MOSL: INTERGLOBE AVIATION (Neutral)-Hit by a double whammy of crude and competition

InterGlobe Aviation: Hit by a double whammy of crude and competition; Turbulence ahead!

(INDIGO IN,Mkt Cap USD5.6b, CMP INR1004, TP INR903, 10% Downside, Neutral)

INDIGO’s revenue of INR65b (+13% YoY, +12% QoQ) was below our estimate of INR72b due to a lower yield of INR4.10 (est. of INR4.51; -5% YoY, +7% QoQ).  EBITDAR of INR10.3b (-47% YoY, -8% QoQ) came in significantly below our estimate of INR21.4b due to (a) higher fuel cost per ASK of INR1.54 (est. of INR1.48; +30% YoY, +11% QoQ) and (b) a rise in other expenses per ASK of INR1.17 (est. of INR0.98; +24% YoY, +21%QoQ), led by a forex loss and higher maintenance cost. While the company reported an EBITDA loss, PAT stood at INR278m (-97% YoY, -76% QoQ) helped by higher other income of INR3.1b (+51% YoY, +19% QoQ) and a lower tax rate of 11.3% v/s 28% in 1QFY18 and 29% in 4QFY18.

• Ticket yield down ~5% YoY in a seasonally strong 1Q: INDIGO's ticket yield declined 5% YoY (+10% QoQ) to INR3.6 (est. of INR3.9), led by pricing pressure in the 15-day window (contributes ~40%) due to heightened competitive intensity.
• EBITDAR margin contracts to 15.8% (34% in 1QFY18): Fuel cost per ASK increased sharply by 30% YoY in 1QFY19. However, we note that 1Q is a seasonally strong quarter from demand perspective and cost increases should have been passed on. A low ticket yield, thus, indicates limited pricing power with the airline. Adding to this, higher other expenses squeezed the EBITDAR margin to a six-year low of 15.8% in 1QFY19.
• Aggressive ASK guidance for 2QFY19 and FY19: Management guided for ASK growth of 28% YoY in 2QFY19 and 25% YoY in FY19. We expect INDIGO to face pricing pressure in 2QFY19 to profitably deploy incremental capacity in a seasonally lean quarter given the increased competitive intensity due to industry-wide capacity addition.