What Should You Do With Interglobe Aviation IPO

Interglobe Aviation, the owner and operator of airline brand Indigo looks good financially and valuation wise, however, the recent action by management raises many eyebrows on the functioning of company.

Issue
Interglobe Aviation (IAL), the owner and operator of airline brand Indigo is planning is taping capital market with its maiden IPO. The price band has been fixed at Rs 700-765. The issue comprises of fresh issue of around 1.66 crore shares at upper price band and 2.61 crore shares through offer for sale. The total dilution will depend upon the final pricing of the shares; however, it will be around 10-11 per cent of post equity expansion. The money so rise will be primarily used for retirement of certain outstanding lease liabilities and consequent acquisition of aircraft. Besides it will be used for the purchase of ground support equipment for the airline operations. Company will not receive any funds from Offer for sale.
 
OFFER AT A GLANCE
Name                                    InterGlobe Aviation
Public Offer                        Fresh Issue of 1.66 cr to 1.82 cr shares of Rs 10 each
                                & Offer for Sale of 2.28 cr shares
Price                                      Between Rs 700 and Rs 765 
Offer Amount                   Rs 2870 cr to Rs 3018 cr 
Application Quantity       15 & Multiples of 15 Bid/Offer
Opens                                   27-Oct-15 Bid/
Offer Closes                       29-Oct-15
Listing                                   NSE and BSE
 
Company
IndiGo is India’s largest passenger airline with a 33.9% and 37.4% market share of domestic passenger volume for fiscal 2015 and the five months ended August 31, 2015, respectively, according to the DGCA report. The Company operates on a low-cost carrier (LCC) business model and focuses primarily on the domestic Indian air travel market. Indigo is the seventh largest low-cost carrier globally in terms of seat capacity in fiscal 2015, according to CAPA report. Currently company has an order book of 430 A320 neo aircraft and expects to take delivery of 14 additional aircraft, including nine A320neos, by March 31, 2016. As of August 31, 2015, the average age of aircraft was 3.7 years. As of March 31, 2015, the average age of aircraft was 3.2 years, which, according to CAPA, was the second youngest average fleet age among Indian carriers and one of the youngest fleets of any LCC globally.
 
Financials
For the three year ending FY15, company has clocked revenue growth of 23 % annually and was Rs 13925 crore for FY15. The EBIDT and net profit in the same period had grown at a CAGR of 44.6% and 28.6 % respectively and recorded Rs 2253 crore and Rs 1295 crore respectively. While the company’s operating revenue has steadily grown from Rs 9203 cr in FY13 to Rs 13925 cr in FY15 its profitability has been wildly fluctuating and largely depends upon the prices of crude oil and US dollar rates. If they are favourable company’s profit tend to grow otherwise it remains tepid. EBIDTA, which was at Rs 893 cr in FY13, slumped to Rs 506 cr in FY14 but soared to Rs 1896 cr next year due to drop in crude oil prices by almost half. Therefore, if crude oil prices increases it will definitely impact the company’s performance.
 
Despite all good for the company, what has raised many eyebrows is the way management has been using the reserve and surplus. The company has made exorbitant cash dividend pay-outs to the promoters in an arbitrary manner. In fact, using the Rs 3500 cr dividend, the company could have easily retired its debts which amount to almost an equal amount. The dividend was so huge that IAL’s net worth has turned negative Rs 139 in June 2015 after an illogical 3267% dividend amounting to Rs 1003 crore.
 
Valuation
The shares of the company are offered at price to earnings ratio of 20.29 times at FY15 earnings and without pre-issue equity. Nonetheless, if we annualised the Q1FY16 earnings and take post issue equity the PE ratio comes to 10.77 times. This looks attractive looking at the financials of the company and the overall growth prospect of the aviation sector in India.
Nonetheless, we advise our readers to subscribe it only for listing gains as crude oil prices are low and will help company to post good numbers in coming quarters. Nevertheless, long term investors should remain away from the issue as fate of the company’s performance largely depends upon crude oil that can boil any time and most importantly the way company had distributed its surplus just before IPO raises more question about the functioning of the management.