IPO Report of Indigo airlines by Epic Research

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IPO Report

Interglobe Aviation Ltd

Gearing up for a new route

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Issue Details

Analysts

Indigo- Interglobe Aviation Ltd

India’s low cost, profit making airline ‘’InterGlobe Enterprises Limited’’ (IGL) commenced

operations in August 2006 under the brand name ’’Indigo’’. It connects 33 cities across India

and provide services to other five cities internationally in Asia and Middle East with 623 daily

flights. It have 92 aircrafts in its fleet. At present it holds 33% of domestic aviation market

share with 10% profit margins. Promoters of the company are Mr. Rahul Bhatia, Mr. Rakesh

Gangwal and InterGlobe Enterprises & Acquire Services.

Issue objectives

(a) Retirement of outstanding lease liabilities up to Rs. 3,912 Cr and acquisition of new aircrafts

(b) Purchase of ground support equipment for airline operations worth Rs.342million; and

(c) General corporate purposes

In addition, benefits of listing of the Equity Shares on the Stock Exchanges will be there,

increasing the brand image and transparency of the company.

Our Recommendation: ‘’Subscribe Only For Long Term Gains’’

Profit records of Indigo for last seven years in a row despite of slow down in aviation sector

makes it an attractive pick for investment. High debts of company is a concern but they plan

to retire one third of it from the share sales proceeds , which will improve its debt equity

ratio which is currently 8.4 times. Their plan of expanding aircraft fleet to 150 by FY17 from

current level of 92 airbus endow with a success story in making.

Concerns:

1) IGL is known for its hefty dividend paying, due to which company’s net worth turned

negative on 30 June 2015.

2) If US interest rates start increasing, IGL will have to shell out higher interest charges,

affecting profitability

3) At current valuation, there is low probability of listing gains, hence short term investors

should stay away from the IPO.

We believe the company’s brand value and strong fundamentals will ensure that the stock will

continue to outperform its peers. We recommend to SUBSCRIBE ONLY FOR LONG TERM GAINS

and with low possibility of re-rating, short term investors should stay away.

Face Value (Rs) 10

Issue Size (Rs Cr) 3000

Industry Airlines

Lot Size 15 shares

Stock Recommendation

Rating Subscribe

Issue opens 27-Oct-2015

Issue Closes 29-Oct-2015

Price band (Rs) 700-765

Potential Upside 15-20%

Fundamental Report By Epic Research


26 October 2015

Please refer to disclaimer at the end of this report www.epicresearch.co

Shareholding Pattern

Pre IPO % Post IPO %

Promoter 99 91

Others 1 1

Public - 8

QIB 50

Non institutional 15

Retail 35

Share reservation (%)

Issue Manager

BRLM Citigroup, Barclays,

Kotak Mahindra, UBS,

Morgan Stanley,

JP Morgan,

Registrar Karvy Computershare

Listing BSE, NSE

Vrinda Aditya, Analyst [email protected]

Y/E March (Rs Cr) FY12 FY13 FY14 FY15

Revenue 57,086 94,402 114,321 143,091

YoY % 44.7% 65.4% 21.1% 25.2%

EBITDA 1,929 11,307 8,205 22,535

Margin % 3.4% 12.0% 7.2% 15.7%

PAT 1406 7834 4733 12956

Margin % 2.5% 8.3% 4.1% 9.1%

EPS (Rs) 4.6 25.5 15.5 42.2

ROE % 57.8% 201.4% 112.5% 304.0%

ROCE % 5.4% 26.3% 9.5% 24.9%

BVPS 793 1,267 1,370 1,388

Financial Performance

Source: Company RHP, Epic Research

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Why should you subscribe to this IPO ?

Profit making company with Strong management

IGL is a well run business , having overcome all the difficulties of highly complex aviation industry in

a short span of 11 years. It has made a strong position among the age old competitors by earning

profits since seven years in a row despite of its peers who are suffering losses. Indigo has served lakh

of satisfied customers having 33% market share and is most preferred due to its low fare and good

services. Promoters of company hold 30 years plus experience in aviation industry and they have

proved with their managerial skills that they are not just doing business but are capable of writing

new story in Indian aviation Industry.

High Dividend paying company, will maintain its payout policy

Interglobe has consistently paid dividend to its shareholders. In FY11 it paid Rs.490 crore; in FY13, it

paid Rs.549 crore; in FY14, it paid, Rs.378 crore; in FY15, it paid Rs.1,080 crore; and for FY16 it paid

an interim dividend of Rs.1,003 crore to the promoters in June. Company believe in paying off its

shareholders and is firm to follow the same practice post IPO. This will provide an opportunity to

investors as they will get regular income in form of dividend besides the benefit of price movement .

