IndiGo continues to fly high: Analysts see up to 34% upside potential; UBS says ‘Buy’
Zurich-based global investment banking firm UBS raised its target price for Indigo to Rs 4,000 from Rs 5,400 while maintaining ‘Buy’ rating on the long-term macro outlook along with various demand and supply tailwinds.
UBS said in a note on the company that it expects Indigo’s market share gains in international travel to continue, further aided by A321 XLRs and A350s in the medium to long term.
“We remain constructive on Indigo’s medium-term profitability, driven by a very favorable industry structure. We expect Indigo to deliver an EBITDA CAGR of 13 percent over FY24-27E with upside risks. However, a near-term impact on earnings from a sudden significant increase in supply, seasonality or sharp increases in fuel prices cannot be ruled out; any associated dip remains an ideal buying opportunity in our view,” Pramod Kumar, Nikunj Mandowara and Aditya Chandrasekar of UBS wrote in a recent report.
However, the investment bank expects the domestic aviation giant’s profitability to be impacted in Q1’25 given the sharp increase in Air India/Vistara’s capacity in the near term, and expects a weaker Q2 due to seasonality.
Indigo, the only moneymaker
According to analysts, besides rising GDP per capita, the Indian aviation sector is also experiencing several structural tailwinds, including strong growth in airport infrastructure, growing demand outside major cities, the government’s focus on making India an export hub and significant time savings supporting the transition from railways.
That said, Indigo is the only profit-making airline in the Indian flying group, according to analysts at brokerage firm Kotak Institutional Equities. Other Indian airlines are struggling to make profits due to higher capital expenditure and lower returns on investment.
Most airlines besides Indigo have invested a lot of capital, which they need to make returns on and are not making money with the current fares. In our assessment, airlines have no option but to increase fares over time. Airlines will have to worry about the heaviest price inflation borne by flyers flying closer to the travel date, analysts said. KIE has given Indigo a ‘Buy’ rating with a target price of Rs 5,700 per share.
Furthermore, UBS stated that Indigo’s cost structure is best in class; it was the only airline to post positive Ebitda in fiscal 2023, with margins 1,700-2,800 basis points higher than competitors.
In FY24, Indigo posted a record post-tax profit of Rs 9,000 crore, while Air India posted a loss of Rs 7,000 crore. UBS, therefore, sees strong pricing power for Indigo. Despite near-term cost inflation, it sees multiple margin tailwinds in the medium term, including a decline in crude oil prices, a shift to more fuel-efficient aircraft and a decline in the number of aircraft on the ground.
The company’s stock price rose 1.32 percent intraday to Rs 4,283 per share. At 11:28 am; the company’s shares were trading 0.18 percent higher at Rs 4,235.35 per share on the BSE. In comparison, the BSE Sensex was up 0.35 percent at 79,312
First print: Jul 01, 2024 | 11:53 am IST