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IPO Review
Interglobe Aviation (Indigo)
Rating matrix
Rating
:
Price band | 700-765
Unrated
Stellar performance but rich in valuation…
Issue Details
Issue Opens
27-Oct-15
Issue Closes
29-Oct-15
Issue Size (| Crore)
2882-3031
Fresh issue
1,272
Offer for sale
1610-1759
Price Band (|)
700-765
No of Shares on Offer (Crore)
3.96-4.11
QIB (%)
50
Non-Institutional (%)
15
Retail (%)
35
Minimum lot size
15
Objects of the issue
Amount
Retirement of debt
Purchase of ground support equipment for
our airline operations
| 1165 crore
| 34 crore
General corporate purposes
Shareholding Pattern
(%)
Promoter & promoter group
Pre-Issue
Post-Issue
93.4
85
0
3.0
6.6
12
Institutional & Non- Institutional
Public & Others
Financial Summary
| crore
FY11
FY12
FY13
FY14
FY15
Revenues
3833
5565
9203
11117
13925
712
49
894
505
1870
18.57
0.88
9.71
4.54
13.43
63
67
86
226
302
Interest
45.0
51.4
57.8
122.6
115.5
Adjusted PAT
579
141
783
473
1296
EBITDA Margin (%)
Depreciation
EV/Sales
India has one of the lowest air travel penetration rates in the world of 0.08
annual seats per capita vs. 0.35-0.65 in developing countries like Brazil,
Turkey, Indonesia and China. This under-penetrated market has been
dominated by Indigo (an LCC player) with a market share of 37.4% as on
August 2015 (up from 12.5% in FY09). Further, pending orders of 430
A320neos will help the company to grow its fleet at 11% CAGR in the
next seven years and maintain leadership in the Indian aviation market.
Disciplined execution helps maintain cost leadership
The magnitude of order of 100 aircraft in 2005 and 180 Aircraft in 2011
has enabled Indigo to have a structural cost advantage by reducing cost
related to acquisition, maintenance and operation of aircraft. Indigo also
receives incentives from Airbus (due to bulk orders), which helps in
reducing aircraft rental payments. Indigo has been able to maintain a
young fleet with average age of 3.1 years by entering into short-term saleand-leaseback operating leases typically ranging from three to six years.
This helps maintain higher flight dispatch and improved fuel-efficiency.
Further, high aircraft utilisation and lower turnaround time have helped
Indigo maintain the lowest cost in the industry. This places it in a better
position compared to its peers.
Strong cash flow, consistent profitability
Valuation Summary (at | 765 ;upper price band)
EV/EBITDA
Investment Rationale
Largest player in one of the fastest growing aviation markets globally
Objects of the Issue
EBITDA
Interglobe Aviation (Indigo) is India’s largest aviation player with a market
share of 37.4% as on August 2015 and the seventh largest low cost
carrier globally. The company commenced its operation in August 2006
with a single aircraft and has grown to a fleet of 97 Airbus aircraft (with an
average age of aircraft of 3.2 years) as of August 2015. The magnitude of
the 2005 and 2011 aircraft order with Airbus has enabled Indigo to have a
structural cost advantage in reducing cost related to acquisition,
maintenance and operation of aircraft. The company has an excellent
financial track record with revenue and EBITDAR CAGR of 38.0% and
34.8%, respectively, in FY11-15.
FY11
FY12
FY13
FY14
FY15
38.9
566.4
31.0
54.8
14.8
7.2
5.0
3.0
2.5
2.0
The structural cost advantage has enabled the company to register
consistent profitability over the past seven fiscals (FY09-15). Even in the
worst year (FY12), the company was able to register PAT of | 141 crore.
This is also reflected in robust cash flow generation, which has grown at a
CAGR of 30% in FY10-15.
Concerns
Research Analyst
Rashesh Shah
[email protected]
Devang Bhatt
[email protected]
•
Sudden spike in crude
•
High competitive intensity
Richly valued
The proposed issue price band of |700-765 implies an EV/EBITDA of 13.614.8x and EV/sales of 1.8x-2.0x, which, we believe, factors in all major
positives of lower than industry cost structure, low crude prices and
sustained mid-teen ASK growth. The valuation also commands a
premium over select global peers that are trading at average EV/sales of
1.5x and EV/EBITDA of 9.3x.
