You may have heard people saying, “Trade in aviation sector, don’t invest in them.” One justification for this statement is the high fixed costs the aviation companies need to bear. We all know what people talk about Air India and Kingfisher and bankruptcy of Kingfisher. The oil prices have helped aviation sector and hence it is expected that
GoAir also would be coming with an IPO soon. Indigo IPO is the first aviation IPO to hit the market in the last 9 years. Can this company be a better investment? Let’s get ourselves introduced to the factuality of the industry and this company.
About the company
InterGlobe Aviation is the parent company which manages IndiGo airlines. IndiGo is India’s largest passenger airline. It has 33.8% of the total domestic passenger volume. It runs on a LCC (Low Cost Carrier) model; meaning it keeps its profits margins small making fares cheap for the passengers. IndiGo started with one airplane, adding more to the fleet it had 6 airbuses in 2006, and now flying 97 planes in 2015.
Industry
The airlines market in India got liberalized and grew since 2003. From 2004 to 2010, the domestic passenger volume showed up 19.4% CAGR.
To the Indian Air Market (domestic) Indian Rails is a tough competition. And within the aviation industry companies like SpiceJet, GoAir, Air India Express, and AirAsia India are it competitors.
Financials
The financials of any airline company feature- low profit margin, high fixed costs which includes lease cost and purchase price of the airbus, maintenance charges, employee costs, etc.
Rupees in millions
For the year ended March 2015, the carrier recorded a net profit of Rs 1,295.58 crore on revenues of Rs 14,309.14 crore.
This is one of the few companies in the Indian aviation market which have made profits in the last five years. This is a big plus as not many people are able to make money in this sector. Even though they have a profit of almost IndiGo posted a net profit of Rs 640.44 in last quarter, its net worth was negative -139.39 Crore which does not seem good.
- Mode of Revenue:
- Passenger and Cargo revenue
- In flight sales
- Dividend income
- Tours and packages
- Interest income
- Commission and advertisement income
Book building
Of the total issue, reservations for investors:
- 50% for QIB
- 15% Non-institutional investors
- 35% retail investors
Use of IPO proceeds
The capital raised from this IPO will be used to:
- Pay ‘lease and purchase of aircraft’ liability
- Purchase some equipment required for ground support
And for other corporate purposes…
Key risks to Indigo’s growth include
- a) Inability to grow domestic networks and frequencies in a profitable manner
- b) Inability to acquire additional licenses and traffic rights
- c) Delay or inability to procure, flight slots on financially viable terms
- d) Changes to cost structure
- e) Greater exposure to exchange rate volatility
IPO highlights
Valuation
At the top end of price band, InterGlobe’s enterprise value (EV) works out to be 10.9 times its operating profit (EBITDAR) of 10.9 times based on FY15 earnings. This is higher than the Asian peer sector average of 9.5 times. It is difficult to compare it with Indian airlines as most of the major airlines in India are loss making.
Also the have given a dividend just before going public to there old shareholder. This don’t give a good feeling as it happened just before the issue hit the market. Right now, they also don’t have a consistent dividend policy.
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