Interglobe Aviation IPO – Can You Fly High?
“A recession is when you have to tighten your belt;
Depression is when you have no belt to tighten.
When you’ve lost your trousers – you’re in the airline
business” – Sir Adam Thomson
The Wright brothers, inventors of airplanes, would have squirmed in their seats on hearing the above words. But, these words aren’t entirely off the mark – there are few profitable airlines in the world. India had a Kingfisher Airlines which went bust but it also has Indigo, a profit-making airline company. Interglobe Aviation, more popularly known as Indigo, has launched its IPO today! Read to know if you should own this flight.
Business Summary
Indigo is India’s largest Low Cost Carrier (LCC) with a focus on domestic Indian market & a domestic market share (passenger volume) of 37% as on Aug, 2015. It operates services to 33 airports in India, 5 international airports with maximum 623 domestic flights per day. It also holds the unique distinction of being a consistent profitable airline; it’s revenues and have grown at a CAGR of 40% and 22% respectively from FY10 to FY15.
Investment Arguments
- Leadership Position in one of the Largest Aviation Markets
The Indian air travel market is highly underpenetrated and is forecast to be the world’s fastest growing airline at average annual growth rate of 9.5% between 2013 & 2033.
Currently, Indigo is comfortably in the pole position commanding 34% market share while the 2nd largest player, Jet Airways, has 22% market share as on FY15. Over the years, Indigo has strengthened its leadership position by building a brand which symbolizes “low fares and on-time flights” which has aided in almost doubling its market share in last 4 fiscal years.
- Superior Operating Performance
Indigo scores high on several operational metrics – It has the highest aircraft utilization and highest on-time performance of 87.5% in India in FY15. It is also credited to have high operational reliability of 99.95% in 5 months ended Aug, 2015. This not only augurs well for its brand but also helps in cost-control.
- Solid Track Record of Consistent Profitability & Cash Flow Generation
Indigo’s ‘no-frills’ and ‘asset light model’ have helped to keep costs under check. The company has also registered consistent profits and positive cash flow generation in 7 out of 9 years of its operations (from Fy09 to FY15). These profits have been re-invested in business and have been used to pay dividends to their shareholders in 4 out of the last 5 years till FY15.
Financials
| Rs. crores | FY12 | FY13 | FY14 | FY15 |
| Net Sales | 5,565 | 9,203 | 11,117 | 13,925 |
| EBITDA | 49 | 894 | 505 | 1,870 |
| PAT | 141 | 783 | 473 | 1,296 |
| Key Ratios | ||||
| Debt/ Equity | 4.2 | 4.6 | 8.0 | 9.2 |
| RoE | 58% | 201% | 113% | 304% |
| RoCE | (1%) | 37% | 7% | 36% |
Source – RHP
GreenEdge Wealth Services’ View
Despite the above strengths, there is a lot of negativity in the market around the dividend stripping & aircraft trading business of Indigo. We believe that the dividend stripping issue isn’t a corporate governance issue and money hasn’t been siphoned off using any loop-holes or shady acquisitions. It’s more of an aggressive management policy. As for the profits that accrue out of the aircraft trading business, they may continue at least in the near future given the global supply-demand mismatch.
At the upper end of price band, the company is valued at 21x FY15 earnings, which is in line with similar international peers. Given that Indigo is an extremely well run business and is well positioned to capture the opportunity in growing Indian market, there is a case for 10% to 20% upside in 12 months period.
Issue Details
| Issue Open Date | 27th Oct, 2015 |
| Issue Close Date | 29th Oct, 2015 |
| Issue Size (Rs. crores) | Rs. 3,100 to Rs. 3,270 crores |
| Issue Price (Rs.) | 700 to 765 |
| Market Lot | 15 shares |
| Objects of Issue | Retirement of certain outstanding lease liabilities, purchase of ground support equipment for airline operations & general corporate purposes |