IndiGo shares up 1.3% as airline gains market share but valuations flying higher; should you buy?

Helped by its surging market share IndiGo has potentially reached 40% of pre-coronavirus volumes which is above the industry average.

Shares of India’s largest domestic airline carrier InterGlobe Aviation or IndiGo surged over 1.3% to trade at a price of Rs 1337 per share on Thursday morning. The upmove comes after aviation data suggested that the domestic aviation industry was now running at traffic capacity 25% to the pre-coronavirus levels. The return to normalcy in the aviation industry benefits IndiGo which controls close to 60% of the aviation traffic in India. According to figures from the civil aviation regulator total domestic passenger traffic was still down by 76%  on-year basis at 28.32 lakh passengers but was up from the 21.07 lakh passengers in July 2020.

Helped by its surging market share IndiGo has potentially reached 40% of pre-coronavirus volumes which is above the industry average. This could help the aviation giant in controlling its losses. In June this year IndiGo was losing Rs 300 million per day. “This would help Indigo retain material part of the end financial year 2020 free cash level by end of this fiscal year without using any liquidity-boosting measures. Indigo should start adding to its cash position once it breaches 80% pre-Covid volume levels,” said a report by Kotak Securities. 

The brokerage firm has a ‘Buy’ rating on the scrip with a target price of Rs 1,520 backed by the airline carrier’s domestic market share and resources to grow other business segments. IndiGo is also well positioned to capture the market share of any airline that succumbs due to the pandemic. 

Offering a different view, global investment bank HSBC earlier this week advised investors to ‘Hold’ their positions adding that although pickup in demand is encouraging but far too little to achieve break-even. “ Despite potential headwinds and slow recovery in demand, Indigo’s stock is close to pre-COVID-19 levels and now appears expensive on valuation,” HSBC said in a report. It added that while IndiGo is now operating at around 40% capacity a weaker macro environment, grounded capacity, imbalance between demand and supply, structural changes and softer fares are all set to hurt profitability.

IndiGo’s shares have now gained 57% from their March lows. With this the stock is among the most expensive aviation stocks across the world. “At current levels, the stock is expensive as it trades at FY22e EV/EBITDA of around 14.2x which is higher than its historical average of around 8.0x,” HSBC said while adding that the valuations are not justified given the uncertainty ahead. 

Analysts at Kotak Securities see risks to IndiGo’s high market share, which they think may not sustain over time. SpiceJet gaining share in the market or Vistara enhancing its coverage with the purchase of Air India’s operations are some of the key factors that might disrupt the part for IndiGo. 

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