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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 We /I, Rashesh Shah, CA, and Devang Bhatt, PGDBM Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. 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