Equity Research

August 19, 2016

BSE Sensex: 28077

INDIA

Aviation
Aviation
InterGlobe Aviation
(Rs880 BUY)
Target price Rs1,225
SpiceJet
(Rs59 HOLD)
Target price Rs64
Jet Airways
(Rs538 ADD)
Target price Rs600

Pricing pressure bottoming out

Reason for report: Sector Update
Domestic Airlines have been stressed by intense pricing pressure during most of
the 1HCY16. However, there are signs of reversal in the same with unusually
strong recovery witnessed in August in particular. Our case is based on end to
end fare consideration and thus do not include the effect of the spike in fares
during the Independence Day week. While the demand side triggers are the
strong traffic growth and positive momentum in economy, limited available slots
in key airports provide supply side construct for an uptick in domestic airfares.
We continue to believe that any kind of price war is not sustainable under this
background, particularly with domestic airlines having already internalized the
low crude advantage and operating at higher PLFs/utilizations. Based on our
data points, we believe that the sequential decline in domestic fares in Q2 would
be significantly lower than the usual ~15% which we have seen in the past.
Q2 airfare data points indicate significant positive momentum building up.
Characteristically, the weakest quarter of all, airfares in domestic circuit has been
unusually stronger than expected with a recovery seen during July/August. We have
tracked the domestic fares across 14 routes among 6 metros in India. As a
methodology, we have recorded fares for the next day, next week and next month to
catch the temporal distribution of the fares. To give a sense, the point to point fares
between July end and mid-August, fares have actually increased by 13.5% on
average for the fares next day, while the fares have declined by 6%/5% on average
for fares on next week and next month respectively. To give a contrast, IndiGo
recorded sequential drop of 13% in Q2FY16. SpiceJet recorded a loss of 22%/14%
in Q2FY15/Q2FY16. Hence, the decline in airfare is likely be much lower for Q2FY17
considering the data thus far. Q3FY17 (October/November) advance booking fares
are also significantly higher on comparison with September fares, which is in line
with a seasonally strong festive season.
IndiGo remains our top pick, incentives to remain strong and fear of delays in
neo is overdone. With the largest committed orderbook, IndiGo remains to benefit
the most from the strong domestic demand, while cost structure remain most efficient
along with further economies available along with ramp up in capacity. The current
market price factors cumulative fare decline of 10% for FY17/18E, which we believe
is very pessimistic considering we already had two consecutive years of fare decline
of 5%/15% in FY15/16. Our channel checks suggest neos consider to have very
strong value despite weakness in asset yields, which essentially ensures at least
US$5-7mn$ per aircraft in trading profits for IndiGo. 3 additional neo deliveries have
happened in July (1 for Lufthansa, 1-IndiGo and 1- Pegasus CFM engine).
Supply adjustments will offer strength to fares. The supply market has improved
with the slower pace of capacity addition than expected earlier. Delay in neo
induction of IndiGo, higher realisations of international sector (particularly for Jet, Air
India and SpiceJet), incremental international offerings by Go Air(already received
approval for 9 countries) and troubles for TrueJet and Air Costa will serve to
strengthen the domestic airfares incrementally.
Valuation Summary
Mcap
TP
Reco
(Rs bn)
(Rs)
IndiGo
318 BUY
1,225
SpiceJet
35 HOLD
64
Jet Air
61 ADD
600
Source: Company, data I-Sec research
Company

Research Analysts:

Ansuman Deb
ansuman.deb@icicisecurities.com

Revenue (Rs mn)

FY17E
FY18E
196,986
233,585
59,272
72,414
230,845
247,988

EBITDAR (Rs mn)

FY17E
FY18E
67,838
84,153
15,675
20,086
38,402
43,397

+91 22 6637 7312

Please refer to important disclosures at the end of this report

PAT (Rs mn)

FY17E
FY18E
23,016
32,029
3,667
6,383
4,099
8,770

ICICI Securities

IndiGo, August 19, 2016

Chart 1: For next day travel-point to point fares have increased in 9 out of 14 destinations in our
sample universe
16,000

Mumbai-Delhi

Delhi-Mumbai

Mumbai-Chennai

Chennai-Mumbai

Delhi-Chennai

Chennai-Delhi

Delhi-Bengaluru

Bengaluru-Delhi

Mumbai-Kolkata

Kolkata-Mumbai

Mumbai-Bengaluru

Bengaluru-Mumbai

Delhi-Hyderabad

Hyderabad-Delhi

14,000

12,000

10,000

8,000

6,000

4,000

2,000

8/19/2016

8/18/2016

8/17/2016

8/16/2016

8/15/2016

8/14/2016

8/13/2016

8/12/2016

8/11/2016

8/10/2016

8/9/2016

8/8/2016

8/7/2016

8/6/2016

8/5/2016

8/4/2016

8/3/2016

8/2/2016

8/1/2016

7/31/2016

7/30/2016

7/29/2016

7/28/2016

7/27/2016

7/26/2016

The spurt in between is the fares around the Independence Day weekend
Source: Makemytrip, I-Sec Research

