Costly oil may keep Indigo from soaring
Interglobe Aviation (Indigo) shares dropped 2.76 per cent to ~2,080 apiece in Monday’s trade on the BSE as the flaring oil prices and the over-supply situation in the aviation industry worried the Street.
The Brent crude is currently trading over $79, up more than 6 per cent in a week. The stock's outperformance over the past few weeks has also dented sentiment.
Over the past six months, Indigo has surged over 31 per cent on the BSE, as against a 20 per cent rise in the Sensex. From the March 2020 low of ~800, the stock has appreciated nearly 170 per cent, against a 134 per cent rally in the Sensex. Spicejet, on the other hand, has soared 138 per cent during this period.
According to Ansuman Deb and Ravin Kurwa, research analysts at ICICI Securities, the rising Brent crude price and no major structural capacity cut may limit the spreads (between revenue and cost per available seat km) of Indigo to ~0.34 in the financial year 2022-23 (FY23).
“Besides, entry of new players (return of Jet Airways and launch of Akasa — the aviation venture of ace investor Rakesh Jhunjhunwala), delay in recovery of international travel, longer absence of high yielding corporate travel, and low cash balance do not provide any rationale for the increase in multiples,” they said in a report dated September 27.
The brokerage has downgraded the stock to “sell” from “add”, with a target price of ~1,650, which translates into a 23 per cent downside from the current levels.
According to Deb and Kurwa’s estimates, Indigo’s RASK (revenue per available seat km) is unlikely to go beyond ~4.3 in FY23, considering there is no structural capacity cut and there are new players entering the market. The RASK shows how much revenue each seat km has generated for the airline.
On the cost side, fuel/ask is unlikely to go below ~1.25 in
FY23 for Indigo, if Brent crude is at $65/barrel, and there is enhanced fuel efficiency due to neo fleet and possible gain from using A321s. Cost ex-fuel/ask, they said, is likely to achieve efficiency and hence, is estimated to grow only at 5 per cent CAGR between FY19 and FY23E.
The RASK at the end of the June quarter was ~2.73, while the CASK (cost per available seat km) was ~5.55.
The steep run-up in the stock price also calls for profitbooking, cautioned G Chokkalingam, founder and chief investment officer (CIO) at Equinomics Research. “The stock’s current market price is
higher than the pre-covid level, while its financials are weak. Such exuberance in the price isn’t justified given the road to recovery is long.”
That said, Indigo is still a better bet than other players, such as Spicejet as it has consistently earned profits over the past decade, barring the Covid period, has flight connectivity to TIER-II/III cities, and also a better international flights’ network than other private airlines, according to analysts.
Spicejet, on the other hand, is already saddled with its own internal issues, besides the rising fuel prices which can keep the stock price under check.
According to reports, the Ajay Singh-controlled carrier's plans to hive off its logistics and cargo business into a separate entity are facing legal hurdles with lenders and aircraft lessors challenging the move.
The aviation sector, according to A K Prabhakar, head of research at IDBI Capital, is not a good way to play the travel theme amid economic recovery. “Aviation is a cost-heavy sector, hence it’s a risky bet. A small increase in the cost structure of a company makes it unsustainable. Therefore, investors should be very careful while investing in the space,” he said.