IndiGo shares at Rs 3,000? What Emkay Global says on engine issues, rising fuel prices 

Emkay Global on Friday said InterGlobe Aviation Ltd (IndiGo) remains best-placed among peers to tackle the current challenges of engine issues and rising fuel prices. The upcoming travel season, as per our checks, is looking strong and expected yield recovery should offset cost pressures, it said while retaining its 'BUY' rating on the stock. The domestic brokearge noted that Pratt & Whitney (P&W) engine issues have aggravated, with parent company RTX Corporation expecting over 3,000 engine recalls for inspection against over 1,200 engines earlier. Emkay estimated incremental impact on IndiGo, under a worst-case scenario, to be 20-25 more aircraft on ground (AOG) at a time, on an average, for the next 3-4 years, from 40, as of June end.

"This implies 20 per cent total AOG on IndiGo’s current fleet size. As per media reports, IndiGo plans to add 20 A320ceos on damp lease in view of the upcoming peak travel season. We estimate damp lease margins to be 10 per cent lower versus dry lease, although blended impact on net earnings is likely to be moderate at 6-7 per cent," it said.

In the case of rising fuel prices, Emkay said oil marketing companies have recently hiked domestic ATF price by 14 per cent month-on-month (MoM) for September due to the increase in crude prices as well as jet fuel spreads. Brent is currently trading higher at $93 per barrel, indicating another 3 per cent MoM hike for October.

"We estimate IndiGo to report fuel cost/ASK of Rs1.7 in Q2FY24, while our FY24E estimate of Rs 1.6 could turn out to be 10-12 per cent higher at Rs 1.8, assuming current prices prevail in H2FY24, although we believe jet fuel spreads could correct going ahead. For IndiGo, a 5 per cent higher ATF price leads to Rs 28 per share EPS loss, ceteris paribus," Emkay said.

Emkay Global said IndiGo remains well-poised to capture strong air traffic growth in India (12 per cent CAGR over FY24-30), through maximisation of destination-route mix as well as capacity additions. IndiGo has a strong outstanding order book of over 980 aircraft (including the recently placed order for 500 aircraft) with Airbus and a target to double its fleet size by CY30.

"Further, IndiGo is likely to keep benefitting from low competitive intensity. We value Indigo using the DCF method, with a target of Rs 3,000 per share (14.8x Mar-25E target P/E (PBT) and 20 times tax-adjusted target P/E)," it said.

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