Table 1: Significant strength shown in various sectors

Point to point
indicates difference
over last one month(26th July to 18th
August)
The outperformance
is evident in routes
involving Chennai and
Bengaluru-Mumbai.
However, Delhi
Mumbai remains
weak.

Routes
Mumbai-Delhi
Delhi-Mumbai
Mumbai-Chennai
Chennai-Mumbai
Delhi-Chennai
Chennai-Delhi
Delhi-Bengaluru
Bengaluru-Delhi
Mumbai-Kolkata
Kolkata-Mumbai
Mumbai-Bengaluru
Bengaluru-Mumbai
Delhi-Hyderabad
Hyderabad-Delhi
Average
Source: Makemytrip, I-Sec Research

Chg.-Point to Point (%)

(9.7)
8.8
10.6
84.8
9.0
41.4
(2.1)
(0.6)
(7.4)
6.1
1.4
57.8
(20.2)
8.7
13.5

Considering that next day travel would constitute significant proportion of the total
capacity, the average increase of 13.5% is a distinct positive.

ICICI Securities

IndiGo, August 19, 2016

Chart 2: For next week travel, point to point fares have declined by average 6% in August
10,000

Mumbai-Delhi

Delhi-Mumbai

Mumbai-Chennai

Chennai-Mumbai

Delhi-Chennai

Chennai-Delhi

Delhi-Bengaluru

Bengaluru-Delhi

Mumbai-Kolkata

Kolkata-Mumbai

Mumbai-Bengaluru

Bengaluru-Mumbai

Delhi-Hyderabad

Hyderabad-Delhi

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

8/25/2016

8/24/2016

8/23/2016

8/22/2016

8/21/2016

8/20/2016

8/19/2016

8/18/2016

8/17/2016

8/16/2016

8/15/2016

8/14/2016

8/13/2016

8/12/2016

8/11/2016

8/10/2016

8/9/2016

8/8/2016

8/7/2016

8/6/2016

8/5/2016

8/4/2016

8/3/2016

8/2/2016

8/1/2016

The decline is small compared to a traditional ~15% sequential drop generally witnessed in Q2
Further, the percentage decline does not include the effects of intermediate spurt as evident in the graph
Source: Makemytrip, I-Sec Research

Table 2: Fares for next week travel

Point to point would
involve travel periods
during the beginning
and end of August (1st
to 25th August)
Strongest sector
remain around
Chennai along with
Mumbai-Kolkata and
Mumbai- Bengaluru

Routes
Mumbai-Delhi
Delhi-Mumbai
Mumbai-Chennai
Chennai-Mumbai
Delhi-Chennai
Chennai-Delhi
Delhi-Bengaluru
Bengaluru-Delhi
Mumbai-Kolkata
Kolkata-Mumbai
Mumbai-Bengaluru
Bengaluru-Mumbai
Delhi-Hyderabad
Hyderabad-Delhi
Average
Source: Makemytrip, I-Sec Research

Chg.-point to point (%)

(6.7)
(7.5)
12.3
9.3
(5.3)
0.4
(16.6)
(15.0)
2.1
(7.7)
(23.4)
(1.9)
(18.5)
(9.4)
(6.3)

ICICI Securities

IndiGo, August 19, 2016

Chart 3: For nex month travel, point to point fares have declined by 5% on average in AugustSeptember thus far
Mumbai-Delhi
Chennai-Delhi
Mumbai-Bengaluru

8,000

Delhi-Mumbai
Delhi-Bengaluru
Bengaluru-Mumbai

Mumbai-Chennai
Bengaluru-Delhi
Delhi-Hyderabad

Chennai-Mumbai
Mumbai-Kolkata
Hyderabad-Delhi

Delhi-Chennai
Kolkata-Mumbai

7,000

October-November fares
are significantly above
the current trend

6,000

5,000

4,000

3,000

2,000

1,000

11/18/2016

10/18/2016

9/18/2016

9/17/2016

9/16/2016

9/15/2016

9/14/2016

9/12/2016

9/11/2016

9/10/2016

9/9/2016

9/8/2016

9/5/2016

9/4/2016

9/3/2016

9/1/2016

8/30/2016

8/29/2016

8/28/2016

8/27/2016

8/26/2016

8/25/2016

Source: Makemytrip, I-Sec Research

Table 3: Fares for next month (September)

