Aviation – Q2FY20 result preview – Seasonal weakness to take a toll
1) we expect Indigo (up 25% YoY) and SJ (up 46% YoY) to continue to clock robust RPKM growth versus mid single-digit industry growth;
2) yields, although lower than Q1 due to seasonal weakness, are likely to rise 3-5% YoY;
3) ATF prices are down 8.7% YoY, leading to 11x/8x YoY surge in EBITDAR at Indigo/SJ;
4) hike in lease rates and forex losses due to translation of lease liabilities are likely to offset EBITDAR growth leading to net losses at both the airlines; and
5) we expect slight decline in PLF at Indigo (83.2%, down 1.5% YoY) and SJ (89.1%, down 3.8% YoY) as capacity additions outpace demand.
Guidance on resumption of 737 Max deliveries is a critical monitorable for SJ. We also revise up our TP for Indigo by 5.9% to INR1,685/share as we slash FY20/FY21E tax rate from 29% to 25%. Pecking order remains unchanged with SJ as our top pick.
Industry consolidation continues
Although industry growth has slowed down considerably to ~5%, Indigo and SJ continue to capitalise on the vacuum left by Jet’s shutdown. SJ has, in fact, grown at 9x industry, accounting for bulk of the slots vacated by Jet. Consequently, top-line growth remains robust at 28%/51% at Indigo/SJ aided by yield expansion. Assuming the grounding of 737 Max aircraft is lifted from Q4FY20, we expect RPKM growth to accelerate further to over 70%.
Higher yields despite falling oil prices
Although ATF prices are down 8.8% YoY, airlines have not passed on these savings to passengers. We expect yields to rise 5%/3.5% at Indigo/SJ indicating a shift in pricing power to airlines post recent consolidation. Despite the recent slowdown in passenger traffic, PLFs have declined only slightly as airlines continue to retain flexibility on aircraft deliveries.
International expansion accelerates
International growth continues to accelerate at 70%/40% at Indigo/SJ as both the airlines continue to add new routes to Middle East and SE Asia. We expect international revenues to account for over 20% of overall revenues at Indigo and SJ. We expect Indigo’s market share to have crossed into double digits in Q2FY20 versus 6.5% last year.
Outlook: Industry growth to accelerate post slot reallocation
Over half of Jet’s slots have been kept in abeyance by the government in light of the company’s ongoing sale. Although these slots are on low traffic routes compared to allocated slots, redistribution will add to industry’s PAX growth. SJ can potentially repeat its earlier success and gain the lion’s share of unallocated slots. We continue to maintain ‘BUY’ on SJ (TP: INR173/share, 4.6x FY21E EV/EBITDAR) and ‘HOLD’ on Indigo (7.3x FY21E EV/EBITDAR).