Jefferies assigns an ‘underperform’ rating to IndiGo; projects a 13% stock decline

According to brokerage firm Jefferies, IndiGo, which currently enjoys a dominating position in the fast-expanding aviation market, is likely to experience difficulties in the medium term as new and established operators add capacity in the LCC (low-cost carrier) segment.

Even though decreased fuel prices might offer some short-term comfort, Jefferies predicts that this would certainly lead to earnings challenges. The firm has downgraded the stock to a “underperform” rating and lowered its target price to INR 1,615, which is a 13% decrease from the stock’s current market value.

There is no chance of missing out on traffic growth because of the huge aircraft orders currently being placed in the sector. The overhang of a stake sale by a co-promoter is also a worry, according to Jefferies.

ALSO READ – Rakesh Gangwal & family divested a 2.74% stake in IndiGo for INR 2,004.77 crore

IndiGo co-promoter Rakesh Gangwal, who holds a 37% stake in the company, including affiliates, had announced his intention to leave the board and gradually divest his holdings over five years starting in 2022. He has already sold around 7% of his holdings in the past six months, and the ongoing periodic sales are expected to weigh on the stock, analysts say.

IndiGo’s current market share is around 56%, with the company consistently trying to increase its domestic market share by focusing on on-time performance, competitive pricing, and cost-cutting strategies. Over the past decade, the competitive landscape has also worked in its favour, with full-service airlines pursuing strategies that were not in line with the expectations of price-sensitive customers.

In the past, airlines in India have focused on lower pricing to increase demand and gain market share. However, full-service airlines, such as Jet Airways and Kingfisher Airlines, lost market share and eventually failed. Meanwhile, no-frills airlines, such as Air Deccan, SpiceJet, and IndiGo, emerged as early players in the market.

Recently, after being taken over by the Tatas, Air India has announced plans for separate brands for no-frills and full-service operations. New entrant Akasa also follows a low-price strategy, while SpiceJet is eyeing a revamp, following targeted fundraising.

ALSO READ – From A350s to B777Xs, Air India finalizes the Historic 470 Aircraft deal with Airbus & Boeing

Despite the seemingly large combined market share of IndiGo and Air India, increasing competition is imminent as most players, new and old, adopt similar low-price strategies to capture market share.

ALSO READ – IndiGo reportedly in talks with both Boeing & Airbus for around 500 aircraft

Following Air India’s recent large aircraft order, the industry’s total order book has expanded to 1,250-1,300 planes, almost double the current fleet of approximately 700 planes.

ALSO READ – Indian carrier expected to order over 1,100 planes

This suggests that the industry may witness low to mid-teen capacity addition over the next decade, although near-term supply-chain challenges may provide some protection, the Jefferies report added.

In an extreme downside scenario, Jefferies expects the IndiGo stock to fall 35% amidst a higher-than-expected increase in competition, which is likely to result in a sharp decline in yields. Passenger volume growth is also likely to be under threat due to an urban slowdown.

“Resultant operating EBITDAR should see an EBITDAR CAGR at 41% over FY23 to FY25. We value IndiGo at 6x Mar-25E EBITDA to arrive at a profit target of INR 1,200,” it said.

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