Tax cuts, lower costs may take Indigo out of air bubble

Change in board structure positive; consensus on RPT policy key factor

The stock of Interglobe Aviation (Indigo) has gained close to 8 per cent over the last three trading sessions, following a boost to net profit from the recent corporation tax rate cut, as well as lower costs from newer plane inductions. The other trigger is the expansion of the board and inclusion of an independent director, which could be the first step in resolving the differences between the two founder-promoters.

Among the gains for the company is the cut in corporation tax rate announced last week. Brokerages had factored in a tax rate of 29 per cent for FY20 and FY21, while the effective rate after the reduction would be 25.2 per cent. This, according to analysts, would help increase the bottom line by 5-6 per cent each over the next couple of fiscal years. While the company had tax credits in FY19, its tax rate in FY18 was 28 per cent. Lower costs is another positive that stands out vis-à-vis rivals.

Deepika Mundra of Jpmorgan believes Indigo’s cost advantages will be structural, while rivals faces 737-Max delays, lower scale, or high interim costs for fleet ramp-up after Jet’s exit.

About 55 per cent of Indigo’s fleet of over 235 planes are A320ceo aircraft. These are to be replaced with Neos that burn lower fuel and have more seats. However, investors should be mindful of risks. About 65-70 per cent of costs are dollar-denominated that could offset the gains. The two moving parts here are rising crude oil prices and a weak rupee — both of which aggravate the cost situation. Though crude oil prices have gone up, they are still lower than last year.

Analysts at SBICAP Securities say aviation turbine fuel has dropped 9 per cent year-on-year in the September quarter.

This is running lower than the average ~68/litre for FY19. However, any sharp increase from these levels will be detrimental to carriers such as Indigo.

The other risk that has been an overhang is the tussle between the promoters, especially on the issue of relatedparty activities. However, Ansuman Deb of ICICI Securities believes the consensus between promoters on the ‘related-party transaction’ policy, board composition, and eventual on-boarding of an independent woman director are sentiment-positive steps. Investors could check in to the stock on dips.