Compensation benefits push IndiGo to report strong Q1 earnings

IndiGo Q1 earnings: IndiGo, the country’s largest airline, reported a robust performance in the first quarter, exceeding market expectations. The airline's earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR), adjusted for foreign exchange losses, saw a 20 per cent increase, largely driven by compensation benefits received from Pratt & Whitney (P&W) related to the Aircraft on Ground (AoG) issue.

The airline's other operating income, which includes these compensation benefits, surged 2.6 times quarter-on-quarter and 9.4 times year-on-year due to the accrual of a catch-up component. This spike is expected to normalise in future quarters, brokerage firm Prabhudas Lilladher said in a note. Despite the strong performance, IndiGo's EBITDAR estimates remain broadly intact for the next two years due to revised fuel cost assumptions. These revisions account for rising VAT rates in some states and the induction of less fuel-efficient aircraft via damp lease.

IndiGo's strategic growth plan includes deeper international penetration, highlighted by a firm order for Airbus A350-900 aircraft and plans to launch a business class product soon. The airline expects a revenue compound annual growth rate (CAGR) of 16.0 per cent over the next two years, with EBITDAR margins of 25.2 per cent and 22.7 per cent for FY25E and FY26E, respectively. Prabhudas Lilladher has an an 'accumulate' rating on the stock for target price of Rs 4,958, up from Rs 4,667, based on an EV/EBITDA multiple of 10 times.

Revenue and Profit Highlights

IndiGo's revenue increased by 17.3 per cent year-on-year to Rs 19,570 crore, surpassing expectation of Rs Rs 18,480 crore. The growth was driven by higher compensation benefits from P&W due to the AoG issue. Passenger revenue rose by 10 per cent year-on-year to Rs 16,500 crore, while ancillary revenue increased by 13.9 per cent year-on-year to Rs 1,760 crore. The load factor stood at 86.8 per cent, with revenue per available seat kilometre (RASK) at Rs 5.39. Available seat kilometres (ASKM) and revenue passenger kilometres (RPKM) rose by 11.0 per cent and 8.6 per cent, respectively.

Fuel cost per available seat kilometre (CASK) increased by 10.5 per cent year-on-year to Rs 1.77, driven by higher fuel prices and increased VAT. The total fleet count for IndiGo stood at 382 aircraft.

Profit and Margins

IndiGo reported an EBITDAR, adjusted for forex loss, of Rs 5,840 crore, a 15.6 per cent increase year-on-year, with a margin of 29.8 per cent. However, the FX-adjusted profit after tax (PAT) declined by 6.3 per cent year-on-year to Rs 2,790 crore.

Q1 Earnings Snapshot

• IndiGo has launched a codeshare partnership with Japan Airlines, enabling travel to 14 Indian cities via Delhi and Bengaluru.
• The AoG count stands at mid-70s, expected to start declining early next year.
• Six additional aircraft will be inducted from Qatar Airways for the Doha route on damp lease.
• IndiGo has a firm order book of over 975 aircraft.
• ASKM growth is projected to be in the early double digits for FY25E.
• Compensation benefits from P&W are reflected in other operating income or adjusted in maintenance costs based on the completion of negotiations.
• Fuel CASK increased by 10.5 per cent year-on-year due to higher fuel prices, increased VAT, and the induction of less fuel-efficient aircraft.
• CASK excluding fuel and forex has increased due to cost escalation from AoG.
• IndiGo added 15 aircraft during the quarter, with 10 on operating lease and 5 on damp lease.

IndiGo shares declined 1.75 per cent to Rs 4,412.60, underperforming the Sensex which was up 0.18 per cent.