Everything you need to know about IndiGo IPO: Should you invest?

Update 27/Oct: IndiGo IPO subscribed 80% on day one while its quota for institutional buyers was oversubscribed 2.8 times. Read on to know more about the issue and whether you should invest.

The much awaited InterGlobe Aviation Ltd initial public offer (IPO), which owns India’s most profitable and biggest airlines IndiGo, will finally be up for grabs starting October 27. IndiGo is a low-cost airline and is the largest airline in India in terms of passengers flown with a market share of 35.3% as of August 2015.

The price band for the IPO has been fixed at Rs 700 – Rs 765 per share on a face value of Rs 10 per share. At the upper price band the company would raise close to Rs 3,268 crore from the sale. Here are the quick highlights of the IPO, company’s financial key pointers followed by the verdict if you should invest in IndiGo IPO.

Highlights of IndiGo IPO:

• Price band is fixed at Rs 700 – Rs 765 and face value is of Rs 10 per share.
• The issue opens on 27 Oct 2015 and closes on 29 Oct 2015
• After the IPO, the promoter stake will come down to ~82% from 94%.
• IndiGo is the largest airlines in India in terms of passenger traffic and is also the seventh largest low cost carrier (LCC) in the world by total seats for the year ended 31 Dec 2014 (CAPA).
• Proceeds of IPO will be used to retire the lease liabilities (aprox. Rs 1,166 cr), to purchase aircrafts, and for ground support equipment for airline operations.
• Net worth of the company had gone negative to approx. Rs 139.4 cr in June 2015 from Rs 426 cr as on end of March 2015, after dividend payment to the promoters. But the management says it has reclaimed it back to positive from the September quarter earnings.
• Indigo turned profitable in 2009 (2 years after its launch) and has been profitable in each subsequent fiscal through financial year 2014. It has the lowest cost per available seat km.
• The company has Rs 3,912 cr of total debt against ~Rs 1,500 cr of cash. All of this debt is aircraft related and not on account of working capital expenses.
• IndiGo has a fleet of 97 total airplanes as on March,15 which are expected to rise to 111 by this year end (taking delivery of 15 airplanes in this year from the order book of 180 aircrafts).
• The company uses operating leases as a strategy to keep its cost low.
• The company has reported a EBITDA of 37% for the June quarter; it posted a net profit of Rs 640 cr on a revenue of Rs 4,317 cr.
• Domestic passenger volume has grown at CAGR of aprox. 30% for FY10-FY15.
• The company reduced its offer for sale (OFS) from 26 million shares to about 23 million shares as one of the promoters family reduced their offer.
• Fresh issue will be about Rs 1,200 cr and OFS of 23 million shares. Total issue will be ~Rs 3,000 cr
• Given IndiGo’s low cost structure and asset-light strategy, it is the best bet in the Indian aviation industry
• The big boys namely, Citibank, JP Morgan, Morgan Stanley, Barclays, Kotak and UBS are the book running lead manager of the IPO

Red Flags

• Company has paid unusually high dividends amounting to ~Rs 3,500 cr to its promoters between FY2011-FY2016. In FY2015-FY2016 alone an interim dividend of Rs 2,083 was doled out to its promoters. This amount is close to what IndiGo is planning to raise through the IPO and also left the company’s networth to negative.
• The ‘other expenses’ of the company has risen from Rs 652.45 cr as on 31 Mar 2010 to Rs 2232.25 as on 31 Dec 2014; a four times jump. The draft prospectus does not provide a break-up of ‘other expenses’ which raises some eyebrows.
• While IndiGo’s profits have seen a good jump in June 2015 quarter, primarily due to low fuel costs, the growth has slipped in last two years.

Verdict

Considering that the promoters paid themselves a hefty dividend of Rs 1,500 cr right before the IPO taking the company’s networth to negative Rs 139.4 cr the confidence in the management is questionable. Having said that, this low cost carrier has been one of the most profitable airlines in the country and have been doing exceptionally well on the business front. At the middle of the price band, IndiGo is asking for a valuation of 13x its estimated earnings of the year, which leaves little room for profit for investors considering the comparable international LCC are commanding valuations close to or less than IndiGo’s asking. Investors with a high risk appetite can invest in IndiGo IPO considering its long term prospect as it offers a good diversification for those betting on India’s growth story.