IPO proceeds will let them lighten their burden

Although recently they were in news for having negative net worth of Rs.139.4 crore where as on

March end net worth was positive at Rs.426Cr. Its negative net worth is a minor issue as its due to

payment of dividend. Issue proceeds will provide them to maintain their cash balance back and they

are planning to pay off part of total debt of Rs.3,912 crore, all of it aircraft related debt. Further they

have ordered aircrafts in bulk to enhance their fleet to 150 airbus in near future. This provides struc-

tural cost advantage as well.

Government of India’s reforms to provide wings to Aviation Industry

Aviation industry is taking upturn in country with increase in spending power of middle class pop-

ulation. Total passenger traffic in January-September rose to 59 million from 49.14 million YoY, an

increase of 20.10%. Further increase in FDI limit to 100% have provided much needed monetary

assistance to the airlines. This has lead to international mergers and new entrants in the sector.

Falling crude prices (below USD 50) provided relief in form of cheap air fuel for companies as heavy

operating expenses is the main concern.

Projects like smart cities and make in India widens the scope for growth and development. Under

the smart cities plan , 100 cities will be developed and it will include infrastructure at its best. It

means development of airports and connectivity as well. Airports Authority of India aims to bring

around 250 airports under operation across the country by 2020.

Profit earning airline since 2009


Fundamental Report By Epic Research www.epicresearch.co

20% increase in passenger traffic in a year

Funds will be used to pay off debt and enhance aircraft fleet

High dividend paying player

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Industry Overview

Indian Aviation industry is ninth largest in the world and is all set to become third largest by 2020.

It is one of the least penetrated air markets in the world with 0.04 trips per capita per annum as

compared to 0.3 in China and more than 2 in the USA.

Indian aviation is experiencing dramatic growth across the board, from the emergence of Low Cost

Carrier and growing middle class ready to travel by air as well as growth in business and leisure

travel. At present more than 85 international airlines operate in India and 5 Indian carriers

connect over 40 countries. Total passenger traffic stood at a 190.1 million in FY15, registering an

increase of 12.47%. By 2020, passenger traffic at Indian airports is expected to increase to 421

million from 190.1 million in 2015. Domestic passenger traffic expanded at a CAGR of 11.8% over

FY06–15. It is expected to touch 209 million by FY17. International passenger traffic posted a

CAGR of 9.5% over FY06-15 and is set to touch 60 million by FY17. Looking at the current growth

of 20% p.a, Indian carriers plan to increase their fleet size to reach 800 aircrafts by 2020.

The Indian aviation sector is likely to see investments of USD 12.1 Billion during 2012-17;

USD 9.3 Billion is expected to come from the private sector. The Government of India (GOI)

envisions airport infrastructure investment of US$ 11.4 billion under the Twelfth Five Year Plan

(2012-17). It has opened airport sector to private participation, six airports across major cities are

being developed under the PPP model. The Airports Authority of India (AAI) aims to bring around

250 airports under operation across the country by 2020. 100% FDI is permitted for greenfield

airport projects under the automatic route. Further up to 74% FDI is permitted for existing airport

projects under the automatic route and above 74% and up to 100% permitted under government

approval route.

In last one year aviation turbine fuel prices have declined owning

to downfall in crude prices. This was also the key reason for profit

earnings of the airline companies. It in turn provided for reduction

in fares.

Large scale collaboration deals like, Etihad Airways & Jet

Airways, Tata Group & Singapore Airlines, Tata Group & AirAsia

are providing a niche for technology advancement and

enhanced operational management.

Indian Aviation industry to be third largest by 2020



Source: APAO, Epic Research Source: DGCA Epic Research

Market Share of Airlines Passenger Traffic in India

Airline Model Revenue Net Profit/Loss

LCCs USD 3.9bn USD 41-67mn

FSCs USD 7.2bn (USD 1.28-1.31bn)

Total USD 11.1bn (USD1.21-1.27bn)

Estimated earnings for FY16

Source: APAO, Epic Research

100% FDI is allowed in sector through government route

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Company Profile

Indigo airlines is the brand of InterGlobe Aviation Limited (IAL), established in 2004 at New Delhi.

IAL is the subsidiary of InterGlobe Enterprises Limited (IGE) which was incorporated in 1989 in Delhi.

IGE is currently engaged in the business of providing services as tourist and travel agents, transport

agents and IATA agents. It also have venture in technology business, having a network of 126 offices

across 59 cities globally. IGE employs more than 17,000 professionals across its businesses which

include IndiGo (InterGlobe Aviation)‚ InterGlobe Technologies‚ InterGlobe Air Transport‚ InterGlobe

Technology Quotient‚ InterGlobe Hotels and InterGlobe Education.

