Mumbai: Kotak Institutional Equities has upgraded Indigo airline‘s parent company InterGlobe Aviation to ‘buy’ from ‘sell’ as it expects pressures on cost and yield to recede for the airlines sector beyond a tough FY21 and expects the company to continue driving double-digit growth for air travel for long.
The brokerage has raised fair value on the stock to Rs 1,520 from Rs 900 to factor in expectation of modest growth over FY20-FY23 period over low FY20 base and rolling forward of valuations.
Kotak Institutional Equities expects airlines to retain meaningful share of benefits of a low crude oil price regime in order to return to profit after three years of losses between FY19-FY22. The brokerage also believes there is limited scope of the sector expanding coverage with the top-2 private players – Indigo and Spicejet – already covering around 90% or more of current traffic through the destinations they serve.
“We also expect Indigo to benefit from (1) uptick in fuel-cost savings with increasing share of A320neos in the fleer over FY2021-23 and (2) reduction in maintenance cost related to retiring of the old A320ceos,” the brokerage said. It added the limited scope to expand coverage does not necessarily mean low growth.
Indigo is likely to breach Rs 100 EPS in FY23, said the brokerage.
“Indigo’s network of 62 domestic destinations, low-cost structure and potential change in competitive scenario in the post-Covid world may accelerate gains for Indigo’s international business, key upside risk to our unchanged 15 times target multiple,” it further added.