Interglobe Aviation Ltd.

Valuation date: 11th October Recommendation: Stock exchange: BSE, NSE

2019
Current Price: 1,745.00 Target Price Sector: Aviation sector

Upside Industry: Airlines

Market Data
Px/Chg 1D (INR) 1558.95/-1.19%
52 Wk H (04/18/19) 1650
52 Wk L (10/09/18) 691
YTD Change/% 393.90/33.81%
Mkt Cap INR 599,271.0M
Shrs Out/Float 384.4M/94.0M

Business Description
IndiGo, operated by Interglobe Aviation Limited, having commenced operations in August
2006 with a single aircraft has grown its fleet over the years and is now leader in the
domestic airline industry with 49.9% market share (April 2019). The airline, with a
modest beginning, has significantly outpaced market and its peers since 2008 having
clocked 29.5% CAGR in passenger growth versus industry CAGR of 6.7% and has been the
only profitable airline in India for the past seven years. IndiGo flew a record 54.81 lakh passengers
during April. The company has been delivering best in class performance thereby gaining market
share.
Despite being largely domestic focused IndiGo has aircraft utilization levels being the best in
the industry at 11.6 Hrs/aircraft/day consistently. Further, its comfortable liquidity position
and healthy B/S enables IndiGo to take delivery of aircrafts and grow in a competitive
scenario.

Geographical Location
IndiGo has a total destination count of 83 with 60 domestic destinations and 23 International. This
includes six destinations: Shirdi and Mysore in India, Riyadh in Saudi Arabia, Guangzhou in China,
Hanoi and Ho Chi Minh City in Vietnam which are open for sale. Twelve codeshare destinations beyond
Istanbul on Turkish Airlines are also open for sale. They include, Athens (ATH), Budapest (BUD),
Brussels (BRU), Tel Aviv (TLV), Malta (MLA), Paris (CDG), Dublin (DUB), Copenhagen (CPH) , Prague
(PRG), Vienna (VIE), Zurich (ZRH) and Amsterdam (AMS).

Fleet Description
Fleet of 244 aircraft including 89 new generation A320 NEOs, 129 A320 CEOs, 21 ATRs and 5 A321
NEO. IndiGo has been a US based CFM power customer since 2016 and currently operates a fleet of
17 A320ceo aircraft powered by CFM56-5B engines. IndiGo has a fleet of over 230 aircraft. Out of
these 230, the airline said that 215 aircraft belong to Airbus A320/321 family. Also, they are planning
to increase the size slowly to about 293 aircrafts.

Company Strategies

International
International seats have contributed 19% of the ASK mix for IndiGo. Overall the 30% ASK
growth, nearly half will be international routes implying. Thus share of share of international
will continue to increase as IndiGo will be adding several destinations in the 6 hour flying
radius apart from the current 22 destinations. But the company is also looking at wide
body aircrafts (inevitable, but not in the near future) with abundant caution given the
higher risks as well as the Airbus A321 XLR to expand the flying range for its international
operations. As per management, the international profit spreads are not diluting profitability.

North East
The North East of India is a particularly difficult geography to access by rail and by road. Many
of the cities in the North East are also not large enough for high frequency service with 180
seat narrow body airplanes. IndiGo will provide a 74 seat ATR high frequency
service to the North East starting this winter and the introduction of this service will make the
lives of the people in the North East a lot easier. This is in sync with their larger objective to
connect every corner of this country to one another and to promote cross cultural
integration, further building on the rich heritage of India.
In the past twelve months they have opened 10 new stations across India and in the next
twelve months they plan to add 11 more destinations to their portfolio.

Focus On Quality Service And Loyalty

The company places great emphasis on making its brand associated with quality through their
operational differentiation from other airlines, mainly by on-time performance and offering
convenient and attractive schedules and destinations.
Corporate Social Responsibility
As a responsible corporate citizen, IndiGo’s commitment to Corporate Social Responsibility is
ingrained in their culture and they recognize that their Company grows stronger by helping
to advance local communities, business practices and improving the lives of individuals.

