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Indigo shares up 40% since Nov 10 debut

Shares of InterGlobe Aviation has risen over 40% in less than a fortnight; widened its valuation gap with rivals Jet and SpiceJet.

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The shares of InterGlobe Aviation Ltd, which operates the budget carrier IndiGo Airlines, are defying gravity since its debut on November 10, rising up over 40% to Rs 1,087.50 per piece on Tuesday from Rs 765, bloating its valuation to Rs 39,188.77 crore and causing a concern among many.

What's glaring is the wide valuation gap between the Rahul Bhatia-owned airline and its listed rival airlines like SpiceJet Ltd and Jet Airways, whose valuations currently stand at Rs 3,735 crore and Rs 5,206 crore respectively.

Bangalore-based aviation analyst Pankaj Pandit said at the current price IndiGo's price to earnings (P/E) ratio was around 30 times, which was a little stretched, but he believes investors have discounted future earnings into it based on the airline's strong fundamentals and speculations of Gulf carrier Qatar Airways picking up stake in it.

Pandit expects the New Delhi-based airline's profit to further improve as it retires part of its debt with the proceeds from the recent Rs 3,018-crore initial public offer (IPO).

"Once it (IndiGo) retires part of its debt, its financial burden will go down and profit will rise. This could push up its PE ratio further, but we can expect debt to increase again as it takes deliveries of new aircraft," he said.

Another aviation expert, who spoke on condition of anonymity, said the small size of the airline's float, around three crore (30 million) shares, could be the reason why the shares have risen up so much.

"About 30 million shares is very small for daily trading. Of this, 10 million or so must be getting traded daily," he said.

Pandit said stock prices of smaller floats are easier to manage.

"There must be technical issue of demand for the stock (IndiGo's) being higher than its supply," he said.

Lower amount of shares available for trading, notwithstanding, aviation experts believe the operational performance of IndiGo was way superior to its domestic counterparts and cannot be compared with them, but only with profitable and efficiently-run low cost global airlines like Ryanair and Southwest Airlines.

"Frankly, IndiGo cannot be compared with anyone here (local airlines). It can be compared only with the Ryanairs and Southwests. Jet has been continuously making losses, quarter after quarter, for the last 7-8 years. On top of that they have Rs 11,000-12,000 crore debt. Jet's market share is just 22% (along with JetLite). There is no comparison," said an aviation analyst, who did not want to be named as he was a consultant with both airlines.

According to him, despite the high aviation cost environment in the country, IndiGo's overall philosophy on operation was very similar to some of the best-run low-cost airlines around the world.

"They (IndiGo) are focused on keeping costs low and maintaining operational excellence. Every rupee they spend, they are very concerned about it. They do not spend on brand building, glamour or pampering the passengers," he said.

As per a SAP report, published in December last year, IndiGo's cost per available seat kilometre (CASK = total cost divided by ASK) was the lowest in the Indian market at 5.95 cents. It was 6.37 cents for GoAir, 6.68 cents for SpiceJet, 9.05 cents for Jet Airways and 9.82 cents for Air India (AI).

Generally, CASK excluding fuel cost is taken for comparing costs of carriers across the globe as fuel costs vary in different geographies due to taxation, government fuel pricing regulation and other reasons. Here too, IndiGo's cost was the lowest at 2.87 cents, and dropped further to 2.51 cents on exclusion of maintenance reserve. In comparison, GoAir, SpiceJet, Jet and AI had CASK excluding fuel cost of 3 cents, 3.74 cents, 5.82 cents and 6.35 cents, respectively.

The SAP report revealed that IndiGo's CASK excluding fuel cost was only slightly higher than the average CASK excluding fuel cost of low cost airlines in Asia of 2.81 cents. The average CASK excluding fuel cost of low cost airlines in Europe, Middle East and Africa (EMEA) and Americas was 3.60 cents and 4.78 cents respective.

Besides its lowest cost, IndiGo's lead in the airline market and pending delivery of 430 Airbus A320neo has also buoyed investor sentiment. The airline's fleet is already over 100 aircraft and it has a 15 percentage points lead over its closest rival Jet Airways.

"Once they get these new planes, they can easily grow the market. They are in the right position to grab more and more traffic and make money," said one of the analysts.

The budget carrier is also the most profitable airline in the industry. In the first quarter of the current fiscal, the airline recorded a net profit of Rs 640 crore compared to Jet's Rs 221.7 crore and SpiceJet's Rs 71.8 crore. Its debts are also the lowest in the industry, which is seeped in huge borrowings made on aircraft acquisition and to meet operational costs.

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