UBS maintains buy rating on this aviation stock; upgrades target price by 35%

Global brokerage UBS has continued with its ‘buy’ stance on Interglobe Aviation with a target upgrade from Rs 4,000 to Rs 5,400, implying an upside of nearly 28 per cent.

The brokerage foresees double-digit growth in the country’s air travel by FY30E. Further, the demand for air travel in the country is projected to register 11-17 per cent CAGR between FY24-30E. 

Long-term  macro  prospects  along  with  various  demand/supply  tailwinds indicate continued  strength  in India's air  travel demand, it noted.

UBS expects Indigo’s (run by parent entity Interglobe Aviation) share to increase further in the international market.  We  expect  Indigo's market  share  gains  in  international  travel  to  continue,  further  aided  by  A321  XLRs/A350s  in  the  medium/long  term, it highlighted.

The brokerage expects the company to generate a 13 per cent  EBITDA CAGR over FY24-27E and upside risks on capacity growth as well as margins.

Despite the price upgrade and continuation of the ‘buy’ stance, shares of the company ended on a muted note at Rs 4,225 per share in today’s trade (July 1, 2024).

The brokerage added that most upgrades on the stock are made on the back of better-than-expected Q4 earnings.

Near-term outlook for Indigo

The brokerage for the just concluded June quarter of the FY25 expects the company’s yields or profitability to take a hit amid the sharp rise in Air India/Vistara's near-term capacity and expect a weaker Q2 on seasonality

UBS  values  Indigo  at  11x  one-year  forward  EV/EBITDA  (vs  11x  EV/  EBITDAR), which is the  five- and 10-year historical mean. Our PT implies FY26E PE of 23x. Indigo's valuation is less expensive (despite dominant share and favourable industry structure) than other Indian tourism-oriented plays, added the brokerage.

What should investors do?

As a short-term profit impact on sudden significant rise in supply,  seasonality or sharp fuel price increases cannot be ruled out; any associated dip remains an ideal buying opportunity, suggested UBS.