Rakesh Jhunjhunwala, the Badshah of Dalal Street, rarely talks about the merits of individual stocks. However, he made an exception in the case of Indigo Airlines (Interglobe Aviation) and explained why it makes for an excellent “no brainer” investment. He said:
“What makes me very excited about aviation is and about Indigo in particular that 85-88 percent capacity utilisation, Air India’s market share is shrinking every year. There are not many planes on order. Indigo is the lowest cost airline. Can you imagine he invested Rs 300 crore, he has taken away Rs 3,500 crore as dividend? The Return on Capital (RoC) is 300 percent. And if you just make his first quarter’s earnings into four he will earn about just 640 multiplied by 4 is Rs 2,600 crore which is about Rs 80 per share. Rs 80 per share what price is it coming. At 765 it is coming at 10 times earnings and I am very bearish on oil prices. I don’t see them going anywhere in 3-5 years. So, it is a leader, the industry – one large player is shrinking, others don’t have money, he has got the largest planes on order, he is the lowest cost operator. It is a no brainer.”
Rakesh Jhunjhunwala has so far been proved correct because while the stock was allotted at Rs. 765, it closed at Rs. 1003 yesterday. This means that in just a couple of days, the Badshah and other allottees of the IPO have pocketed magnificent gains of 31%.
However, Daljeet Kohli is not at all gung ho about Indigo. He has given cogent reasons for his concerns:
(i) The present time, when crude oil prices are at the lowest, is the best case scenario for Indigo;
(ii) Fuel cost as a percentage of the top line is around 40 per cent and the Company is able to make operating profit. If the ratio goes to 44 per cent, Indigo would break even. If the ratio goes beyond 44%, Indigo will suffer a loss;
(iii) Crude oil prices are highly unpredictable. Indigo’s profitability is held ransom to the movement of crude oil prices;
(iv) Though InterGlobe has shown five years of profit, 67 per cent of that profit is mainly because of the aeroplane trading and not from the running of the airline;
(v) There are several issues related to the corporate governance. There are many issues regarding the management payments and salary advances that one has to be cautious on.
So, notwithstanding the Badshah’s certification that Indigo is a “no brainer buy”, Daljeet is not enthused. He is totally opposed to the idea of investing in Indigo.
Now, in view of the conflict of opinion amongst the experts, if you have stock in Indigo or if you are planning to tuck into some, you need to carefully evaluate the situation and then take an informed decision!