Company Background
Operational data
Particulars
Number of Aircraft
FY12
FY13
FY14
FY 15
55
66
77
94
Passengers (in mn)
International
Domestic
Total passengers (in
mn)
0.4
1.2
1.5
1.5
12.3
15.7
18.1
23.7
12.7
16.9
19.6
25.2
Available seat km (in
mn)
International
1345
3714
4207
3910
Domestic
16661
21263
25760
31417
Total ASK (in mn)
18006
24977
29967
35327
Revenue per ASK
3.1
3.7
3.7
3.9
Cost per ASK
3.06
3.3
3.56
3.42
Profit per Ask
0.04
0.4
0.16
0.52
Revenue passenger Km
(in mn)
International
1107
3084
3435
3220
Domestic
13719
17176
19701
24957
Total RPK (in mn)
14826
20260
23136
28177
85
Passenger load factor
(%)
International
82
83
82
Domestic
82
81
77
79
Blended
82
81
77
80
3911
4895
5071
4879
3.4
4.1
4.3
4.4
Revenue per passenger
Yield per passenger
Indigo is the market leader among passenger airlines with 37.4% market
share of domestic passenger volumes for August 2015. The company
operates on a low-cost carrier business model. Indigo is focused primarily
on the domestic Indian air travel market. The company is the seventh
largest low-cost carrier globally, in terms of seat capacity. Indigo operated
in 33 airports with a maximum of 603 domestic flights per day.
Indigo commenced operations in August 2006 with a single aircraft and
has grown its fleet to 97 aircraft, all of which are Airbus A320 aircraft. The
company has an asset light model. Out of the 97 aircraft, 75 are on an
operating lease while 22 are on financial lease. The company has placed a
bulk order of 430 A320neo aircraft, which will be delivered over the next
10 years. The A320neos have enhanced seating capacity and are 15%
more fuel efficient. This will enable Indigo to maintain its cost leadership
in the coming years.
Promoters and the promoter group hold 93.41% stake in the company.
The company is promoted by Rahul Bhatia and Rakesh Gangwal. Rahul
Bhatia has more than 25 years of experience in the travel industry. Rakesh
Gangwal has worked with United Airlines and Air France and has a
cumulative experience of 17 years in these two companies.
The company generates 88.3% of its revenues from passenger ticket
revenues and 11.7% from ancillary products and services. Revenue from
ancillary services constitutes revenues from seat selection, excess
baggage, ticket modification & cancellation, cargo, in-flight sales,
advertisement and commissions. Indigo’s revenue and PAT have grown
at a CAGR of 40% and 22%, respectively in FY10-15. In Q1FY16, the total
revenues and net profit were | 4,211.5 crore and | 640.4 crore,
respectively. Passenger ticket revenues were at | 3,714.6 crore while
revenue from ancillary products and services was at | 4,96.9 crore.
Exhibit 1: Available seat km trend
40000
29967
35000
30000
24977
18006
25000
20000
15000
35327
9286
12491
10000
5000
0
FY 10
FY11
FY12
FY13
FY14
FY15
Aavailable seat km (in mn)
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research
Page 2
India expected to be fastest growing market in air travel
The Indian air travel market witnessed rapid growth in 2003 following
liberalising actions taken by the Government of India, which is reflected in
the growth in domestic passenger volume at 19.4% CAGR in FY04-10,
according to DGCA data. Following the global financial crisis, between
FY10 and FY15, domestic passenger volumes grew at 9.1% CAGR.
Despite this tremendous growth, the Indian air travel market is still under
penetrated compared to other developing countries. India’s penetration of
0.08 annual domestic seats per capita is low relative to other developing
markets such as Brazil, Turkey, Indonesia and China, where penetration
rates are between 0.35 and 0.65 annual seats per capita, according to a
Centre for Aviation (CAPA) report. Thus, there is tremendous scope for
growth. We believe the robust economic growth coupled with rising
population, increasing per capita income and emerging middle class
population will drive Indian air travel over the next decade. According to
CAPA, domestic passenger volume is forecast to grow at a CAGR of
12.8% in FY15-20.
