IndiGo stock jumps by 4% after JP Morgan upgrades the stock

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Indigo stock upgrade

InterGlobe Aviation (Indigo) is the largest airline in India by passengers carried and fleet size, with a 53.5% domestic market share (October 2021). It drives the overall aviation industry in India.

JP Morgan on IndiGo:

JP Morgan has upgraded  Indigo from UNDERWEIGHT rating to NEUTRAL rating. It has also increased the target price from Rs 1400 to Rs 1825 per share. It said in its report that the peak crude could signal the peak of a downgrade cycle. FY23 will be another loss-making year and has cut its FY23 EBITDA by 44% due to crude. 

However, JP Morgan noted that the issue of increasing crude oil prices and its impact on the company is already reflected in the current stock price. The demand-supply situation looks balanced for now. Going forward, the research firm expects IndiGo's average seat kilometer to grow at a healthy rate of 27% from now till FY25.

International flights to resume:

  • The regular international flights were banned from the week starting 23 March 2020.
  • India has now announced to resume the scheduled international passenger flights from March 27, 2022.
  • The international flight will provide relief for the sector as the borders for tourists open up.
  • The government’s move to start regular flights will help soften airfares. The fares have been soaring due to increased demand and a rise in crude oil prices. International routes also mean higher revenue earned per seat for the companies.

 Impact of rising crude oil prices:

  • There has been a sharp increase in jet fuel prices over the past three months. 
  • In December, ATF prices were up 50% YoY and 13% QoQ to average around Rs 78,000 per kiloliter.
  • ATF forms 40% of the overall cost of airline companies. It is now feared that the carriers would shave off the gains made by them over the past few months.
  • As per Edelweiss's report, corporate travel recovered to 70% of pre-Covid and is expected to touch 100% by June 2022. However, the rising oil price is not a positive sign.
  • If jet fuel prices continue to rise, the airlines are likely to find themselves in a difficult spot. The carriers will find it hard to pass on all fuel price increases to the passengers. If they continue to absorb the price hike, it will hurt margins and bottom-line sharply.

IndiGo Outlook: 

The Aviation sector has been most severely impacted by the pandemic. There has been a ban on international flights, and travel has reduced within the country. The rising crude oil prices have been another worry for the industry. However, IndiGo has sustained all these external pressures and yet managed to report Q3 results above street estimates. The company has reported revenue of Rs 9,294 crore, a growth of a massive 89% YoY and reported profits for the quarter ended December. Going forward, the company is optimistic to scale its business further.