Why analysts are betting on IndiGo, SpiceJet

Airline stocks have been soaring following a steep decline in crude oil prices and sustained passenger traffic.

Analysts have particularly turned bullish on the stocks of InterGlobe Aviation and SpiceJet.

On December 20, shares of InterGlobe Aviation (IndiGo) hit a record high of Rs 3,009 on the BSE, having surged 43.24 per cent year-to-date (YTD).

SpiceJet, meanwhile, hit a 52-week high of Rs 69.20 on December 19, having zoomed 57 per cent YTD.

In comparison, the benchmark S&P BSE Sensex was up 16.3 per cent during this period.

“Travel demand is showing no signs of abating.

"Strong daily domestic passenger traffic suggests a healthy operational environment, which will help airlines improve their passenger load factors (PLFs).

"Besides, the decline in crude oil prices, which are down nearly 20 per cent from their September peak, is another relief for the industry,” said Parul Sharma, a research analyst at SAMCO Securities.

According to the data provided by the Directorate General of Civil Aviation (DGCA), air traffic grew 9 per cent year-on-year (Y-o-Y) to 12.7 million in November as against 12.6 million and 12.2 million passengers in October and September 2023, respectively.

In December, the average daily number of passengers stood at 442,000.

If this trend sustains, analysts believe December could see air traffic of nearly 13 million passengers.

IndiGo’s PLF increased by 230 basis points (bps) in November 2023 to 85.6 per cent, while SpiceJet and Vistara saw an increase of 70bps and 20bps,
respectively, to 90.8 per cent and 89.4 per cent, data shows.

PLF measures how much of an airline's passenger carrying capacity is being utilised.

CAPA India, an aviation consulting, research and knowledge practice, forecasts domestic passenger traffic to grow over 15 per cent Y-o-Y in FY24 to 155 million passengers, while international traffic could increase steadily to 70 million passengers.

PLFs, the industry body said, are expected to remain around 85 per cent for H2FY24, while yields are likely to decrease 3 per cent Y-o-Y in FY24 due to normalisation of airfares and further aircraft groundings.

Analysts suggest investors start nibbling into the stocks while staying mindful of a sudden spurt in crude oil prices and/or supply constraints.

According to CAPA, the operational fleet will be contained at 588 aircraft by March 2024 with the total grounded aircraft likely to rise to 200 from 165 at present, primarily due to supply chain issues, P&W engine snags, and operational weakness at GO First and SpiceJet.

According to IndiGo's management, over 40 aircraft were grounded till September due to P&W engine issues.

P&W has identified a new issue with powder metal, and around 35 more engines will be removed for inspection from January 2024 onward, thereby hurting the operating fleet further.

CAPA estimates the airline industry to post a loss worth $1.6–1.8 billion in FY24, led by full-service carriers.

The low-cost carriers, on the other hand, may post a loss of $200–300 million this financial year, while IndiGo is expected to report a profit of $500 million for the year.

Motilal Oswal Financial Services has reiterated a ‘neutral’ with a target price of Rs 2,800 on IndiGo as it will have to navigate through supply-related challenges in the near to medium term.

Nuvama Institutional Equities, meanwhile, has maintained a 'hold' rating on SpiceJet but raised the target price to Rs 52 from Rs 33.

It believes the capital raise of Rs 2,241 crore shall allow the repayment of outstanding dues and the resumption of certain aircraft.

“During Q2FY24, the promoter infused fresh capital of Rs 500 crore, while it entered into an agreement with Carlyle Aviation Partners (lessor) to convert its Rs 230 crore debt into equity at Rs 48/share.

"However, given that nearly 40 per cent of its fleet is grounded, coupled with weak balance sheet, we retain ‘hold’ and cut FY25E Ebitda by 4 per cent,” the
brokerage said.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.