Company continues to work and reach out to the community in the 5 focus areas - Children
& Education, Women Empowerment, Environment, Heritage and 6E responsibility. During the
year under review, they partnered with several implementing organizations and expanded
their reach to over 47,500 children providing them access to education. Similarly, they
increased the reach to 64,500 rural women, helping them with skill development through
farm based and non-farm-based initiatives and thereby, creating sustainable income
generation for them.
Children & Education
In order to reach out effectively, they have a two-fold approach and outreach initiatives are
centred around the following areas for facilitating education:
Access to Education - the education program is reaching out to more than 47,500 children in
the rural and urban areas in the country. 400 primary schools in identified slums of Kolkata,
Patna, Agartala& Ranchi. All the 12,507 children in these schools are first generation learners
and have been mainstreamed in the Government schools.

Women Empowerment
IndiGo Shakti, their women empowerment intervention, is helping them to reach out to
64,500 rural, peri-urban and urban women in multiple locations of India. The design of the
program identifies those beneficiaries, who otherwise had no adequate means of livelihood
or opportunity for economic upliftment. This program aims at increasing the income
generating opportunities for women through capacity building sessions, promotion of self-
help groups, regular monitoring and local market linkages The program also aims to link
beneficiaries to Government schemes, thereby enabling them to avail their entitlements.

Environment
At IndiGo, every flight they operate is a reminder of the effects the aviation sector has on the
environment. IndiGo recognizes and is concerned about the environmental and climate
change problems. Considering this, at Indigo Reach are committed to reduce the impact of
carbon footprint by initiating projects with a targeted approach.

Their Company has adopted a site for planting a total of 30,000 trees; which includes species
that are a mix of fruit bearing trees, timber and wood trees. The plantation activity will help
to improve the overall ecological health by restoration of degraded forest patches in the
selected reserve forests area at Dalapchand, East Sikkim. In addition to this, the Company has
also planted another 10,000 timber and fruit trees in Government Institution of Medical
Sciences (GIMS), Greater Noida.
Recycle, Reuse and Reduce
Their Company is recycling all the old employee uniform, shoes, bags, aircraft carpets and
seat covers. All these used and old articles from across their network are being recycled and
up scaled by their partner organization into bags, pouches, folders or items that are sold in
the local market. Since the commencement of the project last year they have recycled
approximately 875 Kgs of uniforms, 1,000 seat covers and more than 1,500 aircraft carpets.
Out of this, more than 80% of all the fabric has been successfully converted into beautiful
products like bags, iPad sleeve covers, luggage tags etc. which have been sold in the local
markets and has helped in the creation of income generation opportunities for women in the
rural and urban areas

Adoption and Maintenance of road 99B

The Company has developed and maintained a 2km stretch on Road Number 99 B along the
Sikanderpur-Faridabad highway in Gurgaon. They have planted a variety of seasonal flotheyrs,
shrubs and bushes in this stretch and also installed proper fencing to enhance the aesthetics
and contribute towards keeping the area green and clean.

Heritage
Their Company is dedicated towards the promotion, development and conservation of India’s
cultural heritage. An important aspect of their intervention is working on promoting national
heritage and cultural issues.

They have started a program for carrying out the restoration of historic interiors of Lal Bagh
palace in Indore. The restoration of interiors work will be done in conjunction with civil
restoration of civil work with Government of Madhya Pradesh.

6E Responsibility
As a responsible corporate citizen, they believe that IndiGo has a responsibility to reach out
to communities who are affected in case of a natural disaster. It is with this belief that they
reached out to flood affected victims during the recent Kerala floods. IndiGo transported 54.2
tonnes of cargo, free of charge to the flood affected region of state and thus supported
different outstations and State Government to distribute the relief material to the affected
people.

Aakhri Ahuti
In 2017, IndiGo participated in the Aakhri Ahuti program and partnered with the Delhi Police.
This service facilitates transporting of Human Remains of deceased underprivileged Northeast
residents, free of cost, back to their homeland.
Key Growth Drivers

Growth of Middle Class Population

With a rising working class and a large middle class population, the growth in the demand for
air travel is expected to persist. As per IATA, India is forecasted to gain an additional 359
million passengers by 2037, compared to 2017. This will be largely contributed by the middle
class, whose share in total population is expected to rise by an additional 13 points to 20%
over the next 20 years.

