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Interglobe Aviation (Indigo) is India’s largest aviation player with a market share of 37.4% as on August 2015 and the seventh largest low cost carrier globally. The company commenced its operation in August 2006 with a single aircraft and has grown to a fleet of 97 Airbus aircraft (with an average age of aircraft of 3.2 years) as of August 2015. The magnitude of the 2005 and 2011 aircraft order with Airbus has enabled Indigo to have a structural cost advantage in reducing cost related to acquisition, maintenance and operation of aircraft. The company has an excellent financial track record with revenue and EBITDAR CAGR of 38.0% and 34.8%, respectively, in FY11-15.
Investment Rationale
Largest player in one of the fastest growing aviation markets globally
India has one of the lowest air travel penetration rates in the world of 0.08 annual seats per capita vs. 0.35-0.65 in developing countries like Brazil, Turkey, Indonesia and China. This under-penetrated market has been dominated by Indigo (an LCC player) with a market share of 37.4% as on August 2015 (up from 12.5% in FY09). Further, pending orders of 430 A320neos will help the company to grow its fleet at 11% CAGR in the next seven years and maintain leadership in the Indian aviation market.
India has one of the lowest air travel penetration rates in the world of 0.08 annual seats per capita vs. 0.35-0.65 in developing countries like Brazil, Turkey, Indonesia and China. This under-penetrated market has been dominated by Indigo (an LCC player) with a market share of 37.4% as on August 2015 (up from 12.5% in FY09). Further, pending orders of 430 A320neos will help the company to grow its fleet at 11% CAGR in the next seven years and maintain leadership in the Indian aviation market.
Disciplined execution helps maintain cost leadership
The magnitude of order of 100 aircraft in 2005 and 180 Aircraft in 2011 has enabled Indigo to have a structural cost advantage by reducing cost related to acquisition, maintenance and operation of aircraft. Indigo also receives incentives from Airbus (due to bulk orders), which helps in reducing aircraft rental payments. Indigo has been able to maintain a young fleet with average age of 3.1 years by entering into short-term sale-and-leaseback operating leases typically ranging from three to six years. This helps maintain higher flight dispatch and improved fuel-efficiency. Further, high aircraft utilisation and lower turnaround time have helped Indigo maintain the lowest cost in the industry. This places it in a better position compared to its peers.
The magnitude of order of 100 aircraft in 2005 and 180 Aircraft in 2011 has enabled Indigo to have a structural cost advantage by reducing cost related to acquisition, maintenance and operation of aircraft. Indigo also receives incentives from Airbus (due to bulk orders), which helps in reducing aircraft rental payments. Indigo has been able to maintain a young fleet with average age of 3.1 years by entering into short-term sale-and-leaseback operating leases typically ranging from three to six years. This helps maintain higher flight dispatch and improved fuel-efficiency. Further, high aircraft utilisation and lower turnaround time have helped Indigo maintain the lowest cost in the industry. This places it in a better position compared to its peers.
Strong cash flow, consistent profitability
The structural cost advantage has enabled the company to register consistent profitability over the past seven fiscals (FY09-15). Even in the worst year (FY12), the company was able to register PAT of Rs 141 crore. This is also reflected in robust cash flow generation, which has grown at a CAGR of 30% in FY10-15.
The structural cost advantage has enabled the company to register consistent profitability over the past seven fiscals (FY09-15). Even in the worst year (FY12), the company was able to register PAT of Rs 141 crore. This is also reflected in robust cash flow generation, which has grown at a CAGR of 30% in FY10-15.
Richly valued
The proposed issue price band of Rs 700-765 implies an EV/EBITDA of 13.6-14.8x and EV/sales of 1.83x-2.0x, which, we believe, factors in all major positives of lower than industry cost structure, low crude prices and sustained mid-teen ASK growth. The valuation also commands a premium over select global peers that are trading at average EV/sales of 1.5x and EV/EBITDA of 9.3x.
The proposed issue price band of Rs 700-765 implies an EV/EBITDA of 13.6-14.8x and EV/sales of 1.83x-2.0x, which, we believe, factors in all major positives of lower than industry cost structure, low crude prices and sustained mid-teen ASK growth. The valuation also commands a premium over select global peers that are trading at average EV/sales of 1.5x and EV/EBITDA of 9.3x.
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