Indigo IPO - To Buy or Skip - A Detailed Advisory

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Indigo airlines is probably among few airlines which is in a profitable mode due to their strict usage of multitasking by a single individual and optimum utilisation of the seats. So; definitely this IPO do raise an eyebrow and one need to make a judicious choice to whether to subscribe it or give it a skip.

Inter Globe Aviation, promoters of Indigo airlines is set to launch its IPO on 27 October 2015. It has fixed a price band of Rs 700-765 for its Rs 3200 crore issue. This is the biggest IPO in India in last 3 years. With this issue company is expecting a valuation of 26,000 crore which is much higher than other players in aviation sector. This is a marquee IPO which has attracted everyone’s attention and rightly so.

Issue Period	October 27 - October 29, 2015.
Price Band	Rs. 700/- – Rs. 765/- per equity share.
Lot Size	15 shares & in multiple of 15 shares thereafter.
Issue Size	Rs.2994 cr. at upper price band
Face Value	Rs.10 each.
Listing	To be listed on NSE & BSE.
Who Can Invest	Resident Indian individuals, HUF, Companies, Corporate Bodies, Scientific Institutions, Societies and Trusts, NRIs, FPIs.

Indigo is the market leader with market share of over 36%. It has shown tremendous growth over last 7 years which expected to fasten as more carriers are added. Today it operates about 650 flight daily. Unlike other players Indigo has managed to maintain low cost structures on sustainable basis. During its initial years it was able to get into long term maintenance contracts for its carriers. This ensured that company could predict its costs with certainty and didn’t have to play around with price and fleet to make profits.

• Interglobe aviation limited (IndiGo) operates India's largest passenger airline with a 33.9% and 37.4% market share of domestic passenger volume for fiscal 2015 and the five months ended August 31, 2015.  
• Indigo commenced operations in August 2006 with a single aircraft and have grown their fleet to 97 aircraft as of August 31, 2015.
• As of March 31, 2015 the average age of their aircraft is 3.2 years, which according to CAPA is second youngest average fleet age among Indian carriers.
• Company operated 570 domestic flights per day, for the month ending March 31, 2015.
• Company was ranked among the "Best Companies to Work For" in India in 2015. 

Indigo is also known for its high aircraft utilization, quick turnaround and low distribution cost which has allowed it to run efficient operations. It has avoided itfalls like free inflight meals, lounges, frequent flyer programs, etc. which have led to downfall of other players in India. Also unlike other airlines it has not digressed from its focus on domestic sector. India is one of the biggest and most under-served market in the world. Indigo realizes this and has focused on increasing coverage in India rather than international flights.

Indigo has a healthy order book and is expecting to induct more than 400 aircrafts in next 10 years. This will not only allow it to achieve better economies of scale but also improve customer service and market share. It is one of the rare players to consistently declare quarterly profits. In Q1 FY15 it announced record profit of 640 cr on revenue of 4317 crores.

• Total revenue as on 31st March 2015 INR 1,43,091.41 million.
• Net profit after tax for the year ended 31st March 2015 INR 12,955.85 million.
• Return on Networth as on 31st March 2015 is 306.61%

But company has been criticized for declaring generous dividend just before the IPO, leaving it with a negative net worth of about 139 crores. But the company has defended paying out dividends as a regular practice and dismissed negative worth saying it has more than 3600 crore of cash reserves. All in all it looks a good bet for retail investors.

Verdict

On the valuation front, the company looks expensive comparing with most of its peers in the Europe, the Middle East and Africa (EMEA) and American regions. Further, comparing EV/EBITDA and P/E multiples with the players in the EMEA and American regions, the company is priced higher. Although, the company’s aggressive growth strategy, strong balance sheet, dominant market share and operational efficiency among global peers is unquestionable, but we believe the valuation factors all these into account.

The listed players far lag IndiGo and have a patchy net profit record; so, a comparison with the better global performers is in order. Low cost European and American carriers have their enterprise value/Ebitdar ranging between seven and eight times. While the company deserves a higher multiple given that the Indian market is growing faster, the IndiGo IPO, at about 7.6 times its FY16 EV/Ebitdar estimates, is slightly on the expensive side.

The comparison can not be undertaken between Jetairways and Spicejet as they are loss making aviation compnaies. Since this is the only profitable company in the lot, thus would advised clients to subscribe for the issue despite it being priced aggresively.

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