Exhibit 2: Annual domestic seats per capita penetration as on CY14
6
4.79
5
4
3.34
1
1.03
0.08
0.65
0.63
0.53
0.41
0.35
0.36
Mexico
2
China
3
2.59
USA
Australia
Norway
Indonesia
Colombia
Turkey
Brazil
Malaysia
India
0
Source: Company, ICICIdirect.com Research
Indian air travel market dominated by Indigo
The Indian air travel market is serviced by domestic and international Low
cost carries (LCCs) and full-service carriers (FSC). Domestic carriers in
India include LCCs like IndiGo, SpiceJet, GoAir, Air India Express and
AirAsia India as well as FSCs like Jet Airways, Air India, Air Costa, Alliance
Air and Vistara. India’s relatively low per capita income and pricesensitive consumers have led LCCs to dominate the country’s air travel
market. LCCs’ share of the Indian air travel market has increased from
40.5% in FY10 to 62.2% in FY15, according to DGCA data. This represents
~55% increase in LCCs’ market share over FSCs’ market share over FY1015.
Among FSCs and LCCs, Indigo has dominated the air travel market with a
market share of 37.4% as on August 2015 (up from 12.5% in FY09),
followed by Jet Airways with a market share of 22.1% in FY15 (down
from 28.1% in FY09) and Air India with a market share of 17.5%. Further,
pending orders of 430 A320neos will help the company to grow its fleet at
11% CAGR over the next seven years and maintain leadership in the
Indian aviation market.
ICICI Securities Ltd | Retail Equity Research
Page 3
Exhibit 3: Player-wise market share trend over FY09-15
FY 09
FY 10
FY 11
FY 12
FY 13
FY 14
IndiGo (%)
Market share
13
15
18
20
27
30
FY 15
34
Jet Airways (%)
28
26
26
27
26
24
22
Air India Ltd. (%)
16
17
16
16
17
18.3
17
SpiceJet (%)
10
13
14
15
19
19
15
GoAir (%)
Kingfisher (%)
3
5
6
6
8
9
9
28
23
20
16
2
0
0
Others (%)
2
2
0
0
0
0
2
Total (%)
100
100
100
100
100
100
100
Source: Company, ICICIdirect.com Research
Exhibit 4: Market share trends by metro, non-metro
120
100
80
8.9
17.1
60
18.2
0.4
0.9
11.2
2.6
13.3
10.3
39.8
38.7
Top 10 Metro to Metro routes
Top 10 Metro to
Non-metro routes
20
0
20.2
17.3
15.6
40
13.6
19.4
52.5
0
Indigo
Jet Airways
Air India
Top 10 Non-metro to
Non-metro routes
SpiceJet
Go Air
Others
Source: Company, ICICIdirect.com Research
Indigo has high aircraft utilisation and a lower turnaround time. The
company has also been a leader as far as on time performance is
concerned. Indigo has the least flight cancellation rate.
