BUY Interglobe Aviation - AnandRathi Institutional Research

Interglobe Aviation - Advantage market leader; initiating, with a Buy with a target price of Rs 1200

We initiate coverage on Indigo with a Buy rating and a target price of Rs. 1,200. A market leader with a one-third market share, a rare eight straight years of profit and favourable macro-economic factors make a case for a premium valuation of Indigo. A unique aircraft-acquisition strategy, entry barriers to competition, sharper focus by the government and favourable crude-oil prices make Indigo a good investment.

A simple plan, perfect execution reflected in consistent performance: Indigo's bulk-aircraft-order strategy, a first-of-its-kind in India, obtained for it huge discounts, negotiating advantage and a sale-and-lease-back option, lowering the overall cost of ownership. A single-type aircraft plan reduces staff training and aircraft maintenance costs, and a younger fleet keeps fuel costs lower than its peers.

Favourable macro-economic conditions: Declining crude prices, the sharper focus by the government, higher disposable incomes, the cost-benefit advantage over the Railways are some of the key factors in the turnaround of the aviation sector.

Market leader in one of the most underpenetrated markets: With a ~35% share, Indigo is poised to grow along with the Indian aviation sector. At present, India's per-capita seat is 0.08 compared to 2.6 in the USA or 1.03 in Malaysia.

Valuation. We expect CAGRs of ~23%, 36% and 38% over FY16-18 in, respectively, revenue, EBITDA and PAT. The stock trades at 5.2x FY18e EV/EBITDA and 3.3x EV/EBITDAR. We believe that the recent correction has priced in the delay in deliveries of the new aircraft, and expect the management to be more cautious ahead. We recommend a Buy, with a price target of Rs. 1,200. We value the stock at a P/E of 12x FY18e, implying a 48% potential upside.

Risks: Delay in aircraft acquisition, crude-oil prices.

Source : Equity Bulls

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