IndiGo shares suggest worries about turbulence at the top have receded

Shares of InterGlobe Aviation Ltd are not very far from their lifetime highs of 1,716 seen on 28 May. Besides the airline’s stock, at 1,656.25 currently, is nearly 6% above the levels seen before the troubles between its two promoters intensified in July

InterGlobe runs IndiGo, India’s largest airline by market share. Clearly, investor worries about the turbulence at the top appear to have subsided, at least for now.

In fact, Tuesday’s annual general meeting concluded on a good note. “The consensus between promoters on ‘related party transaction’ policy and board composition is sentiment-positive," wrote Ansuman Deb of ICICI Securities Ltd in a report on Thursday. Shareholders have approved the alteration of the company’s Articles of Association to increase the board size to 10 from six earlier.

IndiGo’s operational performance has remained unaffected by the promoter squabbles so far. This is evident from the impressive June quarter numbers. One bright spot has been the better-than-expected yields (a measure of pricing) improvement of 12.7%.

Having said that, June quarter financial performance cannot be expected to be replicated in the September quarter, as the latter is traditionally leaner. The airline has done its bit to lower expectations.

During its June quarter earnings conference call, Ronojoy Dutta, chief executive officer of IndiGo, said, “We are witnessing some lower fares in the 0-15 day booking window and expect this to add some pressure to our unit revenues in the second quarter."

Nonetheless, crude oil prices have behaved and that is comforting for the sector in general. “The fall in aviation turbine fuel prices in the first 2 months of Q2FY20 will help offset weaker (versus Q1FY20) yields," said analysts at SBICAP Securities Ltd in a report on 22 August. “This will help reduce cost and improve RASK-CASK spread." RASK and CASK are revenue and cost unit measurements for airlines.

During the call, Dutta added, “I want to remind our shareholders that in the second quarter last year, we registered a negative 16% PBT margin. We will, of course, do better than that this year but how much better is still an open question." PBT is short for a profit before tax.

Going ahead, incremental benefits from the grounding of Jet Airways (India) Ltd could well be limited. IndiGo has been a key beneficiary of Jet Airways’ downfall. It flew 17% more domestic passengers in July compared to last year. The airline’s domestic market share stood at an envious 47.8%.

The sharp appreciation in IndiGo’s shares over the past year, suggests investors have taken this into cognizance. However, meaningful appreciation hereon could well be limited given the lean September quarter unless, of course, the airline surprises dramatically. Investors should watch the traction from the international market in future.

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