Very efficient, super 6E

Whether you are a frequent business traveller or an occasional flyer, by now you probably agree that IndiGo is the best airline to fly in the country today. There is no business class but frequent flyers prefer it because there are flights by the hour to most major cities, food is available for purchase, and most importantly, they know that they will get to their meetings on time. This ruthless efficiency has resulted in high brand equity, not to mention a much superior financial statement. Having done a great job, the promoters now want to take money off the table through an IPO.

According to the offer document, the parent InterGlobe Aviation had revenue of ₹11,432 crore and a profit of ₹473 crore in FY14. As opposed to that Jet Airways, a full service competitor posted a loss of ₹4,129 crore on sales of ₹20,004 crore for the same period. IndiGo’s debt is also half that of Jet and used for funding new aircraft. With that kind of payload, IndiGo is ready to hit the public market at an estimated enterprise value of over ₹20,000 crore, compared to Jet’s ₹14,000 crore.

While the premium valuation for IndiGo is driven by its current performance, when Jet came out with its public issue it had similar credentials. It was a great airline — and despite hitting an air pocket, still is — preferred by business travellers. Soon enough, Kingfisher came and stirred up the market. Despite the great franchise that Kingfisher created in a short span, it could not sustain operations in a cut-throat environment. Jet, too, went through a turbulent phase because it decided to enter the low fare segment through a costly acquisition.

Prudent strategy and inefficient competition have played a major role in catapulting IndiGo to where it is today. Plus, with the price of a major cost head (crude) being weak, the environment is favourable for the entire sector. Revenue and profit for the first nine months of FY15 for IndiGo were ₹10,359 crore and ₹721 crore respectively. The IPO timing and the valuation may be perfect for the promoters but investors need to keep history in mind. The aviation industry, despite its indispensable nature of service, has not been a value creating business with very few players succeeding to deliver a sustained return above their cost of capital. Hence, potential investors need to buckle up if they plan to stay invested after the IPO.