Initiate coverage on InterGlobe Aviation with ‘buy’ rating Despite our 44% earnings CAGR through FY18, we assign lower FY17e target P/E multiple of 17x (10% premium to comparable global LCC player RyanAir) owing to high earnings sensitivity to oil prices to arrive at a fair value of R1,478 (an upside of 48%).
At our target price, implied FY17e EV/ebitdaR stands at 9.7x (v/s 9.6x for RyanAir). On FY17e, the stock currently trades at 11.5x EPS and adjusted EV/ebitdaR of 7.4x with an implied dividend yield of >4%.
In our estimates through FY18, we model a) fleet size growth from 94 in FY15 to 154 in FY18 and b) load factor (seat utilization) moving from 80% in FY15 to 84% in FY18.
Despite double-digit passenger CAGR of 12% over the last two decades, the Indian aviation sector is significantly under penetrated-per capita seats at 0.08 v/s 2.6/1.6 in the US/Canada and average of 0.5 in Brazil, Thailand, Indonesia and China. However, India is set to become the 3rd largest aviation market by 2030, driven by a) value migration from rail to air, b) increasing per capita GDP and disposable income, c) growing tourism and d) favorable aviation policy. Compared with the passenger growth estimate of 13% CAGR through FY20, YTD growth has been very robust at 20% (v/s last 5-/10-year CAGR of 9%/13%)-supported by lower ticket prices owing to benign oil prices.
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