Investors Pay Full Fare to Fly India’s Largest Airline: Budget carrier behemoth IndiGo’s parent company is going public, but at a fulsome price

The Wall Street Journal
By ABHEEK BHATTACHARYA
Oct. 27, 2015 11:27 p.m. ET


India’s largest airline will soon be added to the list of the country’s listed companies. Too bad it may also become part of another litany—big Indian firms that perform well, but whose performance is almost always priced into the stock.

InterGlobe Aviation, which runs budget carrier IndiGo Airlines, is selling shares worth up to about $460 million to the public this week and will start trading in early November. And there is bound to be clamor for them.

IndiGo flies more than one in every three Indian passengers, compared with one in eight, six years ago. That still leaves room to grow—and quickly. Travelers are fiercely loyal to Indigo’s reliable service and cheap fares, making it possible that as many as one in two passengers could be flying IndiGo by March 2018, says Kapil Kaul at the Centre for Asia Pacific Aviation.

This growing slice comes at a time when the Indian pie itself is growing. Mr. Kaul estimates Indian traffic will grow by an average 15% every year for the next five years, as low oil prices boost demand with lower fares.

That explains why IndiGo’s revenue growth for the fiscal year ending March 2015 was faster than the year before, and again looked promising in the June quarter, the latest reporting period. With fuel costs low, and IndiGo sharply controlling maintenance costs by flying only one kind of aircraft, incremental revenue is falling quickly to the bottom line.

This is helping IndiGo post returns almost unheard of in the airline world. Its return on invested capital last fiscal year was above 30%, compared with about 15% at Southwest Airlines and 12% at Ryanair.

Yet IndiGo is now demanding a market value of nearly $4.3 billion at the high-end of its IPO range that some investors already agreed to pay, after accounting for stock options. That is 21.3 times last fiscal year’s earnings. That isn’t outrageous compared with Ryanair’s 20.7 times and Philippine low-cost airline Cebu Air’s 18.4, according to S&P Capital IQ.

But to match Ryanair’s 14.8 times forward multiple, for instance, IndiGo would have to increase net profit for the year ending March 2016 by 44%. That is doable, but doesn’t leave much to chance.

IndiGo’s high valuation won’t dissuade investors who already favor blue-chip Indian companies such as HDFC Bank and Hindustan Unilever, who consistently trade at high multiples. Value investors, though, should keep in mind that they aren’t getting a big safety net if oil prices spike, or if the Indian economy deteriorates, weakens the rupee and renders purchases of dollar-denominated fuel expensive. Competition might also heat up.

IndiGo’s fast ride is so far impressive. The stock just doesn’t offer passengers a cushion if things go wrong.

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