Four reasons why IndiGo shares crashed a whopping 20% on Dalal Street

Shares of InterGlobe Aviation, which operates India's largest airline IndiGo, on Friday crashed 20 per cent in an otherwise rallying market after the company reported its December quarter earnings below Street expectations.

The stock of InterGlobe hit its lower circuit of 20 per cent at Rs 958.00 on the Bombay Stock Exchange (BSE).

We have compiled four reasons that are weighing on the stock:

1) Supply delay in fuel-efficient planes by Airbus

The company said it will miss the 111-fleet target by March following labour issues at Airbus.

The delays could throw a spanner in the ambitious growth plans of IndiGo, which has been betting on the more fuel- efficient A320 Neos (new-engine option), the delivery of which was to start from this month and had even told this to investors during the recent IPO launch.

2) Citigroup cuts target price

Global brokerage firm Citi maintained a neutral rating on the stock but cut the target price to Rs 1,200 from Rs 1,300. The brokerage cut the TP on concerns over A320 Neos delivery and said pressure on ticket prices and rupee depreciation has offset the benefit from crude price.

"IndiGo continues to benefit from the favorable oil price environment, but the pressure on ticket prices and 5 per cent depreciation in the rupee will continue to offset part of this benefit. We also believe, higher D&A, increased tax associated with the expiry of aircraft tax credits and higher wage costs only add to the concerns around the A320neo delays," said Economic Times report, quoting brokerage.

3) Bounce in crude prices

IndiGo could not reap the benefits of lower crude prices in the last quarter, and now the prices have jumped over 5 per cent in one-day to scale the $30 mark breached last week.

G Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory believes any recovery in crude prices will significantly hit margins of aviation companies.

"Aviation stocks are now highly sensitive to the oil prices from 12-year low and that too on a small base, crude can easily recover 15 per cent to 20 per cent in one or two quarters which can impact the margins significantly," said expert.

4) Rising competition in the wake of new players

Competition in aviation sector is soaring high with the entry of new players in the sector, triggering price war.

"Once the price war starts, consumer becomes the king and airlines won't be able to command higher prices. This, along with higher crude prices might put margins into doldrums," said Ravi Rastogi, an Independent Financial Adviser.

Chokkalingam also said severe competition coming foreign airlines could act as a drag on the bottom-line in the short term.

"A price range of around Rs 900 could make it quite attractive stock," added expert.