Indigo’s upgrade from ‘sell’ to ‘buy’ lifts sentiment

Shares of Interglobe Aviation (Indigo) gained altitude on Tuesday on the back of bullish commentary by analysts. Kotak Institutional Equities (KIE) upgraded the stock from ‘sell’ to ‘buy’ and increased its fair value assessment from ~900 to ~1,520.

Shares of Indigo shot up as much as 6 per cent before ending just 2.1 per cent higher at ~1,255 amid volatility in the secondary market.

“We expect pressures on cost and yield to recede for the aviation sector beyond a tough FY21, Indigo to reestablish its lead over peers in terms of spread, and the firm to continue driving doubledigit growth for air travel for long,” said KIE analysts Aditya Mongia and Teena Virmani. The analysts expect Indigo’s earnings per share (EPS) to improve to ~71 in FY22. At that EPS, the stock currently trades at a price-to-earnings (P/E) multiple of less than 18x.

Shares of Indigo have largely moved in line with the benchmark indices this year. The stock has rebounded 47 per cent from its March lows, but is still down 6 per cent on a YTD basis. However, the stock is currently down 32 per cent, from its record high of ~1,852 achieved a year ago.

Aviation stocks have been through a turbulent phase due to expansion of network amid a spike in oil prices.

However, analysts see these headwinds turning into tailwinds. “We envisage airlines to retain a meaningful share of the benefits of a low crude oil price regime in order to turn into the black after three years of losses over FY1921E. We also note limited scope of the sector expanding coverage, with the top-two private players — Indigo and Spicejet — already covering 90 per cent or more of current traffic through the destinations they serve. We expect Indigo to benefit from (1) uptick in fuel-cost savings with an increasing share of A320neos in the fleet over FY21-23, and (2) reduction in maintenance cost related to retiring of the old A320ceos,” the KIE note added.