Point to point indicate
travel period between
August end and
September end (25th
August to 18th
September)

Stronger sectors are

Mumbai-Kolkata and
Mumbai-Bengaluru

Routes
Mumbai-Delhi
Delhi-Mumbai
Mumbai-Chennai
Chennai-Mumbai
Delhi-Chennai
Chennai-Delhi
Delhi-Bengaluru
Bengaluru-Delhi
Mumbai-Kolkata
Kolkata-Mumbai
Mumbai-Bengaluru
Bengaluru-Mumbai
Delhi-Hyderabad
Hyderabad-Delhi
Average
Source: Makemytrip, I-Sec Research

Point to Point (%)

(11.9)
(35.5)
(8.9)
(13.9)
1.3
(1.5)
1.2
(8.3)
1.3
4.2
8.4
4.1
(9.9)
(5.5)
(5.3)

As expected, the fares for October and November are significantly higher on account
of the seasonal strong demand witnessed in Q3. To give a sense, average fares
across these 14 routes one month from now in September currently is Rs3,221. The
same in October and November stands now at Rs3,777 and Rs4,079 respectively.

ICICI Securities

IndiGo, August 19, 2016

Price charts

Feb-16

Aug-16

Feb-15

Aug-16

Feb-16

Aug-15

Feb-15

400

Feb-14

20

Aug-14

40

600

Aug-13

800

Aug-15

60

Feb-14

1000

Aug-14

80

900
800
700
600
500
400
300
200
100
0

Aug-13

1200

(Rs)

100

Jet Airways

(Rs)

SpiceJet

1400

Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
Jun-16
Jul-16
Aug-16

(Rs)

InterGlobe Aviation

IndiGo, August 19, 2016

ICICI Securities

This report may be distributed in Singapore by ICICI Securities, Inc. (Singapore branch). Any recipients of this report in Singapore should contact ICICI Securities,
Inc. (Singapore branch) in respect of any matters arising from, or in connection with, this report. The contact details of ICICI Securities, Inc. (Singapore branch) are
as follows: Address: 10 Collyer Quay, #37-16 Ocean Financial Tower, Singapore - 049315, Tel: +65 6232 2451 and email: navneet_babbar@icicisecuritiesinc.com,
Rishi_agrawal@icicisecuritiesinc.com.
"In case of eligible investors based in Japan, charges for brokerage services on execution of transactions do not in substance constitute charge for research reports
and no charges are levied for providing research reports to such investors."
New I-Sec investment ratings (All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)

BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return
ANALYST CERTIFICATION
We /I, Ansuman Deb, MBA, BE; Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research
report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly
related to the specific recommendation(s) or view(s) in this report. Analysts are not registered as research analysts by FINRA and are not associated persons of the
ICICI Securities Inc.
Terms & conditions and other disclosures:
ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of
financial products. ICICI Securities Limited is a SEBI registered Research Analyst with SEBI Registration Number INH000000990. ICICI Securities is a wholly-owned
subsidiary of ICICI Bank which is Indias largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life
insurance, general insurance, venture capital fund management, etc. (associates), the details in respect of which are available on www.icicibank.com.
ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our
associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research
Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or
derivatives of any companies that the analysts cover.
The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained
herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to
any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information
herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other
reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such
suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity
to this company, or in certain other circumstances.
This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy
or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or
solicitation of offer to buy or sell or subscribe for securities or other financial
Instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat
recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any
investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for
all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not
be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and
return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for
any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see
Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in
projections. Forward-looking statements are not predictions and may be subject to change without notice.
ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject
company for any other assignment in the past twelve months.
ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from
the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage
services or other advisory service in a merger or specific transaction.
ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage
services from the companies mentioned in the report in the past twelve months.
ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its
analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research
report. Accordingly, neither ICICI Securities nor Research Analysts have any material conflict of interest at the time of publication of this report.
It is confirmed that Ansuman Deb, MBA, BE; Research Analysts of this report have not received any compensation from the companies mentioned in the report in the
preceding twelve months.
Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.
ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the
last day of the month preceding the publication of the research report.
Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various
companies including the subject company/companies mentioned in this report.
It is confirmed that Ansuman Deb, MBA, BE; Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report.
ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.
Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.
We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other
jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any
registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category
of investors. Persons in whose possession this document may come are required to inform them of and to observe such restriction.
This report has not been prepared by ICICI Securities, Inc. However, ICICI Securities, Inc. has reviewed the report and, in so far as it includes current or historical
information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.