Interglobe Aviation's Q3FY18 results (Outperformer) - Higher yields led to better earnings

Q3FY18 result highlights

• IndiGo’s Q3FY18 earnings were strong and sharply ahead of our estimate largely led by higher yields and compensation received from Pratt & Witney (P&W) in relation to the grounding of A320 Neos. PAT grew 56.4%yoy to Rs7.6bn (est: Rs6.4bn).
• With capacity additions lagging demand, load factors continue to remain high and grew 120bp yoy to 88.5%. Passenger traffic grew 14.1%yoy to 13.5m, ASKM grew 13%yoy to 16.3bn and RPKM grew 14.6%yoy to 14.4bn. Average fare grew 6.8%yoy to Rs3,944/pax.
• Overall, RASK grew 10.4%yoy to Rs3.8 (est: Rs3.7) led by higher fares and compensation from P&W in lieu of grounding of aircrafts. Passenger yield (ticket revenue/RPKM), which does not include any compensation received, grew 6.3%yoy to Rs3.7 (in line).
• Gross spreads grew 12.2%yoy to Rs2.6 (est: Rs2.4) and CASK ex fuel grew 2.2%yoy to Rs1.9 (in line).
• Revenue grew 23.9%yoy to Rs61.8bn (est: Rs58.5bn), EBITDAR grew 34.3%yoy to Rs19.4bn (est: Rs17.4bn) and EBITDA grew 58.8%yoy to Rs9.9bn (est: Rs8.6bn). Q3FY18 earnings do not include IGST of Rs689m paid under protest on re-import of repaired aircraft and engines, which has been recognized under other current assets. 
• Quarter end fleet grew by 12 aircrafts qoq (8 of them being Neos and 3 ATRs) to 153. Indigo has guided for ASK growth of 24% in Q4FY18 and exceeding 20% in FY19.
• IndiGo started its first ATR operations on 21^st Dec-17.

Key positives: Higher yields led by better pricing

Key negatives: Increase in crude oil prices by ~7% in last one month.    

Impact on financials: Downgrade in FY19E earnings by 2.8% due to higher fuel cost.

Valuations & view

During 9mFY18, IndiGo’s ASKM expanded by 14.8%yoy to 46.4bn and gross spreads expanded by 12.7% to Rs2.6. Over the last three months the crude price have gone up by 15.5% and the impact of this increase is likely to be passed on with a lag, especially since Q4 is a seasonally weak quarter. Due to this, IndiGo’s Q4FY18 profitability is expected to remain under pressure. However, with continued strong growth in air passenger traffic and favourable demand supply balance, we expect 23% earnings CAGR for IndiGo over FY17-20 with robust free cash generation. IndiGo trades at 7.9x FY20E EV/EBITDAR. We value IndiGo at 8.8x FY20E EBITDAR, a ~5% premium to global peers, because of IndiGo’s higher growth, superior leverage and better returns. We maintain Outperformer with a target price of Rs1,476.