Indigo – Should you invest, sell or hold?

December 10, 2015   ·   0 Comments

got listed on stock exchange on 10th Nov exactly a month back. Since then it has moved to and fro from listing price of 845 Rs. to 1170 Rs. to consolidate back to 1010 Rs.

Most of the brokerages, newspapers came with a negative report on why they felt it is overpriced.  Market proved them wrong with stock gaining almost 40% from its listing price. Then came the phase, when stock analysts wanted everyone to hold back the stock. Market again proved them wrong as stock corrected to 14% from its high’s last few days.

Question which keeps to mind is what is next and whether to sell, hold or invest in the stock.

Let me try to answer it in next section of this article.

Why I invested in Indigo IPO?

  • Occupancy Rate: I have travelled myself with Indigo several times. It comes as a low cost carrier airline. I have seldom seen the airline empty. The occupancy rate of Indigo has always remain high. Infact, most of the times what I observed to be nearly full.
  • Operational Efficiency: I found the company to be operational efficient. In my experience, Indigo has always been very punctual in their timings. Airhostess collect the garbage, waste cups, food waste in the airlines itself which means airline would spend less time in cleaning the aeroplane and would take off at the earliest. The company is extremely frugal as they even serve water in paper cups. I have always liked the attention to detail by the management where they have tried to keep their expenses minimum with each single thing.
  • Growth visibility: I started travelling by airlines in 2009. I have seen company growing when it used to have 2 flights a day from New Delhi to Chennai growing to 10 in a day. My neighbour is a pilot in Indigo. He has moved recently from Jet Airways to Indigo. He has talked to me several times on how good/transparent is the management and how they take care of their employees.(Although he didn’t put money in Indigo IPO 😛 ) As Warren buffett has always emphasized on the growth prospect of the company and good management as key principle to investment.

The above said things gave me enough reason to track the IPO and do some research which led to below mentioned things:

  • Highest Market Share: Indigo has the highest market share of almost 37% of the total traffic of airlines which is pretty massive.
  • Business Model: Company has got business model of leasing and retiring aircrafts. Right now, It has a fleet of 98 aeroplanes which would add 14 more aeroplanes in this year. Overall, the company has given has order book of 250 aeroplanes for Airbus (highest and world record) which would be used in few replacements of old aircrafts and rest would be used in utilising for commuting to new routes i.e. more flights per day.
  • Fuel Cost and Profitability: Airline business is not considered as one of the best business to invest due to fluctuating crude oil prices which basically determine the profitability of the company. The company has been profitable since last 7 years even when crude price sky rocketed in 2008-2010 period. The crude fuel prices have corrected two-thirds of its highs and expected to remain the same for next atleast couple of years.
  • EPS, Revenue Growth: Company has seen a consistent growth with CAGR of 29.43% from 2011 to 2015 and revenue growth has been also in the same lines.  Further, profits of the company have seen a sudden spike in the last year and for Q1 of FY 2016 Company has posted profits of Rs.640 crore. The reason being reduced price of crude oil and in near future the prices of crude oil may not see any rise as supply is in excess of demand. Last year diluted EPS was 38 and EPS for first Quarter was 18.

My Math here on was pretty simple. As i saw no reason for the company to hold on to its profits, I assumed the overall EPS for coming year to be in the range of 65-75 (Average 70) which gave an overall P/E to upper band around 11 which is pretty less as compared to P/E of FD. In case, you are confused on P/E of FD. Yes, FD has a P/E too. P/E is nothing but how much rupee you would have to invest to generate another 1 Rs. Bank FD Rates are around 7.5% these days which means to generate 7.5 Rs., one has to invest 100 Rs. in FD which give the P/E of 13.3.

Moreover, the return of FD is taxable which would yield net return of less than 7.5%. The company prospect looked good to me and with all the above reasons I ignored the negative book value which I mostly highlighted in the brokerage firm reports.

Although, for the investment I had to loan some of the amount from my Dad and applied for 2 applications(One from my account and another in the name of my Mother). With God grace, I got the full allotment of 510 shares in these 2 applications. Once the stock listed, I booked some of the profit in the range of 880-920 Rs selling 210 shares so that I could return my Dad’s money. I have now net 300 shares. Even at today’s closing price, I am still in the profit of another 75K.

The Questions which arise is whether one  should sell at current price, hold of or invest at present price?

Although stocks are considered to be equivalent to wife which means you should marry a good stock and should seldom sell it. As good business does not turn to be a bad business if it priced a little higher. But one needs to also consider stock market as Mr. Market which works on Demand-Supply mechanism where good stocks are available at cheap prices(in recession/depression times) and at extremely high price (in economic upturns)

At current valuation of 1010 Rs, Indigo has a market Cap. of 37k crores which takes Indigo to be India’s largest 60 companies list.

There is no other airline doing even half well as Indigo. Let us do some comparison with stocks having similar growth trajectory:

Stocks MarketCap=A Income=B Ratio =A/B Profit Margin Price EPS P/E
Bajaj Fin Serve 30,642 211 145.22 126 59.72 1930 8 241.25
Britannia 32,849 7,431 4.42 622 8.37 2760 52 53.08
Interglobe Aviation 36,522 13925 2.62 1879 13.49 1010 38 26.58
Siemens 40,715 11,297 3.60 603 5.34 1150 17 67.65
Godrej 42,500 4,490 9.47 655 14.59 1250 19 65.79
Lupin 76,567 10,103 7.58 2,397 23.73 1710 54 31.67
Asian Paints 81,435 11,954 6.81 1327 11.10 850 14 60.71

Screenshot 2015-12-10 12.41.35

The analysis is done on the basis of their last financial year,2015 Income and Profits.

We have not plotted Bajaj Fin Serve as all the graphical points were going haywire because of alarming numbers at which company is operating right now.

Few Inference Points: 

  • Indigo has got the minimum market cap/sales ratio as compared to its peers from companies having market cap ranging from 30k to 80k.
  • Stock Price of companies is reflective of the margin it is making on the total sales. Indigo has got a healthy margins of about 13% which is set to improve with the crude oil pricing has headed downwards more in this year financial year.
  • Company sales is max in all the peer comparison with profits second best to  Lupin. Lupin has got a better market cap because of high profit margins which gives it a close 8 times market cap as compared to total sales.
  • Companies ranging from 30-50k has actually got half the sales and profits as compared to Indigo.

Verdict: I feel if Indigo continues to perform even with the same sales and profit, it should be re-rated and get a better market cap which should should be atleast 6-7 times of the total sales. At present, ratio is close to 3 which means it should at least become double from its current price. Hence, coming in the range of 2,200 Rs. – 2400 Rs. in coming months which would give a P/E close to 60 for the stock. This gives it a good price to invest and a strong hold in case you are having the stock. Any valuations above the numbers would make it expensive a good sell for this year 

We would do the same exercise again after financial year results for 2016 kicks in May,2016 to determine how stock is fairing.

Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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