The skies are clearer for IndiGo stock to surge further as Go First’s troubles mount

• India’s largest airline InterGlobe Aviation (IndiGo) has much to gain if its peer Go First fails to land safely.
• Cooler crude, more passengers taking to the skies, and the grounding of Go First have set the airline’s growth on a higher altitude.
• IndiGo also expects a 15% growth in its revenue per available seat kilometre (RASK), a key metric for airlines, in FY24.

India’s largest airline InterGlobe Aviation (IndiGo) has a lot to cheer if its peer Go First fails to land safely – with domestic and international market share up for grabs. If the troubles of the budget airline which has filed for insolvency compound, competition will ease in the low-cost segment giving IndiGo more control over air fares.

IndiGo’s shares have surged by over 7% since May 2 when Go First announced that it had filed a voluntary insolvency petition with the National Company Law Tribunal (NCLT). Despite the recent surge, IndiGo is flying light – literally and figuratively – with its valuations being attractive, according to brokerages.

On the back of robust fleet utilization rates and the Indian aviation sector being on an upswing, IndiGo expects its revenue per available seat kilometre (RASK), a key metric for airlines, to grow at 15% in FY24.

Now, new tailwinds like the grounding of Go First and the softening of crude oil prices are expected to give it a further boost.

“The bias is positive towards airline stocks, predominantly IndiGo, for the next 9-12 months,” said a report by Motilal Oswal, adding that the airline is well positioned to improve its realisations and margins too.

An average of brokerage estimates suggests that there is an upside of 17% over the next 12 months, with a target price of ₹2,536 per share, as compared to the current market price of ₹2,164.

Dominance will play to its advantage

There is daylight between the market share of IndiGo and its rivals – the company has a market share of 55% domestically. Air India and Vistara, owned by the Tata group come in next, with a share of 8.9% and 8.7% respectively. IndiGo’s dominance will play to its advantage, according to analysts, not only helping it boost its margins, but also increase its market share.

“Go First accounted for 8% of domestic traffic and 5% of international traffic (among Indian carriers). If this capacity goes out of the system, industry-level load factor and pricing environment can improve substantially,” said a report by IIFL Securities.

Analysts at Credit Suisse explain that bringing an airline back from the brink of a collapse is difficult, as evidenced by Jet Airways’ troubles. “Go First filing for bankruptcy can benefit IndiGo in many ways,” the brokerage said.

IndiGo’s flight gets bigger wings

While Go First was India’s third largest airline, the Covid-19 pandemic hit the company hard when Pratt & Whitney engines started failing, leading to the airline grounding half of its fleet. The company voluntarily filed for insolvency seeking interim relief from NCLT to stop lessors from possessing its fleet.

IndiGo too was a customer of Pratt & Whitney once. But, when its engine troubles surfaced in 2016, it signed on a competitor – another US-based engine manufacturer CFM, and escaped this fate. With a diverse and young fleet, the airline now boasts over 1,800 daily departures with more than 300 aircraft.

Further, to cater to the growing demand, IndiGo is also looking to expand its fleet by 500 more aircraft, from Boeing and Airbus. This was right after its rival Air India run by the Tata group placed a mega order of 470 aircraft.

Flying high

Overall, brokerages are bullish about IndiGo’s prospects, stating that the softening crude oil prices will further help the airline improve its margins.

A surge in domestic passenger traffic also bodes well for the Indian aviation sector, with April witnessing 15% higher traffic of 4.3 lakh passengers per day, than the FY23 average of 3.73 lakh.

All in all, IndiGo’s numero uno position in India, cooler crude, more passengers taking to the skies, and the fall of Go First all set the airline’s growth on a higher altitude.

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