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IndiGo IPO set to hit Street on Tuesday; brokerage recommends 'subscribe'

IndiGo IPO set to hit Street on Tuesday; brokerage recommends 'subscribe'

InterGlobe IPO will be the largest share sale in the country since 2012 and will give the low cost airline Indigo a valuation of around Rs 26,000 crore.

Photo: Reuters Photo: Reuters

InterGlobe Aviation, India's most profitable airline IndiGo, is all set to enter capital markets with its Initial Public Offering (IPO) beginning on Tuesday. The issue will close on Thursday.

The promoters will sell 22.82 million equity shares via the initial public offer (IPO) to raise around Rs 3,000 crore. The airline has fixed a price band of Rs 700-765 per share for the public issue

InterGlobe IPO will be the largest share sale in the country since 2012 and will give the low-cost airline Indigo a valuation of around Rs 26,000 crore.

"We believe that the valuation of Interglobe is justified, considering the opportunity present in the vastly underpenetrated Indian air travel market. Interglobe is better placed than its peers to capture higher market share on the back of its proven Management track record, continuous fleet addition and with its sustainable profitable business model. Hence we recommend a "Subscribe" to the issue at the higher end of the price band," said broking firm Angel Broking in a research note.

However, following are the three concerns, the brokerage points out to keep an eye on:

Low Entry Barriers: The Indian airline industry is characterized by low entry barriers given the availability of leasing options and external finance. Increased competition can impact the load factors of airline companies.

Increase in Crude Oil prices: Since crude oil is a major portion of operating expense for all airline carries, any sharp increase in crude oil prices will impact the profitability of the company.

Currency Fluctuation Risk: Most of the company's debt is funded via ECBs. Any adverse impact on the currency could impact the profitability of the company.

The much-talked about IPO stuck in controversy even before the launch of issue as analysts and investors questioned rather hefty dividends that have been paid out to promoters in recent years.

Analysts believe IndiGo's negative net worth of 1.39 billion rupees ($21.41 million) as of June 30 may have been caused by rich dividends paid in that period.

The airline's profits in June quarter stood at 6.4 billion rupees.

"Our company had negative net worth of Rs 139.39 crore as of June 30, 2015. If this financial position continues, it might make it more difficult or expensive for us to obtain future financing or meet our liquidity needs. Further, there can be no assurance that we will achieve positive net worth in periods going forward," said IndiGo in its red-herring prospectus filed with exchanges on Friday.