Interglobe Aviation's Q3FY19 results (Upgrade to Neutral) - Yields show marked recovery

Q3FY19 result highlights

• IndiGo’s Q3FY19 earnings were sharply ahead of our estimates due to beat on RASK. PAT came in at Rs1.9bn (down 75%yoy) vis-à-vis our estimate of net loss of Rs3bn.
• RASK came in at Rs3.7 (down 3%yoy) vs. our estimate of Rs3.3. Improvement in RASK was on account of improvement in fares in the 0-15 day period of the travel cycle. Passenger yield grew 3.7%yoy to Rs3.83 and average fare grew 6.6%yoy to Rs4206/pax (est).  
• Employee costs grew 36.0% yoy to Rs8.3bn (our estimate of Rs7.7bn). 
• ASKM grew 32.8%yoy to 21.6bn and RPKM grew 28.1%yoy to 18.4bn. CASK ex-fuel grew 6.3%yoy to Rs2.04 lead by lower load factor and higher fixed costs. Overall CASK grew 14.5%yoy to Rs3.61 led by 31%yoy rise in fuel costs. Gross spread declined 18.2%yoy to Rs2.1.
• Revenue grew 28.1%yoy to Rs79.2bn (est: Rs70.9bn), EBITDAR declined 17.6%yoy to Rs15.9bn (est: Rs8.7bn) and EBITDA came in at Rs2.2bn (est: loss of Rs4.5bn) with yoy profitability impacted by higher fuel costs and 9.1%yoy depreciation in USD/INR rates. 
• Indigo has guided for ASK growth of 34% in Q4FY19 and has indicated that international business would be a significant growth driver.

Key positives: Strong than expected qoq improvement in yields

Key negatives: High fuel costs and INR depreciation.    

Impact on financials: Upgrade in FY20E earnings by 62.1% due to higher than expected yields and lower fuel cost.

Valuations & view

The improvement in IndiGo’s RASK in Q3FY19 was sharply ahead of our estimate and was led by an improvement in fares in the near term booking window of 0-15 days. We note that the pressure on fares in this booking window had been a key stress point for airlines in the preceding two quarters. Also, crude prices have declined 30.6% from peak to $60 per barrel currently from their Oct-18 peak of 86.4, the full benefit of which is likely to reflect only in Q4FY19. On the back of an improved yield outlook, we have upgraded our recommendation on IndiGo from Underperformer to Neutral. Our rating however remains constrained by a slowing domestic traffic growth environment, which can keep yields under check in a rising capacity environment. We have a revised price target of Rs1056 (based on 9.0x FY20E EBITDAR).