related to P&W issues into FY2026.
We note that we had previously adjusted ASK estimates for FY2024 and FY2025, considering that Indigo’s ASK is expected to remain flat q-o-q for the remainder of FY2024 and grow by 12-13% in FY2025/26, in alignment with the addition of new aircraft.
We have adjusted the fair value to $3,200, taking into account a 1X higher multiple (17X) and updating it to reflect the quarter ending in September 2025. This higher multiple of 17X reflects the temporary issues faced by P&W. Indigo received its final aircraft with P&W engines in FY2021 and operates on a six-year lease period.
