Subscribe to Interglobe Aviation IPO: Aditya Birla Money

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Interglobe Aviation Limited (IAL), the owner and operator of airline brand Indigo is planning it’s maiden IPO. Issue comprises of fresh issue of around 16.6mn shares (at Rs 765) and 26.1mn shares via OFS. IAL would have a market capitalization of around Rs 32,000 crore at the higher price band of Rs 765/share.

Despite India’s overall economic growth and the growth of its air travel market since the beginning of the aviation market’s liberalization in 2003, India still has one of the lowest air travel penetration rates in the world, (defined by annual domestic carrier seats per capita). India’s penetration of 0.08 annual domestic seats per capita is extremely low relative to other developing markets such as Brazil, Turkey, Indonesia and China, where penetration rates are between 0.35 and 0.65 annual seats per capita.

Outlook for crude oil prices: For an airline, typically, aircraft fuel expense is the biggest expense. Over the past decade, it has ranged between 30% to 55% of revenues for most Indian carriers. An airline’s profitability is to a large extent dependent on crude oil prices, since it is one of the biggest cost component. Moreover since its elasticity to revenues is relatively low, any savings on fuel costs will flow almost directly go to their bottom-line. Given global growth concerns, crude oil prices are expected to remain subdued over the next few quarters, which will aid Indigo’s profitability significantly.

Outlook and Valuations
Indigo is India’s largest airline by ASK and passenger volumes, third largest by fleet and largest in terms of fleet order book. Moreover, it is also India’s only profitable airline and has been like that for the past seven years, in an industry plagued with high costs and taxes. In light of Indigo’s market leadership position, cost competitiveness, India’s aviation potential, and Indigo’s ambitious growth plans, we value Indigo at a 30% premium to global peers (global average P/E of 11) at 14.5x FY17 (expected) EPS of Rs 62, implying a fair value of Rs 890, leaving a upside of around 15%. Subscribe for the issue, says Aditya Birla Money.