THE SMART INVESTOR

Pricing pressures add to rising bill, leading to a sharp fall in margins

Indigo loses altitude in Q4 on high fuel costs

Severe competitive pressure, higher fuel costs and adverse forex exchange position led to a weak March quarter performance for InterGlobe Aviation, IndiGo's parent company. The company reported a 73 per cent decline in net profit to ~1.17 billion for the March quarter. Operating profit (excluding rentals) was down 22 per cent, while margins were down 1,000 basis points to 19.5 per cent. The numbers at the operating and net level were 34-80 per cent below estimates. The stock, which fell 3.7 per cent in trade, could see more pressure in trade on Thursday.

Fuel expenses, which account for 40 per cent of costs, were up 33.5 per cent and was the single-biggest reason for the muted show. To compound matters, pricing pressures led to lower yields which were down 5.6 per cent.

The reason for pressure on ticket revenues was the falling average price in the booking period of 15 days prior to departure, much higher last year, according to the management. Finally, forex loss as compared to profit in the year ago quarter dented the profit.

The management indicated the falling yields, over the first four months of the current calendar year, have started to reverse over the past week. It was too early to confirm this trend. The company believes the prevalent discounted prices are not sustainable, given the higher costs (on fuel and a weak rupee) increase the lease and maintenance costs. While the company is looking at keeping its costs down, it has reiterated it will match its competitor’s on pricing.

While unit costs rise and revenue growth is hampered by falling prices, the positives are strong volumes and record load factors. While capacity increased by 21 per cent, passenger growth was at 24 per cent, helping the company reach load factors of 89 per cent. The company reiterated its plan to increase capacity by 18 per cent in the quarter.

It is targeting an overall year-on-year capacity addition of 25 per cent for the full year. The new capacity is expected to be used on current and new routes, including the regional connectivity scheme.

The company is planning to add ATRs, A320 Neos and wide-bodied aircraft to seek growth in India and abroad. Multiple aircrafts could add to the already high cost structure due to the spike in fuel costs. Given the multiple headwinds on the revenue and cost fronts, investors could expect a bumpy ride ahead unless pricing pressures ease.

Operating profit was down 22 per cent, while margins were down 1,000 basis points to 19.5 per cent