InterGlobe Aviation's Q1FY19 results (Downgrade to Underperformer) - Yields remain under pressure

Q1FY19 result highlights

• IndiGo’s Q1FY19 earnings were weak and were sharply below estimate due to lower yields, higher fuel and maintenance costs and adverse impact of INR depreciation. PAT declined 96.6%yoy to Rs278m as against our estimate of Rs4.7bn and consensus estimate of Rs5.1bn.  
• RASK declined 3.1%yoy to Rs3.7, below estimate of Rs3.8, due to lower fares in the 0-15 day period of the travel cycle, which account for ~40% of IndiGo’s total bookings (pre-dominantly corporate/business travellers). IndiGo indicated that yields outside this period actually expanded.
• Passenger traffic grew 20.8%yoy to 15.1m, ASKM grew 18.4%yoy to 17.1bn and RPKM grew 20.1%yoy to 15.9bn. Average fare declined 5.9%yoy to Rs3,827/pax. Fuel cost increased 30.4%yoy to Rs1.5 and was marginally ahead of estimate due to lower discounts (in % terms since discounts are fixed in Rs/litre). Gross spread declined 17.9%yoy to Rs2.2 (est: Rs2.4) and CASK ex-fuel grew 13.3%yoy to Rs2.2, above estimate of Rs2, due to Fx MTM loss of Rs2.5bn and higher maintenance costs during the quarter.
• Revenue grew 13.2%yoy to Rs65.1bn (est: Rs67.7bn), EBITDAR declined 47.1%yoy to Rs10.3bn (est: Rs16.9bn) and EBITDA loss came in at Rs111m (est: +Rs6.3bn) due to lower yields, higher fuel costs, higher maintenance costs (due to higher than provisioned costs towards shop visits of older aircrafts on extended lease) and steep MTM Fx loss as explained above. 
• Fleet grew by 10 (net) aircrafts qoq (4 Neos, 3 ATRs and 3 Ceos) to 169. Indigo has guided for ASK growth of 28%/25% in Q2FY19/FY19.

Key positives: Strong growth in passenger traffic

Key negatives: Low yields, increase in fuel prices and steep Fx MTM losses.    

Impact on financials: Downgrade in FY19E / FY20E earnings by 53.3%/14.5% due to lower than expected yields on metro routes and higher fuel cost.

Valuations & view

IndiGo’s yields continue to remain weak for the second consecutive quarter (despite Q1 being seasonally strong) as airlines have not fully passed on the impact of higher fuel prices. Higher pressure on yields on metro routes, wherein IndiGo has a very strong presence, has further accentuated the impact. Meanwhile, fuel prices remain elevated with average brent crude price at $74.5/bbl in July (Q1FY19 average price being $74.6/bbl). While we expect a gradual recovery in yields (given that passenger traffic continues to grow at ~20%), we see a sharp erosion in earnings for IndiGo, keeping the stock under pressure. Further risk to earnings persist from delayed recovery in yields/further rise in fuel costs. As a result, we downgrade our recommendation on IndiGo from Neutral to Underperformer with a revised PT of Rs965 (based on 7.8x FY20E EBITDAR, 5% premium to global peers).