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IndiGo Shares Soar 10% on Planned Air Fare Increases; Should You Buy, Sell, or Hold?

Shares of InterGlobe Aviation Ltd. (IndiGo) increased by as much as 10% after the firm declared its intention to increase prices to generate a profit following its March quarter loss. The markets also applauded better revenue as a result of a pickup in traffic and improved yield. Yield measures the typical revenue per paying passenger flown one mile.

However, the domestic budget airline, which was impacted by the COVID-19 Omicron wave, reported a widening consolidated net loss of Rs 1,681 crore for the quarter ending March 31, 2022. In the same period last year, the aviation company reported a net loss of Rs 1,159 crore.

The largest airline in India announced a greater deficit for the fourth quarter as rising fuel prices more than offset an uptick in demand for flights. However, compared to the same time last year, it recorded a 10.3% increase in the number of passengers.

Due to a significant traffic bounce in the second half of the quarter, the revenue from operations climbed by 28.8% to Rs 8,020.74 crore in the quarter under review from Rs 6,222.94 crore in the same quarter last fiscal.

EBITDAR for IndiGo was Rs 171.8 crore with an EBITDAR margin of 2.1%, as opposed to Rs 648.3 crore with an EBITDAR margin of 10.4% for the same period last year.

Ronojoy Dutta, CEO of IndiGo, commented on the findings, stating that the quarter had been challenging due to the demand destruction brought on by the Omicron virus in the first half. Even though demand and traffic picked up in the second half of the quarter, we had difficulties due to rising fuel prices and a declining currency.

In a market that is rebounding, we think IndiGo is best positioned to maximize profits. We are concentrated on preserving our cost leadership position and continuing to develop the most effective network in the region as we try to bring the airline back to profitability, he added.

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"IndiGo's reported a poor EBITDAR of 1.3 percent, driven by rising fuel costs, higher FX losses, and demand hampered by Omicron wave," according to analysts at Prabhudas Lilladher. The business was successful in keeping yields at Rs. 4.4, on par with QoQ. Lower RASK (-3 percent QoQ) had a 300bps QoQ impact on load factors at 76.5 percent.

"Despite a resurgence in demand in April and May, profitability would still be negatively impacted in the upcoming quarter due to higher ATF prices and a weaker rupee. However, IndiGo remains optimistic about long-term demand opportunities in the medium to long term and is focused on (1) higher capacity deployment (management highlighted 50 percent-plus growth in FY23), (2) responsibly fortifying and widening its domestic network, (3) increasing cargo revenue, and (4) softening of commodity costs, according to the note.

According to Prabhudas Lilladher, IndiGo will surpass its competitors and maintain its superior position with a 55 percent market share thanks to factors including (1) demand recovery and capacity deployment, (2) superior balance sheet (Rs76bn free cash), (3) superior to industry cost structure, and (4) strong management. We decrease our EV/EBITDAR multiple to 8x from 9x to account for the rising cost environment. Hold the position with a target price of Rs 1,800.

The company still has an outperform rating from research firm Credit Suisse, but the target price has been reduced from Rs 2,500 to Rs 2,200 per share. Strong yields and consistent traffic are encouraging, and lower supplemental rentals imply cheaper maintenance expenses.

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