Interglobe Aviation tumbles over 8% on FEMA violation news; Should you stay invested?

While benchmark indices surged in today’s trading session with Sensex ending at over 260 points or 0.74% at 35,547.33 and Nifty 50 at 10,772.05 above 61.60 points or 0.58%, aviation stocks were not so liked, especially low-cost carrier Interglobe Aviation (Indigo). In aviation sector, Indigo is among the most preferred airline stocks on exchanges, however, it was not favoured by investors due to many factors. Today, almost all airlines were on hotbed at exchanges, and peers like Jet Airways and SpiceJet managed to recover loses, but Indigo continued to suffer the pain. 

The stock price of Indigo finished at Rs 1,136.15 per piece down by Rs 92 or 7.49%. However, the stock dropped by more than 8% with an intraday low of Rs 1,125 per piece. 

According to the Directorate General of Civil Aviation (DGCA), 1.18 crore (118.56 lakh) passengers were ferried by domestic airlines in May from 1.01 crore (101.74 lakh) reported during the corresponding month of 2017.

This report was one of the reasons for decline in airline stocks. But investors were more concerned when it came to trading in Indigo today. Source told CNBC-TV18 that the Enforcement Directorate has summoned the top management of the carrier in a case related to violations related to foreign exchange management act (FEMA).

After market hours, Indigo finally rubbished the news by saying, “We hereby clarify that we have not received any such summons.”

Now that Indigo share price has tumbled, people may fear over further investment in the company, but the decline is just momentary as analysts are very optimistic about the stock price ahead. 

Elara Capital says, “ Strong order book will also keep costs (CASK) under control by fetching higher discounts on maintenance, aircraft purchase and rentals, thereby implying ability to uphold profit even during volatile crude/currency/demand environments due to lower cost cushion.”

Routes analysis indicates INDIGO is increasing its presence on existing routes to gain market share along with lower cost.

Analysts at Elara said, “ We observed INDIGO’s total routes (or city pairs) served fell from 362 in SS 2017 to 341 in WS 2017, indicating company is focusing on deepening its presence on existing routes. Company has strong exposure in Category-III routes, where INDIGO deployed 58% of its ASKM capacity, which are growing strong at ~20% YoY rate in the last 12 months. This will help maintain the strong passenger growth for the company.”

Elara reiterated “Buy rating at TP of INR1606 based on FY20E EV/EBITDAR. We ascribe 8.7X EV/EBITDAR multiple, assuming 8% premium over global LCC peers.”
 
Analysts added, “ We expect IndiGo’s domestic market share would be maintained near 40%.”