Exhibit 5: On time performance in FY15
90
87.5
86.4
85
82.5
81
Exhibit 6: Flight cancellation rate in FY15
80.6
80
78.2
74.4
75
70
65
Indigo
Air Costa
Jet
Airways
Go Air
Air Asia SpiceJet Air India
India
On time performance in FY15
Source: Company, ICICIdirect.com, Research
ICICI Securities Ltd | Retail Equity Research
7
6
5
4
3
2
1
0
5.8
0.6
0.7
0.8
Indigo Air Asia Go Air
1.1
1.3
Jet
Jetlite
Airways
1.4
2.2
Air Air India SpiceJet
Costa
Flight cancellation rate in FY15
Source: Company, ICICIdirect.com, Research
Page 4
Operational efficiency, bulk aircraft order key to Indigo’s success
The magnitude of order of 100 aircraft in 2005 has enabled Indigo to have
a structural cost advantage by reducing cost related to acquisition,
maintenance and operation of aircraft. The company also receives
incentives from Airbus (due to bulk orders), which help reduce aircraft
rental payments. Indigo has been able to maintain a young fleet with
average age of 3.1 years by entering into short-term sale-and-leaseback
operating leases typically ranging from three to six years. This helps in
maintaining higher flight dispatch and improved fuel efficiency. Further,
high aircraft utilisation and lower turnaround time have helped Indigo to
maintain lowest cost in the industry and places it in a better position
compared to its peers. Going forward, the bulk order of 180 aircraft in
2011 and 250 aircraft in August 2015 will help the company maintain its
structural cost advantage. Further, as the A320neos are 15% more fuel
efficient, the company will also be able to have a competitive edge over
its peers in terms of maintaining lower cost.
Exhibit 7: Maintenance cost per ASK in US$¢
0.95
1
Exhibit 8: Fuel cost per ASK in US$¢
0.9
3.4
0.8
0.6
0.4
3.47
3.6
3.2
0.34
0.35
3.23
3.07
2.94
3
0.18
3.37
2.8
0.2
2.6
0
Indigo
Jet airways
Spice Jet
Air Inidia
Indigo
Go Air
Maintainence cost PER ASK in USD¢ in FY14
Jet airways
Spice Jet
Air Inidia
Go Air
Fuel cost PER ASK in USD¢ in FY14
Source: Company, ICICIdirect.com, Research
Source: Company, ICICIdirect.com, Research
Indigo has the lowest cost per available seat km (ASK) within its peer
group.
Exhibit 9: Cost per ASK in US$¢
12
8
9.82
9.05
10
6.68
5.95
6.37
6
4
2
0
Indigo
Jet airways
Spice Jet
Air Inidia
Go Air
Cost per ASK in USD¢ in FY14
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research
Page 5
Exhibit 10: Profitability (ex-fuel) (US¢)
3.6
2.4
2.9
2.9
Ryanair
2.7
3.5
Air Arabia
1.9
2.7
Thai
AirAsia
3.2
Cebu
Pacific
3.3
3.3
3.1
3.1
2.9
2.4
1.7
Gol
WestJet
JetBlue
Southwest
Spirit
Airlines
Pegasus
EasyJet
AirAsia
Malaysia
Air India
Jet
Airways
SpiceJet
Go Air
0.3
IndiGo
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
RASK minus CASK (ex-fuel) (US¢)
Source: Company, ICICIdirect.com Research
Indigo has the youngest fleet compared to Indian as well as many global
players.
Exhibit 11: Average fleet age
13
14
4
4
4
5
5
5
6
6
5
8
WestJet
6
7
Gol
6
3
EasyJet
8
Pegasus
10
Spirit
Airlines
12
Ryanair
10
8
3
4
2
Southwest
JetBlue
Air Arabia
Cebu
Pacific
AirAsia
Malaysia
Thai
AirAsia
Air India
Jet
Airways
SpiceJet
Go Air
IndiGo
-
Average fleet age
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research
Page 6
Consistent in maintaining healthy financial metrics
The structural cost advantage has enabled the company to register
consistent profitability over past seven fiscals (FY09-15). Even in the worst
year (FY12), the company was able to register PAT of | 141 crore. Over
FY10-15, revenue, EBITDA and PAT posted growth at a CAGR of 40%,
29% and 22%, respectively. Further, the company was able to grow its
cash flow at a CAGR of 30% in FY10-15. Going forward, revenues are
expected to grow at a robust pace in FY15-18E led by 17.9% CAGR
increase in fleet over FY15-18E.
