Unmatched efficiency, growing market share make IndiGo stock a good long-term investment

Despite InterGlobe Aviation (Indigo) putting out weak numbers for the first quarter of 2016-17—net profit fell 7% compared to same period last year—a majority of analysts feel that the airline is a good long-term bet. This is because the weakness in the first quarter was triggered by sectoral issues. Analysts advice investors to stick with this best-in-class aviation company.

IndiGo is well ahead of its competitors in terms of operational efficiency— less delays, cancellation, consumer complaints, etc. Besides increasing operational efficiency, the airline’s strategy of using one type of aircraft has also helped it to reduce costs related to maintenance, spare parts, labour, etc., making it the best airline in terms of cost-efficiency. Due to its consistent profitability and an asset-light, lease-based, model, Indigo has been generating free cash flow, and has net cash on its books. Since Indigo operates on negative working capital— assets are less than liabilities—increased growth will only results in further cash generation from working capital.

IndiGo’s market share has gone up from around 12% in 2008-09 to around 37% in 2015-16. Unlike other operators, Indigo also boasts of a healthy balance sheet—the net worth of Jet Airways and Spice Jet is in the negative now. Indigo is using its balance sheet strength for fleet expansion to gain market share. The fleet will be expanded by leasing aircraft and, therefore, will not be a strain on the company’s balance sheet.

The domestic aviation industry is growing speedily at around 20% per annum. Most of this domestic volume growth is triggered because of passengers shifting from railway services due lack of ticket availability, high ticket prices, desire to save time, etc. and the shift is likely to continue into the future as well. Increased business and leisure travel, reasonable aviation fuel prices—which are expected to remain low in the near future—are other factors helping the aviation industry.

However, the competition in the domestic sector is expected to go up further because of capacity expansion—expected to be around 33% in 2016-17, more than the expected 20% increase in demand. The predatory pricing by newer players to gain market share may also put some pressure on industry wide margins. Margin pressures, however, should not affect Indigo much as its increased volumes—market share growth— should adequately compensate for any cut in margins.


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