I would have a cautious view on the future. This is not to indicate that I do not believe in the story of Indigo.
The following are the key merits that I see:
The long runway in front of the airline companies( % of people who travel vs the population). Even if we discount the same for the people who cannot afford the same, it will still be a sizable number.
As has been rightly pointed out, their cost of operations has been significantly lower than the other airlines( better negotiating power/ hands on approach of promoters etc)
I have appreciated their focused approach (Limited types of carriers/ Limited routes - which helps them maximise their returns etc)
The area which I would be cautious about is the pace of growth and the Operational issues which arise. In my experience with the Industry, I have seen that despite an amazing opportunity, at times the top management needs to undergo a change in “vision”/ Mindset to embrace the next level of growth. I am sure that the promoters are quite smart and have thought about this!!
My point was a bit different.If we look carefully, the prices of tickets during diwali, new year, holi, other festivals , conferences touch the roof due dynamic pricing.There are many streams of income. Interglobe is unique in many ways.It received close to 240 cr in last qtr as compensation from P & W due engine issues.While its aircrafts on ground reduces seats availability, increases occupancy rates, provides opportunity to raise fares to all, its therefore beneficial to interglobe in short term.The most unique aspect of interglobe is a certainty to reach in time.There are many firsts and while I was v sceptical in investing in this business , I am confident indigo has a fantastic management team.They r changing the leased model to ownership model which I believe would be beneficial for the company.
With the change in the leased model to the ownership model, do you think Indigo will have to invest cash upfront and also raise cash for the same( QIP/ Borrowings etc)? This will have a near term impact on their cash situation.
In the LT, the overall outflow will be significantly cheaper than a leased model. One thing to be aware of will be the fact that the premium that they used to derive in a sale-leaseback model will no longer apply. This is a kind of a fee income( upfront recognition or amortised)
Depreciation benefit, ownership of aircraft due to it’s life longer than 20
years while value on books would b negligible r some of the benefits.In a
leased model, one ends up paying much higher in long run.
But lease model helps the company weather the down-cycle more peacefully and as we all know crude oil prices are on upward trajectory, the pressure on margins will be inevitable in next few quarters so in such situations lease model works like blessing.
Would you know the effective cost of sale and leaseback? Is that cost higher than then the interest rate for the loan they could borrow at the corporate level?
I think it’s buy and lease back.while I do not know the interest rates, calculation etc, it’s similar to any asset owning or on lease.Mt opinion is any asset having life of Abt 20 years works out cheaper owning it rather than the current model of interglobe.huge depreciation in initial years wuld bring down taxes, generate good cash flow etc etc.May be some stuff. Boarders especially CAs may give a much better view.
There are tax benefits both ways. In a lease model, the rental cost is a deductible cost and in the ownership model, one gets the depreciation benefit. The lease model is much more expensive, because of the high interest rate costs. Ideally this should be compared with the cost of capital for the airlines company. The ownership model works for the airlines industry, because they will not be subject to the huge amount of change which the auto industry is witness to( BS IV/ BS VI/ Electric vehicles/ Hydrogen based engines etc).
there is no disclosure from the company as far their compensation from PW is concerned. in the concall also they said they cannot disclose it due to their non disclosure agreement… the 240 crs figure is specualtion
While I have not been able to trace the amount of compensation, I am posting a part of article published in money control today.
Though, IndiGo continues to face challenges emanating from the engine issue, it is not facing much of a financial impact as it is adequately compensated by Pratt & Whitney - the engine manufacturers of its new A320neo fleet - for the business loss it incurs. This is evident in the strong set of Q3 FY18 numbers that the company posted.
Indigo’s H1 2017 fuel costs were 30.9% of revenue when crude was 40-50$ a barrel. That resulted in fuel costs of 3406 cr on a revenue of 11043 cr. Profits before tax for this period was 1888.87 cr. With crude inching close to 70$ mark, that could push up fuel costs by 30-40%(may be an overestimation). Taking that into account, the earnings could start dissapearing fast. Somehow the market isn’t taking this into account and Indigo continues to rise inspite of higher crude pricecs. To add to that there is uncertainity over the engines issue.
Disclosure: Sold all positions today. Waiting for crude oil prices to be reflected in earnings.
EDIT: I was looking around to see if Indigo hedges fuel costs, and by how much. Couldn’t find much, just couple of old articles which said it does not: https://jainmatrix.com/2017/05/30/indigo-airlines/
It could be that it changes with how the crude price moves. Seeking some insight on this.
May I am asking a naive question. Generally how many quarters it takes in reflecting the no. in P&L
Will it be reflecting in the next quarter if prices are up right now. For other companies if they have inventory it may take more time to finish if they have FIFO inventory recognition. Will we be able to see crude price effect in next quarter
There are few other factors also which we need to consider before deciding upon the effect of rise in crude price on the profitability -
The increase in traffic.
The company’s ability to pass on the increase in crude price to passengers.
Any other further cost saving measures…
Certainly a rise in crude price is detrimental for profitability…I am into this stock with a long term view and plan to use any good drop for buying more…
