IndiGo shares take off, but journey ahead isn’t smooth

Market


The InterGlobe Aviation Ltd stock has been relentless. Shares of the company, which runs India’s largest airline IndiGo, flew to a new high on Friday, closing 11% up on the National Stock Exchange.

“Investors seem to have been excited about the prospects of inclusion of aviation turbine fuel (ATF) under the goods and services tax (GST) ambit,” said an analyst, requesting anonymity. “But that is puzzling considering the chances of that happening were bleak to start with,” he added. The GST Council has decided that it is not appropriate to bring petroleum products under GST at this stage.

The gradual lifting of restrictions and rising pace of vaccinations have driven up domestic air passenger traffic. According to the Directorate General of Civil Aviation, passenger traffic in August increased by nearly 34% month-on-month. Even so, the August performance was still 14% below the highs seen in February.

Before and after

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Before and after

For IndiGo, losses are expected to decline sequentially in the September quarter. “IndiGo passenger yield and RASK are likely to be higher than 2Q-4Q FY21 levels, driven by support from the government fare regulations. We estimate overall 2Q loss would be around 1,200 crore ( 900 crore counting for potential MTM forex gain). This would be less than half of 1Q FY22 levels,” said analysts from Credit Suisse Securities (India) Pvt. Ltd in a report on 16 September. RASK is revenue per available seat kilometre, a unit measurement for airlines.

Meanwhile, the government has allowed airlines to fly 85% of their pre-covid domestic capacity from 72.5% earlier. Analysts point out that if demand recovery is decent and the third covid wave does not hit the country, this improves the outlook for the festive December quarter and accordingly, airlines could see narrowing of losses.

To be sure, it’s unlikely that financial year 2022 would bring a large respite on profitability, especially considering crude oil prices are firm. In FY21, IndiGo’s net loss was around 5,800 crore. After Q1FY22, the airline’s net worth turned negative.

However, market share gains have kept sentiments upbeat for the stock, which has increased 46% from its pre-covid highs.

Moving ahead, the slower pace of recovery and a potential third covid wave remain primary challenges.

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