Exhibit 12: Fleet to grow at CAGR of 18% over FY15-18E
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
134
Starting Fleet
25
39
55
66
77
94
111
Net Additions
14
16
11
11
17
17
23
20
Ending Fleet
39
55
66
77
94
111
134
154
Source: Company, ICICIdirect.com Research
Exhibit 13: Indigo has better EBITDAR margins compared to Indian as well as global peers
28.7
19.8
23.4
16.9
19.9
22.1
21.8
25
20.8
17.6
16.7
17.1
15.5
14.6
5.9
2.3
Southwest
JetBlue
GOI
WestJet
Sprint
Airlines
EasyJet
Air Arabia
Pegasus
Ryanair
Cebu
Pacific
Thai
AirAsia
AirAsia
Malaysia
Air India
SpiceJet
Jet
Airways
Go Air
-9
Indigo
35
30
25
20
15
10
5
0
-5
-10
-15
EBITDAR margin (%)
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research
Page 7
Key risks and concerns
Increase in crude oil prices
Crude oil forms a major part of operating expenses of the company. Fuel
cost has fluctuated from 35.0% to 52.0% (as a percentage of revenues)
over the past six years, which has hit the company’s profitability. Any
sharp increase in crude oil prices will impact the profitability of the
company.
High competitive intensity
The airline industry is characterised by low entry barriers given the
availability of leasing options and external finance. Further, over the past
few years, the industry has faced intense price wars. Any increase in
competitive intensity will adversely impact company’s profitability.
High dividend payout just before IPO – raising concerns
A high dividend payout is considered a good practice, which not only
projects a positive image among investors but also helps maintain healthy
return ratios. Indigo also follows the same strategy. Till date, it has paid
94% of cumulative PAT as dividend over FY11-15. However, during
Q1FY16, the company cashed out more than it earned through dividend
(including tax) of | 1,200 crore. This resulted in negative net worth during
Q1FY16 and raised some concerns among investors on why the company
chose to pay the dividend rather than reducing the debt by the same
amount just before the IPO, given the volatile nature of the airline
industry. We believe that if the company continues to opt for the
aggressive dividend payout strategy, then this step will not be viewed as
a major concern.
ICICI Securities Ltd | Retail Equity Research
Page 8
Valuation
The proposed issue price band of |700-765 implies an EV/EBITDA of 13.614.8x and EV/sales of 1.8-2.0x which, we believe, factors in all major
positives of lower than industry cost structure, low crude prices and
sustained mid-teen ASK growth. The valuation also commands a
premium over select global peers that are trading at average EV/sales of
1.5x and EV/EBITDA of 9.3x.
Exhibit 14: Operating parameters
Company
EasyJet (UK)*
Ryan Air
Wizz Air
WestJet*
Norwegian*
Indigo
Total
Revenues
EV
FY13
FY14
FY15
65,232
42,580
45,270
47,200
130,355
36,059
37,186
41,743
6,737
NA
NA
9,506
14,998
20,843
21,978
20,248
20,219
15,533
18,951
17,571
28,841
9,440
11,432
14,309
266,383 124,455 134,817 150,579
FY13
6,090
7,736
NA
3,417
1,495
894
19,632
EBITDA
FY14
7,010
7,460
NA
3,881
(642)
505
18,213
FY15
8,215
10,488
1,580
4,113
1,697
1,870
27,963
FY13
7,110
8,461
NA
3,880
2,124
2,250
23,825
EBITDAR
FY14
8,230
8,209
NA
4,423
947
2,175
23,985
FY15
NA
11,296
2,518
NA
NA
3,822
17,636
FY13
3,980
4,203
NA
1,542
318