Strong Economic Growth

The Indian economy is expected to maintain its growth momentum. Its GDP is forecasted to
grow at 7.5% for FY20 and is expected to maintain strong growth going forward. As per IATA,
after adjusting for inflation, per capita incomes are expected to increase to
almost USD 5,000 per year in 2036, more than double the current level.
Furthermore, improvements in living standards (due to higher incomes) are expected to
contribute around 5.1 points out of a 6.1% forecasted average annual growth in Indian air
passenger demand over the next 20 years.

Challenges

Operational issues with our new A320neo aircraft and engines

We have experienced operational issues with our A320neo engines, which has adversely
impacted our operations. These operational challenges have required the engine supplier to
deliver upgraded engines and provide spare engines in the interim to reduce operational
disruptions.

Exceptional variation in fuel prices

Aircraft fuel expenses is the single largest expense of our total cost. Price of fuel cannot be
accurately predicted because of several economic and political factors and events that govern
them. Our operating results could be negatively impacted by any adverse movement in
aircraft fuel prices.

Adverse movement in foreign exchange as most of the expenses are exposed

to foreign exchange rate risk
Several cost items including aircraft and engine lease rentals, aircraft and engine maintenance
and aircraft insurance are denominated in foreign currency and any adverse movement in
foreign exchange may negatively impact our profitability. Further, we may not be able to pass
the increase in cost to our customers through higher fares, resulting in decreased profits.

Competition in the airline industry

The airline industry is highly competitive. We face intense competition from other low cost
carriers as well as full-cost carriers that operate on our routes. We may also face competition
from airlines that could be established in the future.

Changes in Government regulations

The civil aviation industry in India is regulated by the Ministry of Civil Aviation (MoCA), the
DGCA and the Airports Authority of India (AAI). The regulations are extensive, complex and
cover all major aspects of operations, including basic licenses, aircraft acquisitions and
routing. Any changes in regulations, or the imposition of additional restrictions and
conditions, can affect our business and operations.

Aviation Industry

India is currently the 7th largest civil aviation market in the world and is expected to become
the third largest civil aviation market within the next 10 years.
The International Monetary Fund (IMF) projects that the global economy will grow at 3.3%
in 2019 and 3.6% in 2020, It took a more optimistic view on India and expects the country’s
GDP to grow by 7.5% for FY20.
The domestic passenger traffic registered CAGR of 13.4% during the period FY10 to FY19
while the international passenger traffic grew at a CAGR of 9.3% during the same period.
By 2033, airport traffic in India is expected to grow by 5.3 times.

Challenges

Key metro airports in India are already experiencing slot constraints, and there is a need
for growth in airport infrastructure to ensure a healthy airline transport sector. As per the
report released by Federation of Indian Chambers of Commerce & Industry (FICCI), by
FY40, the passenger traffic (to, from and within India) is expected to grow by 6 times
to reach 1.1 billion from the current 187 million in FY18. If the airport capacity has to keep up
with the demand, then by FY40, India is expected to require investments of approximately
USD 40 - 50 billion. As per IBEF, strong private participation will boost growth in the sector
and investments worth USD 25 billion are expected to enter the airport sector by 2027.

Last minute requests, delays, aircraft changes from airlines and operational
limitations
Food safety and security regulations aren’t the only challenges, last minute requests up until
15 minutes before aircraft departure, short turnaround times, aircraft changes, delays and
airport operational limitations, also generate additional demand and pressure on airlines to
deliver on time and according to customer specifications.

Breaches in IT/Cybersecurity
The Company is heavily dependent of the use of computers and complex network
technology to run its business. These complex systems and technologies are subject to
random interruptions and delays caused by catastrophic events, acts of war or terrorism,
power loss, computer and telecommunications failures, security breaches and similar events
or disruptions. Any such system interruptions or security breach in these systems can
disrupt our normal business operations and can also lead to loss of business or confidential
information and even damage the Company’s reputation.

Inadequate market supply of pilots and inability to recruit and retain key
talent
The business requires companies to attract and retain highly skilled, dedicated and efficient
management personnel including pilots and experts from other airlines globally. Any
shortfall in availability of pilots or inability to hire, train or retain qualified employees can
have adverse effect on the operations and the ability to grow.

