GURUGRAM- Despite achieving its best-ever quarterly net profit of Rs 3,091 crore in the April-June period of the financial year 2023-24 (Q1FY24), InterGlobe Aviation-owned IndiGo (6E) Airlines is likely to face problems in the near future, as indicated by analysts.
Given this situation, most brokerage firms have chosen to maintain their ‘buy’ to ‘underperform’ ratings for the stock and their target price, reports Business Standard.
IndiGo Airlines Problems
For instance, Motilal Oswal Financial Services has upheld its ‘neutral’ rating on the stock, citing ongoing initial challenges the low-cost airline faces.
“While the aviation industry in India shows positive prospects and robust current demand, we observe various challenges that prevent IndiGo’s situation from being ideal.”Motilal Oswal Financial Services
Analysts suggest that IndiGo’s profitability might face challenges in the July-September quarter (Q2) due to lower fares in a traditionally less active period and increased fuel costs.
The management has indicated that this situation could lead to a decline in yields by around 10-15 percent during Q2FY24.
Based on estimations, the average 30-day forward prices for domestic flights (across the industry) have dropped by 15 percent compared to the previous quarter for Q2. In comparison, the 15-day forward prices have seen a 15 percent decline on a quarter-on-quarter basis.
For IndiGo specifically, the figures indicate a 10 percent reduction in 30-day domestic forward booking prices and an 11 percent decrease in 15-day domestic forward booking prices.
During the current Q2FY24 period, the prices of Aviation Turbine Fuel (ATF) have experienced a rise of 10.7 percent, reaching Rs 100.1 per liter.
Fierce Competition and Engine Trouble
Analysts are also cautioning about the potential escalation of competitive pressures in the upcoming months.
This is driven by events like SpiceJet (SG) receiving financial infusion from its promoters (Rs 500 crore), the anticipated restart of operations by Go First (G8), and the issuance of the air operator’s permit to Jet Airways (9W).
Amidst these developments, IndiGo faces increased aircraft grounding due to ongoing inspections of Pratt and Whitney (P&W) engines.
Comprehensive investigations are currently underway for these aircraft, and this process could potentially impact nine additional aircraft in addition to the 35 aircraft already grounded.
Pratt and Whitney (P&W) are set to examine a total of 1,200 engines, with approximately 200 engines anticipated to be inspected by mid-September. In contrast, the remaining engines are planned for inspection over the course of the next year.
Buoyant Future Outlook
According to analysts, the potential emergence of a duopoly within the industry, with IndiGo and Air India (AI) as dominant players, is viewed favorably for IndiGo’s prospects.
This favorable outlook is attributed to several factors, including strong demand and the expanding international business landscape expected to contribute to passenger growth.
Furthermore, the incorporation of extra-long-range Airbus A321XLR aircraft into the fleet and enhancements in the cargo business are anticipated to bolster the airline’s competitiveness over the long term.
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