783
10,826
PAT
2 yr CAGR
FY14
FY15 Revenue EBITDA
4,516
5,445
5.3%
16%
3,860
6,399
7.6% 16.4%
NA
1,132
NA
NA
1,753
1,880
-1.4%
9.7%
(1,018)
576
6.4%
6.5%
473
1,296
23.1% 44.6%
9,584 16,728
10.0% 19.3%
PAT
17.0%
23.4%
NA
10.4%
34.6%
28.6%
24.3%
Source: Company, ICICIdirect.com Research, *Estimated Figures
Exhibit 15: Valuation parameters
EasyJet (UK)*
Ryan Air
Wizz Air
WestJet*
Norwegian*
Indigo
Average
FY13
14.3
21.5
NA
16.4
9.6
9.5
14.2
EBITDA (%)
FY14
15.5
20.1
NA
17.7
(3.4)
4.4
10.8
FY15
17.4
25.1
16.6
20.3
9.7
13.1
17.0
FY13
9.3
11.7
NA
7.4
2.0
8.3
7.7
PAT (%)
FY14
10.0
10.4
NA
8.0
(5.4)
4.1
5.4
FY15
11.5
15.3
11.9
9.3
3.3
9.1
10.1
FY13
15.0
9.6
NA
12.8
5.9
20.3
12.7
RoCE (%)
FY14
16.9
9.1
NA
11.8
(6.0)
4.5
7.2
FY15
NA
12.6
52.6
NA
NA
20.0
28.4
FY13
20.9
17.3
NA
17.6
12.4
201.4
53.9
RoE (%)
FY14
21.5
15.9
NA
16.9
(44.0)
112.5
24.6
FY15
NA
23.7
59.1
NA
NA
304.1
129.0
FY15 (x)
EV/Sales EV/EBITDA
1.4
7.9
3.1
12.4
0.7
4.3
0.7
3.6
1.2
11.9
2.0
15.4
1.5
9.3
Source: Company, ICICIdirect.com Research, *Estimated Figures
ICICI Securities Ltd | Retail Equity Research
Page 9
Financial Summary
Exhibit 16: Profit and Loss Statement
(| Crore)
FY 11
FY 12
FY 13
FY 14
FY 15
Q1FY16
Ticket revenues
3391.0
4987.3
8266.7
9924.0
12293.9
3714.6
Ancillary revenues
442.4
577.4
936.5
1192.6
1631.4
496.9
Total Revenue
3833
5565
9203
11117
13925
4212
Aircraft fuel expenses
Aircraft and engine rentals (net)
Purchase of stock in trade
Employee benefits
Other expenses
Total Operating Expenditure
1521
2874
4313
5513
5748
1348
409.8
800.7
1,356.1
1,670.3
1,952.2
601.7
19.0
33.5
54.1
59.7
78.5
23.0
293.0
511.9
690.5
921.1
1188.7
382.5
878
1296
1896
2447
3088
884
3122
5516
8309
10612
12056
3239
EBITDA
712
49
894
505
1870
972
Interest
45.0
51.4
57.8
122.6
115.5
32.8
Depreciation
62.9
66.5
85.6
226.0
302.2
120.0
Other income
110.7
144.0
237.1
315.5
383.8
105.7
715
75
987
472
1836
925
Total Tax
-135.3
65.7
-204.0
1.4
-540.2
-284.8
Net profit
579
141
783
473
1296
640
PBT
Source: RHP, ICICIdirect.com Research
Exhibit 17: Balance Sheet
Balance Sheet
FY13
FY14
FY15
Share Capital
34.37
34.37
34.37
355
386
392
Reserves and Surplus
Non - Current Liabilities
1617.3
3080.7
3588.4
Other Long-Term Liabilities
Long -Term Borrowings
1945
2714
3758
Long-Term Provisions
23.2
36.8
52.3
Current Liabilities
Short- Term Borrowings
81.4
0.0
0.0
Trade Payables
265
384
475
1501
2003
2321
31
465
153
5852
9103
10774
1755
3941
4866
10
15
10
7
0
0
Other Current Liabilities
Short-Term Provisions
Total
Non - Current Assets
Tangible Assets
Intangible Assets
CapitalWork-In-Progress
Non - Current Investments
Long-Term Loans and Advances
525
801
1124
Other non-current assets
486
1432
1606
Inventories
52
67
131
Trade Receivables
69
89
105
1341
1102
1999
Current Assets
Cash and Bank Balances
Short-Term Loans and Advances
359
223
156
Other Current Assets
1251
1434
778
Total
5852
9103
10774
Source: RHP, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research
Page 10
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey
Head – Research
[email protected]
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
[email protected]
ICICI Securities Ltd | Retail Equity Research
Page 11
ANALYST CERTIFICATION
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ICICI Securities Ltd | Retail Equity Research
Page 12