IndiGo faces risks to market share but it may not be a worry for the stock yet

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InterGlobe Aviation Ltd’s domestic market share has improved significantly during the ongoing Covid-19 health crisis. InterGlobe runs India’s largest airline, IndiGo. According to Directorate General of Civil Aviation data, the airline’s market share improved to 57 percent in August 2021 from 47.9 percent in January 2020.

While that augurs well, heightened competition is expected to pose a threat to this dominance. Analysts see brighter prospects for a privatised Air India to gain a larger slice of the pie. They added that in general, deployment of more capacity by other players too can pose a risk to IndiGo’s market share.

Last week, Tata Sons won the bid to acquire Air India. “With Air India, Tatas would have flying rights to more than 56 domestic destinations. This compares to 31 routes for Vistara (the full-service airline the Tata group operates in collaboration with Singapore Airlines). Air India thus becomes a platform for Tatas to fly full-service airlines to a larger network, similar to what Jet Airways had in the past,” said analysts from Kotak Institutional Equities in a report on October 11. The broker pointed out, “Key question is the extent to which travellers would prefer a full-service carrier for non-metro routes as Vistara already covers the metro routes. We already build a 400 basis points decline in market share from current levels of IndiGo on such competitive grounds.” One basis point is one-hundredth of a percentage point.

Having said that, the anticipated hit to IndiGo’s market share in the future is unlikely to pose a threat to the sentiments for the stock, at least from a near-term perspective.

As such, IndiGo’s stronger balance sheet holds it in good stead. True, IndiGo’s net worth had slipped into negative territory after its June quarter results when it had reported a net loss of over Rs 3,000 crore. However, IndiGo has ample cash. At June-end, free cash and restricted cash stood at Rs 5,620 crore and Rs 11,447 crore, respectively. IndiGo’s restricted cash cannot be used for daily operations but for aircraft-related expenses used over the life of a plane before handing it back to the lessor. It also includes cash deposited in banks to typically issue letters of credit to lessors.

For the September quarter, analysts estimate IndiGo’s loss to be lower sequentially.

In the days to come, pricing remains a key monitorable given the substantial rise in crude oil prices. “In this backdrop, one can expect airlines to behave rationally,” said an analyst who did not wish to be named. Fuel costs account for a big portion of an aviation company’s operating expenses and, therefore, a spike in oil prices is typically undesirable for airlines. Note that Brent crude oil prices are hovering around $80 a barrel.

Much also depends on the pace of recovery ahead. Further, investors need to keep an eye on the adverse impact on demand from a potential third Covid wave if it hits the country. It helps that the recovery in the sector is progressing well. In an October 11 report, ICICI Securities Ltd analysts said, “Weekly average daily fliers came in at 262k in the week ended (W.E) October 9 versus 240k in the W.E. October 2 and touched 300k on October 9 (around 75 percent of pre-Covid level).”

As of now, it appears that the IndiGo stock is factoring in a good share of the optimism. After all, the shares have appreciated around 39 percent from the pre-pandemic highs seen in January 2020.