IndiGo: The past, present, and potentially exciting future

The rally came after a year of organisational restructuring and boardroom changes. Let's start from February 2022, where the stock bottomed out, falling more than 23%.

It was a horrible year for the economy as a whole, and stock prices were in retreat after a wild rally. It was also the year IndiGo co-founder Rakesh Gangwal exited the board and announced that he planned to reduce his stake in the company. Gangwal and his family have sold almost 18% of their stake since September 2022 and now own less than 20% of InterGlobe Aviation.

While investors generally don’t react positively to promoters selling shares, this particular exit seems to have been conducted in a transparent and orderly manner.

From losses to record profits

Investors did eventually absorb Gangwal’s gradual exit in 2023. They welcomed the new management after it took the airline from a net loss of ₹305 crore in FY23 to a record profit of ₹8,167 crore in FY24. Driving these profits were the strong demand induced by post-pandemic “revenge" travel and limited growth in overall capacity, which boosted realisations.

In a market suffering with lower capacity due to the grounding of some planes with Pratt & Whitney engines, Indigo increased its capacity by 22%. It received new planes from previous orders, extended aircraft leases and signed new ones. At the end of the first quarter, it had 18 planes on damp lease.

The airline has 70-80 of its 382-strong fleet grounded because of engine issues. The engine supplier has agreed to provide IndiGo customised compensation for this.

In its March 2024 presentation, IndiGo said it would continue to lease more aircraft to achieve its target of growing capacity by double digits in FY25. While these leases will affect the airline's profits in the short term, they will help it maintain its market share. So while it tackles short-term issues, management has charted a systematic path to achieving its long-term goals.

The impact of this move is apparent in recent data. IndiGo increased its fleet size from 367 in March to 382 in June, adding five planes on damp lease and 10 on operating lease. It plans to add more than one aircraft per week in FY25. This helped IndiGo increase its market share to 62% in July from 60.8% in June, according to data from the Directorate General of Civil Aviation (DCGA).

The next phase of growth

IndiGo CEO Pieter Elbers aims to double the airline's fleet to 600 aircraft by 2030. This might seem like an ambitious target. After all, it took IndiGo 14 years and a no-frills approach to achieve a fleet size of 362 (from 19 in FY10).

But it is also true that Indian aviation was a challenging market when IndiGo entered it in 2006. It had to compete with the likes of Kingfisher, Jet Airways and Air India, all while paying high fuel prices because of Indian import duties. Several full-service airlines were unable to fill most of their business-class seats and fell into bankruptcy.

Meanwhile, IndiGo used the no-frills model to squeeze in more seats, and became the go-to airline for first-time travelers in India’s price-sensitive market. Today it is the market leader with a 62% share, 100 million customers, and less competition.

It has the management chops and experience to pull off the next phase of growth, too. Having said that, to grow from here, the airline needs a new perspective. As the saying goes, “If you keep doing what you’ve always been doing, you’ll keep getting what you’ve always been getting." IndiGo has adopted a new strategy as it looks to transition from the no-frill model to a full-service airline.

Enter IndiGo Stretch Cabin

The carrier has announced its new business offering, IndiGo Stretch Cabin, which features 12 seats in a 2-2 configuration (Air India’s business-class cabin has eight seats). Apart from plush seats, IndiGo Stretch customers will enjoy curated meals, a wide selection of beverages, advance seat selection, priority check-in and anytime boarding.

You will be able to book an IndiGo Stretch seat for Delhi-Mumbai flights scheduled around mid-November. The introductory price is ₹18,018 (an economy class seat costs around ₹4,000). The airline plans to gradually extend this offering to 12 metro-to-metro routes by the end of 2025, but will it be able to fill these seats?

Historical data shows that many full-service airlines in India fell into losses as they failed to fill their business-class cabins. According to the DCGA handbook 2023-24, full-service carrier Vistara was operating at a loss of ₹264 crore in FY23. The only carrier apart from IndiGo that reported an operating profit was low-cost carrier Air India Express.

Aware of these risks, IndiGo is treading cautiously in its business-class journey. It is attempting this at a time of record profits, which gives it the financial flexibility to handle the high cost of providing business-class service. At first, the plan did not excite the investors, and InterGlobe Aviation’s share price fell by 2.1% after the announcement.

International plans

One segment that has investors excited, though, is IndiGo’s expansion into international skies. Long-haul flights offer higher yields and are more profitable than domestic ones. IndiGo increased its share in international operations from 11.5% in FY20 to 17.6% in FY24, as per DGCA data. In the June 2024 quarter, 27% of Indigo’s available seats per kilometer were on international routes, and it plans to grow this in a structured manner in the coming years.

It is deploying existing planes on international routes, adding new destinations every quarter. At the end of FY24, the airline served 33 international destinations. It has also forged code-sharing partnerships with eight international airlines, enabling connectivity to 49 more destinations worldwide.

Indigo is expanding its fleet, too. It will introduce the A321 XLR in 2025, and has ordered 500 aircraft scheduled to be delivered in phases by 2035, and 30 wide-body A350-900 aircraft that will start to arrive in 2027. The new orders combined with previous pending orders bring IndiGo’s outstanding order book to around 980 aircraft. With such a huge order book, it is looking to capitalise on the Indian government’s ₹1 trillion investment in airport infrastructure.

India has a geographical advantage, with 65% of the world’s population living within five to six hours of flying time. Improving airport infrastructure would help the country create international hubs on the lines of Singapore and Dubai.

Crisil Ratings expects international passenger traffic to increase at a compound annual growth rate of 10-11% in the next four years, from just 5% in FY16-20, driven by rising disposable incomes, easier visas, more airports and better connectivity.

Final takeaway

IndiGo is leaving its comfort zone in the no-frills market to enter the next phase of growth. It is doubling its fleet size and routes, and adding a new class of seats. Add to this a new loyalty program and the IndiGo of today is already very different from what it once was.

On the flip side, the high costs of offering business class could be offset by higher margins for international operations. ICRA has also upgraded InterGlobe Aviation’s long-term rating to AA- (stable) on its strong net profit and international expansion plans. That’s a good sign.

IndiGo stock is trading at 86 times its book value, an important valuation metric, hinting that the market has priced in high growth. Its price-to-earnings (P/E) multiple, however, is 21x. The absence of other viable listed airline companies means there’s nothing to compare this to, but IndiGo’s 10-year median P/E is 20.5x.

That being said, while the company seems poised to robust growth, the stock’s high valuation could limit its upside. Time will tell.

Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.

Puja Tayal is a seasoned financial writer who works with companies such as Motley Fool Canada and Market Realist. With more than 17 years of experience in fundamental research, she provides comprehensive, well-researched insights on companies’ operations in her articles.

Disclosure: The writer or his dependants may or may not hold the stocks/commodities/cryptos/any other asset discussed here as per Sebi guidelines.