Can InterGlobe Aviation sustain its growth in the next 5 years?

Year	IndiGo’s Market Share	Reason
FY07	3%
FY08	9%
FY09	12%
FY10	14%
FY11	18%
FY12	20%
FY13	27%	Kingfisher Bankruptcy – October 2012
FY14	30%
FY15	34%
FY16	37%
FY17	40%
FY18	40%
FY19	43%
FY20	48%	Jet Airways Bankruptcy – April 2019
FY21	55%

Source: DGCA

InterGlobe Aviation’s last 5 years’ growth drivers 

After COVID-19 triggered a wave of ‘revenge travel’, IndiGo resorted to damp leases — outsourcing airline operations to meet demand. The lessor provides aircraft, pilots, and engineers with the option of a cabin crew. Damp lease increased IndiGo’s lease liability but also increased its revenue and market share.

This was a shift for IndiGo, which relied on operating leases to keep costs down.

Fig 3: IndiGo’s Aircraft Order Book (Source: IndiGo’s Presentation)

IndiGo placed its largest-ever order for 500 narrow-body aircraft in 2023, signalling confidence in long-term growth driven by more airports and more routes to capture and more domestic connectivity opportunities.

Smaller planes and shorter distances allow IndiGo to travel to and fro multiple times in a day, which divides the fixed cost across multiple flights. Hence, operating 2,200 flights daily by a fleet of 437 aircraft indicates that the planes are earning their operating lease.

What should investors look for?

Investors can determine if supply-demand economics are healthy or troublesome by monitoring an airline’s available capacity and its utilisation.

Capacity is determined by available seat per kilometer (ASK) and the cost of running this capacity (CASK).

Utilisation is the revenue from the available seat per kilometer (RASK), which is determined by load factor.

The demand-supply balance: The airlines walk on a thin rope of demand and supply. The aircraft fleet is an asset when there is enough demand to fill the seats. In the past, supply disruptions from bankruptcies of other airlines and engine issues helped IndiGo keep its seats filled.

As the fleet size increases, risk increases. For instance, IndiGo’s exposure to forex increased because of US-denominated aircraft leases and maintenance contracts. In the Q3FY25 earnings call, the management stated that every 1% dip in USD-INR rate leads to an unrealised mark-to-market loss of around Rs 790 crore from around Rs 500 crore in FY24.

So far, the demand-supply balance is still favourable for airlines as supply is lower than demand.

Looking ahead: The next 5 years

IndiGo could face competition from Tata-owned Air India, which is undergoing a complete overhaul. Tata Group has ordered 570 planes to tap the growing domestic connectivity and demand for international travel.

Airlines will keenly monitor the spread, the difference between revenue (RASK) and cost (CASK), to keep the demand-supply balance in check.

Growing competition and industry supply could change IndiGo’s dynamics. To stay ahead, the airline is moving beyond its comfort zone of small aircraft and domestic routes and tapping large aircraft and international routes.

In the third quarter, 28% of IndiGo’s capacity was allocated to international routes, which it plans to increase to 40%. It is using B787 wide-body aircraft on the damp lease to explore international routes. Once finalised, it will start flying its first A321 XLR (extra long range) aircraft in FY26 and A350 widebody aircraft in FY28. Owning aircraft reduces the CASK, and IndiGo has reduced aircraft ownership costs with bulk orders.

Fig 4: IndiGo’s International Expansion Plan (Source: IndiGo’s Presentation)

IndiGo will continue to grow fast in the domestic market, which is still its core operation. It is cautious with international expansion, taking calculated risks, as most airlines have perished due to aggressive expansion. IndiGo is adding one destination at a time while closely watching the difference in domestic and international yields.

It is also expanding cautiously beyond its tried-and-tested LCC model. In November 2024, in a departure from its no-frills identity, the airline launched IndiGoStretch on select metro-to-metro routes. It plans to launch this business class offering on 14 metro-to-metro routes. An aircraft will not have more than 12 IndiGoStretch seats, and the cost of frills will be included in the ticket price, which is 4x the price of economy class. With this, the airline looks to tap the premiumisation trend among the urban population.

New leadership

While the changing market trends are one of the reasons for the change in IndiGo’s strategy, another reason is a change in leadership. In May 2022, its co-founder Rakesh Gangwal stepped down and Rahul Bhatia took over as Managing Director. Pieter Elbers was appointed the CEO and Gaurav Negi as CFO.

Under this team, the airline’s revenue and profit grew at a compounded annual growth rate (CAGR) of 68% and 47%, respectively. The airline increased its market share from 55% in FY22 to 62% in FY24.

The shift to damp lease and new aircraft orders significantly increased IndiGo’s lease liabilities by 27.3% to Rs 65,138 crore as of December 2024. A higher lease liability reduces the airline’s financial flexibility to handle any sudden drop in demand due to external factors. However, the airline is managing these liabilities by keeping a sufficient cash balance of Rs 43,781 crore.

Fig 5: IndiGo’s Share Price Growth Before and After the Turnaround (Source: TradingView)

In the tried and tested LCC model, IndiGo’s share price surged 85% from the 2015 IPO date to May 2022 and gave dividends. The new avatar of IndiGo is seeing strong growth facilitated by the rising fleet.

Valuations and market sentiment

International brokerages Morgan Stanley, Jefferies, and Goldman Sachs are bullish on InterGlobe Aviation as they believe it can capitalise on India’s growing aviation market. Meanwhile, domestic brokerages have mixed views.

InCred Equities is bearish on InterGlobe Aviation as it believes that the capacity expansion could be detrimental to revenue growth. The airline’s last 10-year above-industry-average growth was driven by market share capture. But this growth could normalise to industry growth in the coming years.

Fig 6: Analyst Ratings and Price Target on InterGlobe Aviation

Source: Brokerage reports

Looking ahead: The next 5 years

The airline’s Enterprise Value (EV) to EBITDA of 12.5x is lower than its 10-year median of 13.3x, indicating that its operations delivered better margins.

However, the constrained supply scenario of FY23 and 24 won’t be the case going forward, which means its revenue and operating margins could normalise. In that context, EV/EBITDA of 12.5x might be stretched.

Moreover, the FY24 earnings per share (EPS) of Rs 211, its highest since the IPO, is not sustainable as operating margins normalise and lease liabilities increase. Jefferies expects IndiGo’s EPS to fall by 7% to Rs 196.69 in 2025 and 12.4% to Rs 172.29 in 2026. Considering that EPS could fall in the coming years, IndiGo’s 32.8x price-to-earnings (PE) ratio looks stretched. If we normalize the EPS, IndiGo’s 10-year median PE ratio stands at 21.6x.

These stretched valuations reduce the stock’s upside potential.

However, India’s aviation sector is in its early growth stages. If the industry can sustain its high growth momentum and absorb the new capacity, IndiGo’s growth could match the industry’s growth and drive its share price.

It would be interesting to see if IndiGo can replicate its LCC success in IndiGoStretch and international routes.

Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available have we used an alternate, but widely used and accepted source of information. 

Puja Tayal is a financial writer with over 17 years of experience in the field of fundamental research.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article. 

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