Interglobe Aviation's Q2FY19 results (Underperformer) - Yields continue to remain under pressure

Q2FY19 result highlights

• IndiGo’s Q2FY19 earnings were extremely weak as it reported steep net loss of Rs6.5bn as against our estimate of PAT loss of Rs3.5bn due to severe pressure on yields (RASK), Fx MTM loss and higher than expected employee costs. Moreover, PAT includes deferred tax credit of Rs3.3bn baring which pre-tax loss stands at Rs9.9bn.
• RASK declined 8.1%yoy to Rs3.2, below estimate of Rs3.5, 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.
• Employee costs grew 28.7% yoy to Rs7.7bn (our estimate of Rs6.7bn) partly due to 11% increase (~2000 employees) employee count to 20,000.  
• Passenger traffic grew 31.4%yoy to 15.5m, ASKM grew 28.9%yoy to 19.5bn and RPKM grew 29.7%yoy to 16.4bn. Average fare declined 11.1%yoy to Rs3,404/pax. Gross spread declined 32.0%yoy to Rs1.7 (est: Rs1.9) and CASK ex-fuel grew 12.6%yoy to Rs2.2, above estimate of Rs2.1, mainly due to Fx MTM loss of Rs3.4bn.
• Revenue grew 16.9%yoy to Rs61.9bn (est: Rs65.2bn), EBITDAR declined 92.9%yoy to Rs1.1bn (est: Rs7.3bn) and EBITDA loss came in at Rs10.1bn (est: loss of Rs4.1bn) mainly due to lower yields, higher fuel costs and 9%yoy depreciation in average USD/INR rates. 
• Fleet grew by 20 (net) aircrafts qoq to 189. Indigo has guided for ASK growth of 35%/30% in Q3FY19/FY19.

Key positives: Strong growth in passenger traffic

Key negatives: Lower yields, high fuel costs and INR depreciation.    

Impact on financials: Downgrade in FY19E/ FY20E earnings by NM/ 68.8% due to lower than expected yields on metro routes and higher fuel cost.

Valuations & view

IndiGo’s yields continue to remain under pressure for the third consecutive quarter. We believe that the pressure on yields in the last minute booking cycle is unlikely to wane in the near future. Further the full impact of increase in crude prices during September 2018 will reflect only in Q3FY19 fuel prices for airlines, which means their fuel costs may rise qoq in Q3FY19. As a result, we see a sharp erosion in earnings for IndiGo given the higher fuel costs and competitive airfare environment, keeping the stock under pressure. We expect IndiGo is to post net loss of Rs11.9bn in FY19E and a PAT of Rs7.7bn in FY20E, with the earnings clearly being at risk if airlines do not start passing on higher costs by end FY19. As a result, we maintain our Underperformer rating on the stock with revised PT of Rs614 (based on 8x FY20E EBITDAR).