6 reasons why IndiGo IPO is the best investment you will make

6 reasons why IndiGo IPO is the best investment you will make Profitable operations with good cash flows and fast growth amid rising fuel prices, depreciating rupee and India slowing down has led no-frills carrier IndiGo emerge as one of the strongest players in the aviation industry. The company has earned profits in 7 years out of the 9 it has remained in business so far.

With a week left before the Gurgaon-based carrier’s parent InterGlobe Aviation hits the capital market with its little over Rs 3,000 crore initial public offer, here are 5 reasons why investing in it would be the best thing you will do:

1) Largest market share

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In the last 7 years, market share of the company has grown from 12.5 per cent to over 36 per cent. That means 1 out every 3 air traveler in India flies Indigo every day on nearly 650 flights that it operates daily. It's market share is likely to go up with addition of more carriers.

2) Sustainable low cost structure

The company's inception saw a low cost structure, a lot of credit of which goes to its fleet strategy back in 2005 when the airline commenced services. "We entered into long term maintenance contracts that went 10 years into the future and are more commonly known as power by the hour or fleet hour agreements. It gives clear predictability of costs by the hour," said airline's president Aditya.

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The company therefore created “huge predictability of its maintenance costs and therefore did not have to scrounge for funds or profitability to pay for new maintenance issues because it was already taken care of." That meant that while other airlines would have to ground planes if there was a problem with engine or components, Indigo continued flying the aircrafts. Moreover, delivering on typical expectations from LCC like single fleet, quick turn arounds, high aircraft utilization, razor sharp operations, lowest distribution cost has translated into low cost structure.

IndiGO aims to keep it simple even in future. Unlike most full service carriers, IndiGo does not offer free lounges or include food and beverages in ticket price for non-corporate passengers which has further helped it in reducing costs. "Reliability is our frequent flyer program - on time flights, maintaining frequency, affordable rates, no fancy hospitality, no red carpets, great customer service. We are so focused on keeping our cost structure low, there's no plan for in-flight entertainment,"said Aditya.

3)Focus on domestic market for growth and business

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In the last 10 years, India continues to be one of the most unpenetrated market in the world. There are merely 391 aircrafts to serve India's rising middle class populace. "It is one of the primary reasons why we got into the airline business in 2005. There were only 130 commercial airplanes back then. After ten years, there are 391. Indian middle class is growing to about half a billion people in the next 48 months, about 1.5 times the size of the population of US. Out of 56 Indian airports where Airbus A320 can land and take-off, we fly to 33 of them. We add 2-3 new destination every year. So we have a long way to go within India," said Aditya.

4) Cost structure to come down further

With Airbus A-320-Neo, the new variant of the Airbus A320, joining Indigo's fleet, cost structure will come down further. It will cut the fuel cost by 10-15 per cent which in turn will further help the profitability of the carrier. "Our order book of 430 A-320-NEO aircrafts to be delivered till 2026 will ensure we are able to service the domestic market well. I guess 90 per cent of our business will be from the domestic business," said Aditya.

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Moreover, when the capacity goes up, the market share naturally rises, especially since there is a huge unpenetrated domestic air passenger market. "After the IPO, the promoters and founders will hold about 85 per cent. The interest of founders, interest of the management team, and interest of new investors is towards growth of the stock price," the company president said. Moreover, at the moment, out of the total 97 aircrafts, 22 are on finance lease and 75 are on operating lease. Even as operating lease might be more expensive, it is of benefit in the longer run as it guarantees lesser maintenance cost, looks new to passengers every time they fly in IndiGo and also ensures higher aircraft efficiency.

5) No capital working debts

Indigo has debt of Rs 3,912 crore and all of it is aircraft acquisition debt, there are no working capital debt. About Rs 1,166 crore from the IPO proceeds will be used for retiring the debt and financial obligations related to aircraft acquisition.

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6) IPO preferred over FDI

IPO was the preferred route for raising funds for the company and not getting a foreign airline as equity partner as the latter could have diluted the LCC focus. "We do not really need a crutch from anybody else. We never even thought of foreign investments option as conflicting thoughts or strategies can slows down decision-making," said Aditya.

Know about the IPO

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InterGlobe Aviation (promoters of Indigo Airlines) has fixed price band for its initial share sale at Rs 700-765, through which it could raise up to Rs 3,268 crore.The IPO will open on October 27 and close on October 29, with the allotment for anchor investors scheduled for October 26. Promoter share will come down from 94 percent to 82 per cent post IPO. As per the offer, InterGlobe will have fresh issue worth Rs 1,272.2 crore as well as an offer for sale of around 2.3 crore shares. The price band has been fixed at Rs 700-765 per share having a face value of Rs 10 each.