Geojit Financial Services has reiterated a BUY rating for InterGlobe Aviation (IndiGo) with a target price of Rs4,675, projecting a 15% upside from the current market price of Rs4,062. Despite seasonal and cost pressures affecting Q2FY25 profitability, IndiGo’s market leadership, robust fleet expansion, and recent strategic initiatives position it well for long-term growth. Elevated costs from increased airport fees, leasing, and aircraft grounding led to a 42.5% decline in EBITDA year-over-year. However, the outlook remains positive as passenger volumes are anticipated to recover in H2FY25, supported by a stable pricing environment and anticipated reduction in fuel costs. IndiGo’s continued investment in new routes, premium service offerings, and customer loyalty programs further strengthens its market standing.

Q2FY25 Performance: Cost Pressures Amid Revenue Growth

Revenue and Passenger Volume
IndiGo reported a 14% YoY increase in revenue to Rs16,970 crore in Q2FY25, reflecting resilient demand despite a seasonally weak quarter. Passenger volume grew by 6%, underscoring steady market interest even in challenging conditions.

EBITDA Margin Contraction
EBITDA dropped by 42.5% YoY to Rs1,618 crore, driven by higher operational costs, including airport fees and increased lease costs from grounded aircraft. The EBITDA margin contracted by 302 basis points, lowering it to 12.9%, reflecting the impact of increased cost pressures.

Net Loss from Elevated Expenses
The quarter resulted in a net loss of Rs989 crore, attributable to rising depreciation and interest expenses tied to fleet expansion. This is a sharp contrast from a profit of Rs805 crore in Q2FY24, highlighting the cost impact on overall profitability.

Strategic Expansion and Customer-Centric Initiatives

Fleet Expansion
IndiGo added 32 new aircraft in Q2FY25, raising its total fleet to 410, with nine leased additions. This expansion supports IndiGo’s strategy to enhance route coverage and meet growing demand as travel rebounds.

Introduction of Business Class Services
In a strategic shift, IndiGo launched a business class service on the Delhi-Mumbai route, with plans to expand across 12 metro routes by the end of 2025. This initiative aims to attract premium customers and diversify revenue streams.

Loyalty Program Launch
IndiGo’s new loyalty program, BluChip, was introduced in October. Designed to build customer loyalty, the program offers rewards per spend, lifetime validity, and easy redemption, targeting frequent flyers and enhancing brand engagement.

Cost Management and Profitability Outlook

Impact of Rising Fuel and Airport Charges
Fuel expenses rose due to VAT increases in certain states and price hikes by oil marketing companies. While fuel price volatility remains a concern, management anticipates some relief in the near term, which could support margin recovery.

Cost-per-Seat Challenges from Grounded Aircraft
Costs related to grounded aircraft, including maintenance, raised IndiGo’s cost-per-available-seat-kilometer (CASK). Although these costs weigh on short-term profitability, IndiGo’s commitment to fleet expansion aims to address service availability and stabilize CASK.

Growth Prospects and Market Outlook

Projected Recovery in Passenger Demand
With increased travel anticipated in Q3 and Q4 of FY25, IndiGo expects demand growth supported by seasonal trends and a stable macroeconomic environment. This, along with steady ticket prices, should positively impact revenue and profitability.

Venture Capital Arm for Future Innovation
Geojit highlighted IndiGo’s launch of Indigo Ventures, a venture capital arm focused on investing in startups that innovate within aviation and adjacent sectors. This strategic move reflects IndiGo’s long-term focus on diversification and technological leadership.

Investment Thesis and Valuation

Revenue and Earnings Projections
Geojit expects IndiGo’s revenue to grow by 14.3% in FY25 to Rs78,776 crore, with a further 10.2% increase projected for FY26. EBITDA is anticipated to grow 23.2% in FY26, with margin expansion to 23.8%. Adjusted PAT for FY26 is forecasted at Rs8,593 crore, indicating a strong recovery path.

Valuation Metrics
IndiGo trades at a P/E ratio of 22.5x for FY25E, projected to improve to 18.2x by FY26E as earnings recover. With an EV/EBITDA multiple of 7.8x, the stock remains attractively valued, particularly given IndiGo’s strong market share and efficient operations.

Geojit’s Recommendation
Geojit maintains a BUY recommendation on InterGlobe Aviation, with a target price of Rs4,675, signaling a 15% potential upside. This outlook reflects confidence in IndiGo’s market strength, cost-efficiency measures, and strategic initiatives aimed at long-term growth.

Potential Risks

Fuel Price Volatility and VAT Increases
Volatile fuel prices and VAT hikes in select states could exert continued pressure on IndiGo’s cost structure, potentially impacting margins despite strong revenue growth.

Financing and Operational Risks
IndiGo’s ambitious fleet expansion may pose financing challenges, particularly with grounded aircraft adding lease expenses. Managing these costs will be essential to maintain profitability.

Conclusion

IndiGo’s strong market position, expanding fleet, and strategic moves in customer service and loyalty programs offer a solid foundation for long-term growth despite current cost challenges. With a target price of Rs4,675, Geojit Financial Services underscores IndiGo’s potential as an attractive investment in India’s growing aviation sector.