“The time to buy is when there’s blood in the streets, even if the blood is your own”. :Baron Rothschild:
With over 1000 flights cancelled in the last 4 days, both the customer as well as market sentiment has turned negative against Indigo. Shares of Interglobe aviation(parent company of Indigo) have fallen more than 10% in the last 5 days.
The current market cap of the company is INR 2.08L Cr. and the stock is trading at a PE of 40 as of now.The free cash flow for the company was approx. INR 18K Cr in FY25. If we assume that the FCF will grow by only 5%(in the past the FSF of Indigo has grown by 15%) and also assuming terminal valuation if approx INR 1 lacs Cr. , the DCF valuation of the company come around to be INR 2.25 Cr.
Even the valuation shown above is premium compared to peer valuation of the industry. The airline commands 63.8% of domestic air traffic market share with a profitability matrix that other airlines dream of.
IndiGo’s strength lies in its relentless focus on cost leadership and operational excellence, a strategy that has consistently delivered profits while rivals often struggle with losses. This efficiency is best demonstrated through its CASK/RASK.
CASK/RASK (Cost per Available Seat Kilometer / Revenue per Available Seat Kilometer): While the CASK was at INR 3.25 , the RASK was at INR 5.13.The key is the differential (RASK minus CASK), which is historically high for IndiGo.
Although new competitors have tried to gain the market share, but to run a profitable airline in a cost sensitive market they also have to follow the playbook of Indigo, which Indigo has already mastered. This is the reason the company has maintained profitability and is a part of many mutual funds and portfolios. Also, it is a very time taking and tedious process to build capacity in airline industry as pilot hiring process and acquiring aircrafts require a lot of approvals.
The Indian aviation sector is poised for robust growth, driven by rising income per capita, increasing demand from a growing middle class, and under-penetration in air travel.
If the recent turbulence that the company had to face in last 5 days are resolved quickly and do not have a long term impact on Indigo’s operations then this situation could present retail investors with a good buying opportunity in the next few weeks. Remember Mr. Market, when he goes into his midnight rage he thrashes the stock price well below any justification.