Indigo launched its domestic operations in 2006 with an A320 Airbus aircraft which represents its

fleet now with 97 A320 airbus aircrafts. In 2011, company started its international flight and start-

ed operations in other Asian countries like Bangkok, Singapore, Kathmandu and Dubai, Muscat in

Middle East. It provide services across 33 cities within country and 5 international locations with

around 623 flights daily. At present it is the 7th largest low cost domestic carrier in terms of sitting

capacity in India with a market share of 34% as on April’2015. It has also been awarded as ‘Best

Airlines’ ,‘Best Companies to Work For’, by Great Place to Work Institute, India and by CNBC for 7

years in a row.

IAL also has a joint venture with Accor Asia Pacific since 2004 to develop a network of 'ibis' hotels

throughout India, Nepal, Sri Lanka and Bangladesh. With 10 ibis hotels open and 9 under

development, the company shall have a portfolio of 19 operational hotels with room inventory of

about 3500 rooms by 2017.

Other promoters of IAL are:

Mr. Rakesh Gangwal, aged 62 years is the Non executive director of the company He is an NRI

based in USA and have 30 years plus experience in aviation sector.

Mr. Rahul Bhatia, aged 55 years is the Non executive director and was also instrumental in

formation of IGE. He have more than 25 years experience in travel industry.

India’s first low cost, profit

making airline.



Flights across 33 domestic and 5 international locations

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Financial Performance

In Q1FY16, total revenues were Rs.43,172million including other income of Rs.1056million.

Further total COGS was Rs.19,723million while employee’s expenses were Rs.3825million and

other expenses amounted to Rs.8842million for the quarter. EBITDA was Rs.10781 million with

margin of 25% backed by decline in fuel prices and increasing passenger growth. Depreciation &

amortization cost were Rs.1199million, resulting in EBIT of Rs.9581million with 22.2% margin.

Finance cost for the period was Rs.328million. PAT was Rs.6404million, 14.8% profit margin .

Indigo is the only low cost carrier in India which is profit earning and we strongly believe in its

proficient management which have potential of reaching sky scraping position in aviation

industry.

Revenues of Rs 43,172million

for Q1FY16



PBT-PAT-PAT Margin EBITDA-EBITDA Margin

Revenue– COGS– EBITDA Revenue—Growth


Source: Company RHP, Epic Research Source: Company RHP, Epic Research



EBITDA-EBITDA Margin EBITDA-EBITDA Margin


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Income Statement

Y/E March (Rs Cr) FY13 FY14 FY15 Q1FY16

Revenue 94,402 114,321 143,091 43,172

Growth (%) 65.4% 21.1% 25.2% -

Cost of goods sold 57,229 72,433 77,793 19,724

Gross Profit 37,173 41,888 65,299 23,448

Total SG&A 25,866 33,683 42,764 12,667

EBITDA 11,307 8,205 22,535 10,781

margin (%) 12.0% 7.2% 15.7% 25.0%

Depreciation 856 2,260 3,022 1,200

EBIT 10,451 5,945 19,513 9,581

Interest 578 1,226 1,155 328

PBT 9,873 4,719 18,357 9,253

Tax (2,040) 14 (5,402) (2,848)

PAT 7,834 4,733 12,956 6,404

margin (%) 8.3% 4.1% 9.1% 14.8%

Source: Company, Epic Research

Y/E March (Rs Mn) FY13 FY14 FY15 Q1FY16

Share capital 344 344 344 3,437

Reserves and surplus 3,547 3,863 3,918 (4,831)

Total Equity 3,890 4,206 4,262 (1,394)

Debt 16,988 30,807 35,884 35,667

Deferred tax liabilities (Net) 537 523 4,091 4,178

Provisions 539 5,013 2,051 5,428

Other non current liabilities 18,912 26,612 33,487 34,271

Other current liabilities 15,010 20,028 23,207 21,833

Trade Payables 2,648 3,844 4,755 5,771

Total liabilities and Equity 58,525 91,034 107,738 105,754

Fixed assets 17,713 39,560 48,765 48,431

Investments 0.35 0.47 0.46 0.46

Loans and advances 8,834 10,243 12,792 13,650

Inventories 523 673 1,306 1,684

Trade receivables 685 891 1,046 1,173

Cash and bank balances 13,406 11,015 19,994 22,694

Other assets 17,364 28,651 23,835 18,123

Total Assets 58,525 91,034 107,738 105,754

Balance Sheet

Source: Company, Epic Research

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IPO Report of Indigo airlines by Epic Research

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