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Pain in aviation pack likely to continue; IndiGo remains top analysts' pick

Aviation companies have been under pressure in calendar year 2018 with all the three listed companies - Jet Airways, SpiceJet and InterGlobe Aviation slipping 74 per cent, 52 per cent and 32 per cent, respectively on a year-to-date (YTD) basis. In comparison, the S&P BSE Sensex has lost nearly 1 per cent during the window.

The sharp fall in aviation stocks fall comes on the back of higher fuel costs (ATF) led by a rise in crude prices globally, weak rupee and intensifying competition that forced the players to slash prices to maintain occupancy levels.

On Wednesday, InterGlobe Aviation, which runs India’s largest budget airline IndiGo, reported its first-ever quarterly loss of Rs 6.52 billion since its listing in November 2015. The airline had reported a profit of Rs 5.51 billion in the corresponding period an year ago.

However, despite posting disappointing numbers for the September quarter, most analysts are bullish on the stock. InterGlobe Aviation is an efficient airline, they say, whose fortunes can swing for the better once the ATF prices drop.

AK Prabhakar, head of research at IDBI Capital, for instance, remains bullish on Indigo and says the airline has ample cash levels in its balance sheet to meet its debt obligations. He has a ‘buy’ rating on the stock.

“Trouble started with Jet Airways cutting fares to increase occupancy levels. That apart, rising crude oil prices played spoilsport for the sector. Only efficient airlines like Indigo and SpiceJet will be able to survive these in such turbulent times. Their fortunes can change easily once crude oil / ATF prices drop. That apart, Indigo will also benefit from A320Neo fleet, which is being said to save about 18 per cent in fuel cost,” he said.

Post Q2 results, Elara Capital has lowered FY19E earnings per share (EPS) to Rs 9.2 from Rs 71.8 and FY20E EPS to Rs 31 from Rs 94.7 on the weaker USD-INR rate at 75 from 68, and higher crude at $85/barrel from $75/bbl. However, the brokerage house has reiterated 'Buy' rating on the stock on the back of a likely recovery in margins from FY20 onwards due to an anticipated slowdown in capacity addition by competitors, given their higher cost base versus Indigo. The target price has also been lowered to Rs 1,083 apiece from Rs 1,388, earlier.

For Gaurang Shah, chief investment strategist at Geojit Financial Services, the overall Q2 numbers were a disappointment but revenue per seat remaining stable came in as a silver lining.  

“I think the aviation stocks as a whole will continue to remain range-bound for some time. We will see some upward trend emerge once the crude prices fall which, in turn, should bring down the negative impact of operating cost/input cost,” Shah says.

Analysts at Edelweiss Securities estimate a robust volume growth (CAGR) of 24 per cent over FY18–20. Pricing pressure, they say, remains the key concern, which may abate as high cost players exit the market.

“Oil prices may have peaked at the current level, which should keep the rupee depreciation in check. We maintain ‘BUY’ rating on the stock with revised target price of Rs 1,073 at 9x FY20E EV/EBITDAR,” say Jal Irani and Vijayant Gupta of Edelweiss in a co-authored report.

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