What went wrong with Indigo? The share price cracks new low, plunges by 11%; should you buy?

The aviation stocks were on hotbed in today’s trading session, however, it was share price of Interglobe Aviation (Indigo) that took massive hit from investors. Today, the quantum of selling was hefty in Indigo share price, so much so, that the company even cracked a new low of Rs 697 per piece resulting in overall decline of 11% on Sensex. However, at around 1403 hours, the share price of Indigo was trading at Rs 716 per piece below Rs 63.70 or 8.04%.

It was interesting to see such negative sentiments from investors when it came to trading in Indigo share price. The company’s peers were also in red, however, the losses were not that massive compared to Indigo. Jet Airways was trading at Rs 173.25 per piece down 4.41%, while SpiceJet faced less heat, as it was trading at Rs 62.40 per piece lower by 1.58%.

Not much mentioned on stock exchanges, to why Indigo share price slumped by such heavy amount, losing its valuation. In fact, Indigo has recently announced a new sale were it is giving flight tickets starting at Rs 1,199.

Surprisingly,  Kotak Institutional Equities recently trimmed down their target for Indigo. Garima Mishra, analysts at Kotak said, “. Adverse movements in crude price and rupee and no signs of upward movements in yields continue to weigh on Indigo’s stock price. We align our forecasts with our new crude price assumptions (US$80 in FY2019 and US$77.5 in FY2020), resulting in sharp earnings cut and new TP of Rs 980 (Rs 1,220 earlier).”

According to Mishra, the current low-margin scenario for airlines will necessitate fare hikes or capacity rationalization, thus driving an eventual earnings recovery for Indigo.

Mishra explains that, Indigo stock has been battered by crude price rise, weak fares and a resultant decline in profitability. We believe upside risks to crude in the near-term may weigh in on earnings and stock price further. We incorporate higher crude and weaker rupee in our forecasts, leading to a net loss in FY2019, and 23-40% EPS cut in FY2020-21.”

“We believe current fare and cost situation is untenable, and will eventually lead to industry capacity rationalization. This should drive fares up to more reasonable levels, and lead to market share gains for stronger incumbents,” adds Mishra.

Though Kotak has trim down its target price for Indigo, if you look at the current valuation decline, in fact it can be a money making method for new investors.

Indigo share price on its new low can be actually purchased, as it still has a potential to grow up to Rs 980 (Kotak’s target). The airline has been a favorite among investors and aviation industry because of its business models.