Interglobe Aviation (IndiGo) IPO review - High Risk, Low return (Avoid)

Interglobe Aviation Ltd (IAL) that runs “IndiGo” flights since 2006 and has expanded its sphere with enhancement in its fleet to 97 aircrafts, flight destinations to 33 airports and currently having 603 flights per day is the largest low cost private sector aviation company. It has an order book of 430 aircrafts and expects delivery of 14 aircrafts before this fiscal end.  Its market shares as on 31.03.15 was 33.9% that has increased to 37.4% as of 31.08.15. IAL’s domestic passenger volume increased at a CAGR of 25.8% during fiscal 2011-2015 from 9.5 million to 23.7 millions. For five months ended at 31.08.15 the volume was 12.6 millions. It has posted an average on-time performance above 83% and operational reliability of 99.95% for the said period. 

To meet the funding for retirement of certain outstanding lease liabilities and consequent acquisition of aircrafts, purchase of ground support equipments and meet other corpus funding, the company is coming out with a maiden IPO of approx. 1.66 crore equity share of Rs. 10 each in a price band of Rs. 700-765 to raise Rs. 1272.20 crore. It is also having offer for sale of 26112000 shares by existing stakeholders. Thus the overall issue size is for Rs. 3270 crore at the upper price band. IAL plans to reserve permissible quota for eligible employees and they will be offered discount equivalent to 10% on the final price. Through this IPO, the company is diluting around 12% on the basis of post IPO equity.

Issue opens for subscription on 27.10.15 and will close on 29.10.15. Minimum application to be made is for 15 shares and in multiples thereon, thereafter. Post allotment shares will be listed on BSE/NSE. Global co-ordinators / BRLMs to the issue are Citigroup Global Markets India Pvt Ltd., J P Morgan India Pvt Ltd., Morgan Stanley India Co. Pvt Ltd., / Barclays Bank PLC, Kotak Mahindra Capital Co. Ltd., UBS Securities India Pvt Ltd. and registrar to the issue is Karvy Computershare Pvt. Ltd. Its entire equity has been issued at par but internal transfer has been at a fantastic pricing. It has also issued bonus shares in the ratio of 9 for 1 in June 2015. Its current paid up equity capital of Rs. 343.72 crore will stand enhanced to around Rs. 361 crore post IPO.

On performance front, the company has posted an average EPS of Rs.27.24 for last three fiscals and Rs. 18.63 (not annualized) for first quarter of current fiscal (on diluted basis). It has inconsistency in bottom line for last five fiscals. Its top line from FY 2011 to FY 2015 were Rs. 3944.16 cr., 5708.62 cr., 9440.23 cr., 11432.12 cr. and Rs. 14309.14 cr. while bottom line has been Rs. 579.47 cr., Rs. 140.59 cr., Rs. 783.36 cr., Rs. 474.44 cr. and Rs. 1259.59 cr. respectively.  For Q1 of current fiscal it has posted net profit of Rs. 640.44 cr. on a turnover of Rs. 4317.20 cr.  It has posted RONW for last three fiscals at an average of 225.01% and for Q1 of current fiscal at (459.47%). According to management, this is due to capitalization of reserves and payment of dividends (to the tune of Rs. 3500 crore) for last five years to existing stakeholders out of cash generations.  Its NAV as on 30.06.15 is negative at Rs. 4.06. Rise in net is due to Rupee/Dollar parity and eased ATF prices. If we annualized and attribute to fully diluted equity post IPO, EPS will be around Rs. 70.00. Thus asking price is at a P/E of 10 plus expressing greed in pricing of the issue. Peers are quoting at lower P/Es. IAL has not clarified its dividend payout policy. Its other major income is from lease contracts commission which may defer in future as competition rises.

As usual, global co-ordinators and merchant bankers have justified pricing that is based on company’s valuation as per global practice as well as on the feedback from foreign and big ticket  investors during road shows.