Interglobe Aviation's Q4FY18 results (Downgrade to Neutral) - Lower yields drive earnings erosion

Q4FY18 result highlights

• IndiGo’s Q4FY18 earnings were weak and were sharply below estimate due to lower yields. PAT declined 73.3%yoy to Rs1.2bn as against our estimate of Rs4.9bn and consensus estimate of Rs4.8bn.  
• RASK declined 3.2%yoy to Rs3.4 (down 11.4%qoq), below estimate of Rs3.7. While Q4FY18 was a seasonally weak quarter, the extent of qoq decline has clearly surprised us. The yield pressure was largely driven by lower fares in the 0-15 day period of the travel cycle. Passenger yield (ticket revenue/RPKM), which does not include compensation received from P&W for operational disruptions, declined 5.6%yoy to Rs3.3.
• The management has indicated that while the low ticket price environment in the 0-15 day period have prevailed during early April 2018 as well, prices have started to firm up in the last 15 days. 
• Passenger traffic grew 25.8%yoy to 14.3m, ASKM grew 20.9%yoy to 17.1bn and RPKM grew 24.8%yoy to 15.2bn. Average fare declined 6.4%yoy to Rs3499/pax. Fuel cost increased 10.5%yoy to Rs1.4 but was in line with estimate. Gross spread declined 10.7%yoy to Rs2 (est: Rs2.3) and CASK ex fuel grew 5.3%yoy to Rs1.9 (in line).
• Revenue grew 19.6%yoy to Rs58bn (est: Rs63.4bn), EBITDAR declined 15.7%yoy to Rs11.2bn (est: Rs16.6bn) and EBITDA declined 74.4%yoy to Rs1.3bn (est: Rs6.7bn). Besides the lower yields and higher fuel costs, EBITDA/EBITDAR also remained impacted by fx loss of Rs925m. 
• Quarter end fleet grew by 6 aircrafts qoq (3 of them being Neos and 3 ATRs) to 159. Indigo has guided for ASK growth of 18%/25% in Q1FY19/FY19.

Key positives: Strong growth in passenger traffic

Key negatives: Low yields and increase in fuel prices.    

Impact on financials: Downgrade in FY19E / FY20E earnings by 19.5%/11.1% due to higher fuel cost.

Valuations & view

The Q4FY18 yields have been weak as airlines have not passed on the impact of higher fuel prices. In the past too, there have been instances when airlines have passed on the impact of higher fuel prices with a lag. As such we expect yields to improve in Q1FY19 in response to higher fuel prices and favourable seasonality. However fuel prices have continued to rise even in Q1FY19 giving rise to incremental pressure on margins and earnings. After accounting for the recent surge in fuel prices, we have lowered our FY19E/FY20E earnings by 19.5%/11.1% and reduced our price target by 12% to Rs1293 (based on 8.5x FY20E EBITDAR). We have also downgraded our recommendation to Neutral given limited upside potential in the near term.