MOSL: INTERGLOBE AVIATION (Neutral)-Temporary hiccups-long-term growth visible-Yet, rising oil prices a threat

​INTERGLOBE AVIATION: Temporary hiccups; long-term growth visible; Yet, rising oil prices a threat; maintain Neutral

(INDIGO IN, Mkt Cap USD6.9b, CMP INR1177, TP INR1291, 10% Upside, Neutral)

Engine issues impact near-term growth

• Since the induction of A320 NEO planes in the fleet, INDIGO has faced frequent disruptions in operations due to technical glitches in the Pratt & Whitney engines used in these planes.
  
• The NEO engines have seen premature degradation of the combustion chamber lining and premature wear of the number-3 bearing seal. As a result, INDIGO witnessed high number of engine removals and lack of spare engines forced it to ground its NEOs.
  
• Owing to engine issues, the management had reduced its FY18 ASK growth guidance to 19% post 2QFY18 results. In 2QFY18, INDIGO increased its ASK by 13% YoY versus its guidance of 15% YoY. We believe capacity addition for INDIGO will remain slow till the engine issue persists.
  

Strong order book assures long-term growth visibility

• Given the under-penetration in the country, domestic demand has historically followed supply and will continue to do so till a respectable penetration is reached.
  
• India's aircraft order book is extremely strong and we expect domestic capacity to grow at 16% CAGR over FY17-20 (total capacity to grow at 14% CAGR).
  
• INDIGO has the largest order book among peers, which assures robust growth prospects for the airline. We model ~20% ASK CAGR over FY18-20 for INDIGO.