Raamdeo Agrawal, the co-partner of Motilal Oswal, is one of our favourite stock pickers because of his practical and down-to-earth attitude. Raamdeo and Motilal Oswal have showered riches on us by handing over potential “100 bagger” stocks over a platter. Several of these stocks such as Tata Elexsi, Granules India and Shilpa Medicare have notched up hefty gains and enriched us.
Raamdeo makes no secret of the fact that Indigo Airlines (Inter Globe Aviation) is his latest favourite stock. He does not miss a single opportunity to sing praises about the stock.
In November 2015, Raamdeo explained that Indigo has a “huge competitive advantage”. In January 2016, he said that the “best of the gains are still ahead” for Indigo. He added in April 2016 that Indigo has a “very unique opportunity” in India.
Raamdeo even took time out of his busy schedule at Berkshire Hathaway’s AGM to praise Indigo for its performance.
Raamdeo Agrawal’s fascination for Indigo and the other stocks in the aviation industry is quite intriguing because Warren Buffett, one of the World’s greatest investors, has made his contempt for the aviation sector very clear. Warren has called the aviation industry “the worst sort of business” with “no durable competitive advantage” and said that it is a “death trap for investors”. Warren also jokingly said that he has a 800 number that he calls whenever he feels the urge to buy an aviation stock and gets the operator to talk him out of it.
Rakesh Jhunjhunwala is the only investor who has made serious money from aviation stocks. He bought Spice Jet when it was in the throes of great agony and available at a throwaway price. He pocketed multi-bagger gains when the tide turned for the sector and the stock (See Rakesh Jhunjhunwala Defies Warren Buffett’s Credo & Pockets Fortune From Taboo Sector & Stocks).
In the recently held Sohn India conference, Raamdeo Agrawal rubbed shoulders with eminent dignitaries like Akash Prakash, Kenneth Andrade and Shankar Sharma. All dignitaries had assembled to recommend stocks for a noble cause.
Raamdeo came out with all guns blazing in favour of Indigo Airlines. He formulated eight points on why Indigo would be a winner stock, namely, (i) Negative Working Capital, (ii) Value Migration, (iii) Cheap Oil Prices, (iv) Low Cost Advantage, (v) High Market Share, (vi) Operational Barriers, (vii) reasonable Valuations and (viii) high dividend payout. “The stock looks attractive at present” Raamdeo said.
Sadly, the cut-throat fare war between Indigo and its competitors has taken a toll on Indigo’s Q1FY17 results. The company posted a net profit of Rs.591.77crore, down 7.3% from Rs.638.89 crore a year ago even though the revenue rose 9.7% to Rs.4,741.45 crore from Rs.4,322.24 crore a year ago. The EBiTDA and PAT declined by 3% and 7% YoY. There was also a steep decline in the load factor from 87% to 78% YoY.
|INTERGLOBE AVIATION LTD – FINANCIAL RESULTS|
|PARTICULARS (Rs CR)||JUN 2016||JUN 2015||% CHG|
The Company sensibly decided to defer taking delivery of the A320 neo aircraft.
Aditya Ghosh, Indigo’s CEO, stated that the airline will match the low fares offered by its competitors implying that there would be a further dent in the profitability.
Some experts pointed out that if this was the state of affairs when the oil prices are low, the situation can go from bad to worse if the oil prices surge.
Indigo down 10% when oil is 40 …where are the airline bulls today. …???
— Vivek Pandey (@IVivekPandey) August 2, 2016
InterGlobe down 9%, Jet Airway down 5%
— Varinder Bansal (@varinder_bansal) August 2, 2016
Some experts had an “I told you so” look:
As a bull, I normally do not like to see stocks fall. However, I am not displeased with the fall of Indigo.
— sandip sabharwal (@sandipsabharwal) August 2, 2016
All brokerages have rushed to downgrade the stock. Ambit recommended a sell while other brokerages dilly-dallied with a hold/ neutral rating.
The stock price tanked 11.17% and touched Rs. 865.
The mandarins of Motilal Oswal downgraded the stock to “Neutral”. They pointed out that the results are “below estimate”, “disappointing” and that “competitive headwinds have impacted yield”.
Now, we have to see whether Raamdeo Agrawal heeds Warren Buffett’s words of wisdom and abandons the aviation sector or he still sees an opportunity in the sector to make mega bucks!