Key Growth Drivers

Growth of Middle-Class Population

With a rising working class and a large middle-class population, the growth in the demand
for air travel is expected to persist. As per IATA, India is forecasted to gain an additional 359
million passengers by 2037, compared to 2017. This will be largely contributed by the
middle class, whose share in total population is expected to rise by an additional 13 points
to 20% over the next 20 years.

Strong Economic Growth

The Indian economy is expected to maintain its growth momentum. Its GDP is forecasted to
grow at 7.5% for FY20 and is expected to maintain strong growth going forward. As per
IATA, after adjusting for inflation, per capita incomes are expected to increase to almost
USD 5,000 per year in 2036, more than double the current level.
Furthermore, improvements in living standards (due to higher incomes) are expected to
contribute around 5.1 points out of a 6.1% forecasted average annual growth in Indian air
passenger demand over the next 20 years.

Expansion in Aviation Infrastructure

According to data released by the Department of Industrial Policy and Promotion (DIPP), FDI
inflows in India’s air transport sector (including air freight) reached USD 1,820 million
between April 2000 and December 2018. According to IBEF, India’s aviation industry is
expected to witness USD 5 billion investment in the next four years. The Indian government
is expected to invest about USD 1.8 billion for the development of airport infrastructure and
aviation navigation services by 2026, and develop greenfield airports under the Public
Private Partnership (PPP) model.
VALUATION
Our valuation arrives at Rs. 1162.69 per share as per discounted cash flow technique.

Assumptions for Free Cash Flows to Firm:

• Available Seat Kilometres: Expected to grow at 20% annually for next 5 years
• Revenue from Operations
• Passenger Revenue- As per past trend, airline has been able to
yield Rs. 320 per available seat kilometre
• Other Revenue- Includes cargo and is projected at the CAGR of
27%
• Expenses
• Aircraft Fuel- It is projected at CAGR of 15.75%
• Rental- It is projected at CAGR of 15% of last 5 years
• Employee benefits- Considered at 10.50% of total revenue
• Tax Rate: 30%
• Discounting Factor: 10-year treasury yield

Relative Valuation

In Relative Valuation we have used earing multiple instead of price multiple because earning
multiple is less volatility with respect to change in capital structure and price as compared to
price multiple. In earning multiple we have use EV/EBITDA multiple and on the base of that
we conclude that indigo is highly overvalued as compared to it comparable. We
recommend to sell indigo.
TERMS
Aircraft utilization: represents the average number of block hours operated per day per aircraft for the total
Fleet. The metric is calculated by dividing block hours by the number of aircraft days.
ASM: Available Seats per Mile metric captures the total flight passenger capacity of an airline in miles. It is
acquired by multiplying the total number of seats available for scheduled passengers and the total number
of kilometres in which those seats were flown. ASK are Available Seat per Kilometre
Block Hours: number of hours of an aircraft from the moment it pushes back from the departure gate until
it arrives at the gate following its landing. Represents the industry standard measure of aircraft utilization.
CASM: Cost per Available Seat Mile reflects the costs incurred by an airline to fly a single seat one mile. Unit
of measurement used to compare the efficiency of various airlines. Normally, the lower this metric, the more
profitable and efficient the airline.
Load Factor: industry metric that measures how much of an airline’s passenger carrying capacity is used
(utilization). Airlines always try to maximize their Load Factor and take decisions about pricing, capacity, and
frequency of flights based on this key performance indicator. It is basically the ratio of RPM to ASM.
Passenger Yield: Represents average fare paid per mile, per passenger. It is calculated dividing passenger
revenue by RPM. The measure is expressed in cents per mile and is useful in evaluating changes in fares over
time.
RASM: A unit of measurement used to compare the efficiency of various airlines. Obtained by dividing
operating income by ASM. Mostly, the higher the RASM, the more profitable the airline.
RPM: Revenue Passenger by Mile is a transportation industry metric that shows the number of miles travelled
by paying passengers, calculated by multiplying the number of paying passengers by the distance travelled.
RPK are Revenue Passengers Kilometres.