IndiGo stock to soar on a cosy duopoly and an expanding market, say brokerages

• Very few stocks have withstood the recent mid-March market correction like IndiGo did.
• Sector experts believe that with GoFirst and SpiceJet in trouble, the industry is moving towards a ‘cosy duopoly’.
• IndiGo is expanding its capacity, adding more routes and aiming to double in size by 2030.
  

Be it large or small cap, very few stocks have withstood the recent market correction that kickstarted on March 13. IndiGo belongs to a rare club of stocks that has slowly yet steadily risen even in a market where investors were getting disillusioned. It has run up by 13% in a sideways market in the last one month, and has also hit a lifetime high recently. Over the last one year, it has given a tad over 94% returns to its investors.

On Wednesday, an IndiGo aircraft grazed the wings of Air India Express at the Kolkata airport, prompting the launch of a probe from the Directorate General of Civil Aviation (DGCA). Such on-ground incidents can lead some volatility for the stock, but its long-term prospects seem bright, say brokerages.

Growing market

The rationale behind the rising bets on this aviation stock appears strong. The travel bug that’s bitten Indians during the post-pandemic era refuses to die down. Most sectoral analysts believe that the number of air travellers can grow from 225 million (expected) in 2024 to as much as 510 million by FY30.

“Indigo expects demand to remain robust with passenger traffic likely to grow 2.3x led by a shift in traffic from railways to airlines, accelerated airport expansion (Navi Mumbai and Delhi airports), rise in passport holding passengers and increase in connectivity to neighbouring countries,” says a report by Nuvama.

Moreso, metro to non-metro travel is also gaining traction, which can add to the passenger growth momentum. The number of domestic airports is expected to rise from 140 to 220.

The cherry on the top of the cake is that the market is gravitating towards a ‘cosy’ duopoly after GoFirst’s grounding last year and SpiceJet’s ongoing financial troubles. Fewer players – dominated by IndiGo and Air India — means more pricing discipline which can drive yields over the long term.

“Since the entire fleet of Go First is expected to stay grounded and Spice Jet’s operational capacity is also likely to fall by 70% by March 2024, the industry shall have two large players with a combined domestic market share of around 75%. IndiGo is likely to benefit from market share gains across categories amid weakening of small players,” says Nuvama.

Going global

Along with domestic growth, India itself has plans to become an aviation hub which can benefit its aviation players.

“Strong focus on international expansion continues and company (Indigo) as well as Indian regulators believe India can become an important global hub for international-to-international travel travel, akin to the Middle East,” said a research report by UBS.

Indigo, which already has over 60% market share in the domestic market is at a unique position to expand internationally too.

“An airline with double of today's size, global reach and footprint by the year 2030. That is the ambitious target,” Indigo CEO Pieter Elbers told PTI in an interview on Wednesday.

The company is also increasing its capacity by anywhere between 11-13% in FY25. It’s in the process of adding wide body aircraft ie. A321 XLRs to cover mid to long haul markets. These aircraft are expected to be in service over the next two years.

“The company expects its international segment’s share to rise to around 30% by FY25E from around 27% currently,” says Nuvama.

Moreover, it has increased its codeshare destinations (in agreement with other airlines) to 49 – 35 within Europe and seven within Australia. Its destinations in general are at 121, with 33 in Asia and 88 in India.

“We maintain our positive stance on Indigo considering strong growth prospects of the Indian aviation industry, share gains in international travel, efficient cost structure and operational excellence,” says UBS.

Even as it has around 70 aircraft grounded due to issues with Pratt & Whitney engines and more, it’s not too much of a dampner, believe brokerages. As per management commentary, grounded aircraft will remain at current levels for the next 1-1.5 years, and will see a sharp decline after that.

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