Indigo share price plunges; should you buy?

InterGlobe Aviation, which runs country's largest domestic carrier IndiGo, took a severe beating on Dalal Street. The stock tanked a whopping 11% after InterGlobe reported a steep 96.6% fall in net profit to Rs 27.8 crore in June quarter, owing to adverse impact of foreign exchange, high fuel prices, lower yields and higher maintenance cost. At around 1309 hours, the share price of Indigo was trading at Rs 920.20 per piece down by Rs 84.05 or 8.37%, however, the airline has touched a new low of Rs 891.07 per piece today. 

The company’s EBITDAR (operating profit) was also down by 42.4% to Rs 1,130.1 crore in Q1FY19 compared to Rs 1,961.8 crore in Q1FY18. While EBITDAR margin was at 17.4% for the quarter ended June 2018, compared to 34.1 % for the same period last year. 

Indigo’s fuel cost during this quarter rose by 54.4% to Rs 2,715.6 crore as against Rs 1,759.2 crore in similar quarter of the previous year. 

This led to increase in total expenses for the quarter ended June 2018 to Rs 6,787 crore, an increase of 40.5% over the same quarter last year. CASK excluding fuel was Rs 2.17, an increase of 13 .3% over the same quarter last year. 

Considering the current performance in share price and weak Q1FY19 result, as an investor one should ask the question whether to invest in Indigo or to avoid. 

Interestingly, following the result announcement, many analysts and experts have trimmed down their target price for the airline. 

JPMorgan downgraded Indigo share price  to neutral from Overweight, while cutting target price to Rs 900 from Rs 1,150. 

In JP Morgan’s view, Q1 earnings impacted all fronts. Expect industry to either take up pricing or cut back on capacity addition. Lower pricing due to competitive intensity to pressure the stock near term. Sufficient levers to improve its cost base over medium to long term.

Meanwhile, UBS maintained a sell call on the airline’s share price with a target price of Rs 940 from previous Rs 1,040. Analysts over here said, “Q1 net profit declines significantly on high fuel and other expenses. Continue to expect FY19 yield growth to be weak. Maintenance spend to remain high going forward in the near term

UBS has cut their FY19/20 EPS estimates by 34%/5% for Indigo. 

Garima Mishra, analysts at Kotak Institutional Equities said, “We remain surprised by the extent of pressure on yields – Indigo management mentioned that the 0-15 day bucket, accounting for ~40% of bookings, remained under pressure in 1QFY19. This commentary had surprised us in 4QFY18 as the near-term booking window is typically price insensitive. The unchanged situation in 1QFY19 reflects the intense competitive condition of the industry. “

According to Kotak, the extent of mismatch between costs and yields has taken us by surprise, and is the key reason for a sharp 30% cut in FY2019E EPS. 

Mishra adds, “ We believe current yield levels would, with time, put pressure on competition to either increase prices or cut capacity – either scenario should be positive for Indigo. We, thus, factor in mid-cycle margin assumptions (based on average of FY2014-18 margins) for FY2020 and FY2021, which still result in 14-18% EPS cut for those years, and a reduction in TP to Rs 1,220.”