Analyst Corner| InterGlobe Aviation: Domestic growth driven by non-metros

Opportunity beckons. We hosted Mr Ronojoy Dutta, CEO of Interglobe Aviation for investor meetings. The management is upbeat on most factors affecting their performance (demand, competitive positioning, yields, taxation, infrastructure creation, slot allocation) and shared trends and changes underpinning such confidence. We increase our market share estimate to current run-rate, yielding a Rs 2,100 FV (up 7%).

Demand, Indigo expects demand growth to start matching pre-Covid levels over time. It is seeing domestic growth getting driven by non-metro cities, especially by SMEs/trader community and is also seeing good recovery in select routes of leisure travel. It is enthused by trends in disposable income and demand from air travel coming from unexpected places. Competitive positioning, Indigo expects to leverage its current capacity to gain share once the ministry lifts capacity caps. Based on its recent conversations with the ministry, it expects the government to lift price and more importantly capacity caps for both domestic and international travel by end-April or earlier. It also expects the going to be difficult for domestic peers in terms of capacity addition given the manner in which some of them have treated lessors. Yield, Indigo believes that yields will only increase from hereon.

Receding relevance of metro routes, weakening balance sheets of competition and Indigo’s consistent strategy of matching lowest fares would drive such recovery. Increasing share of higher margin international travel would also support blended yields over time. Cost control, Indigo sees the case strengthening for a lower tax regime for airlines, as the government considers adding air travel to its transportation infrastructure to attract FDI.

Infrastructure creation and slots, Indigo shared inclination of the government of opening another 100 small airports (owned by defence forces/ government entities for now). This bodes well for new traffic as the key metro airports are also expanding capacity. It considers the proposed privatisation of Air India is a positive from the perspective of allocation of new slots. International, Covid-19 has further weakened the positioning of Middle-East majors weakening as passengers have started preferring direct flights from US/Europe into India.

Indigo shared huge opportunity that it aims to explore in regional countries followed by Europe over time. It also shared prospects of garnering traffic from China to Africa using India as a stopover.

We expect Indigo to gain share in domestic by leveraging its connectivity beyond metro routes, its capacity and its improving product positioning. Our near-term estimates take a led down due to the current volatility in oil price. We present below our assessment of composition of demand, supports to recovery in demand in the near term, limited coverage of air-conditioned rail travel in urban clusters and thus prospects of passengers to leapfrog to air travel and prospects of Indigo gaining share as traffic beyond metro cities drives traffic.