Super 6E

Whether you are a frequent business traveller or an occasional flyer, you would probably agree that IndiGo is the best airline 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, parent InterGlobe Aviation had revenue of Rs.11,432 crore and a profit of Rs.473 crore in FY14, compared with Jet Airways, a full-service competitor, which posted a loss of Rs.4,129 crore on sales of Rs.20,004 crore over 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 Rs.20,000 crore, compared with Jet’s Rs.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 in and stirred up the aviation 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.

As our cover story on page 34 reveals, 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 Rs.10,359 crore and Rs.721 crore, respectively. The IPO timing and the valuation may be perfect for promoters but investors need to keep the sector’s history in mind. The aviation industry, despite its indispensable nature of service, has not been a value-creating business, with very few players being able 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.