InterGlobe Aviation: Good business; not so good price

InterGlobe Aviation more commonly recognized as IndiGo is the largest domestic airline with a market share of more than 35%. IndiGo is one of the most successful Indian low cast carrier which has taken market share from its competitors. IndiGo has increased its market share from around 12% in 2009 to the current market share of 35% with a possibility of the market share moving closer to 40% by the end of the financial year.

IndiGo has a solid record of executing well as low cost carrier. IndiGo has a solid record of delivering profitability in environment of high and low crude oil prices. It stands miles in front of Jet Airways and SpiceJet the number two and three listed players in the Indian aviation industry.  Jet Airways and SpiceJet were profitable in FY16 for the first time between FY12 and FY16. On the other hand, IndiGo has always been profitable irrespective of crude prices.

So do we buy the stock?

We like the management and their business model. It has shown ability to deliver profits in difficult environments when crude was running high.

We like the fact that Indigo is market leader with a potential opportunity of 35-40% market share in a market which has significant head room to grow. We are quite confident about the fact that the market demand will multiply over a 5-10-year period. We are not concerned about the volatility in yearly and quarterly demand

We like the fact that Indigo has the largest fleet for the India market and has robust expansion plans given the orders. There have been some delays in the delivery of Airbus NEO planes. We think it is a non-issue in the larger scheme of things. Its impact on the stock price will be limited to the short term volatility it will create

Where is the margin of safety?

The margin of safety is in the business model and the proven ability of the management to execute in difficult scenarios.

We like the dividend payouts made by InterGlobe Aviation. The management in its Q4-16 earning call confirmed that they don’t have a dividend policy but future payouts will be in line with the past if the business environment permits. We are quite confident that InterGloble Aviation will continue to make dividend payouts if the business permits given the fact that the promoters still hold 85.95% of the shares.

We don’t like fact that all the quarterly results after listing have disappointed the market. Q2-16, Q3-16 results disappointed. Q4-16 did not excite anyone even if it was not disappointing. Q1-17 results disappointed everyone and price fall is there for all to see. The stock is below its listing price of R 875. We felt that a good business was overpriced in the IPO with no margin of safety. The IPO pricing was good for the promoters but not for the minority investors.

We like the recent weakness in the stock price and would be encouraged to see it fall further. We would start getting interested in the stock at a price in the seven hundreds. A price around its 52-week low of Rs 702 would get us really interested. It was unfortunate for us that we did not cover InterGloble when it had fallen around Rs 702 in Feb-16. We are not sure about it going back to its 52-week low but would not be surprised if it made a new 52-week low during a period of market weakness given the fact that InterGlobe looks expensive compared to its global peers and the more established low cost carriers like Ryanair, Easy Jet etc.

We are not unduly concerned about the competition and pricing pressure in the aviation market at this point in time. However, we would be watching the competition quite closely and would be willing to change our opinion completely if the situation demands.

We are confident about the business performance of IndiGo and the outlook for India aviation. We are only looking for a good entry point in stock for InterGlobe Aviation and benign environment for crude pricing in the next 12-18 months. A good entry point and a benign crude oil pricing environment would give us the initial margin of safety for us to ride out the short and medium term volatility in the unfolding of the long term domestic Indian aviation story

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