New Delhi, February 7 Shares of InterGlobe Aviation (holding company for India’s largest airlines – IndiGo ) logged one of its best gains ever in recent sessions on Monday closing at nearly 10 per cent higher uon the BSE and 9.45 per cent up on the NSE.

The stock closed at ₹2,170.05 on the BSE and at ₹2,161 on the NSE, respectively. On the BSE, the IndiGo stock hit an upper circuit of of ₹2,171.70 during intraday trade, while trading wvolume spurted 3.71 times.

The strong rally came after the carrier beat street estimates to report profits of ₹130 crore for October–December period of 2021; thereby forcing analysts and brokerage houses to upgrade ratings to ‘hold’ or ‘buy’ from ‘sell’ or ‘neutral’.

ICICI Securities in a report said it was upgrading the IndiGo stock “from Sell to Hold” with a revised target price of ₹1,871 (₹1,650 earlier) while Reliance Securities maintained the ‘Buy’ rating with an un-revised target price of ₹2,750.

Strong cash position

Reliance Securities said, IndiGo’s strong cash position would help in sustaining its market share along with pricing power; and also drive overall profitability. Rising Yield and pricing discipline would support turnaround despite higher fuel prices.

Most brokerages are going with a ‘buy’ option as they see the carrier as the best proxy for reopening trade. Better yields, pent-up demand, addition of fuel efficient aircraft to its fleet (and replacement of older ones) and improved cargo business are other key growth drivers in the long term.

Key metrics improve

The airlines saw its yield - rupee earned for each passenger kilometer flown – improved over 19 per cent y-o-y to ₹4.41 (one of the best in the industry). Yield is considered to be measure of fares and pricing power. Improved numbers saw the airlines report a total cash balance of ₹17,318.9 crore, which include ₹7,814.1 crore of free cash; and ₹9,504.8 crore of restricted cash.

However, almost all analysts have expressed apprehensions around Omircon-led restrictions and sustained high prices of air turbine fuel (ATF) weighing down profitability in the near term. The airlines’ management too during its post earnings call also expressed apprehensions of Omicron-led disruptions on capacity.

Fuel cost saw an 186 per cent y-o-y increase in Q3FY22 to ₹32,69.3 crore (₹1,142.9 crore), while cost of available kilometer (CASK) –unit cost expressed in cash value to operate each seat for every kilometre - increased by approximately 10 per cent to 4.03 (3.68) for the quarter under review. A lower CASK value means it is easier to earn revenue.

Major risk

Centrum Broking, which maintained a ‘Reduce’ rating on the stock said, while it factored-in strong traffic recovery in FY23/24 with elevated spreads (RASK – Fuel), valuations at 11.6x/10x FY23/24E EBITDAR leave little room for error especially given higher crude prices.

“Indian airlines historically have found it difficult to maintain both volume expansion and elevated margins at crude prices above $70/ barrel. Maintain Reduce with a revised PT of ₹1,910, it said.

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