InterGlobe Aviation shares have scope to re-rate further — Morgan Stanley cites key triggers

Brokerage firm Morgan Stanley remains positive on shares of InterGlobe Aviation Ltd. and also expects the stock of India’s largest airline to re-rate further, based on some key factors.Shares of InterGlobe Aviation have risen 34% in the last 12 months, and have seen a near-six-fold jump during the last five years.
Morgan Stanley reiterated its “overweight” rating on the stock with a price target of ₹6,502, which implies a potential upside of close to 10% from Tuesday’s closing levels.
Morgan Stanley said as per its estimates, IndiGo is trading at 9 times its FY27 enterprise value/EBITDA, against its pre-Covid median level of 8.5 times.It said companies within the overall travel and tourism space have seen a meaningful re-rating compared to their pre-Covid multiples.

According to Morgan Stanley, the factors that could support a potential re-rating for InterGlobe Aviation in the near-term include:

• Reducing overhang of promoter stake sale
• Tight industry supply in near term
• Industry consolidation into a two-player market
• Possible tailwinds to spreads from a business class ramp-up

Morgan Stanley also believes India’s under-penetration and strong outlook supports the company’s confidence in placing bulk aircraft orders, thus bringing down aircraft acquisition costs. Also, the airline’s single fleet strategy helped in lowering costs as well.It also said that looking at its fleet mix, long-haul international flights could be 7% of the airline’s mix by 2030.

While IndiGo provides limited data on the margins for international business, Morgan Stanley notes that they have the benefit of a higher stage length which helps in lower fuel burn and better fixed cost absorption. That, coupled with low taxes on fuel in international markets helps in lowering fuel cost per available seat kilometre (CASK).

The brokerage is of the view that the Central Government’s focus will be on revival of the sector and its key players and hence it sees limited risks of airfares getting regulated.

Of the 25 analysts that have coverage on the stock, 21 have a “buy” rating and two each have “hold” and “sell” ratings.

IndiGo shares were down 0.23% at ₹5,914.5 apiece at 9.35 am on Wednesday, July 16. The stock has gained 9.9% in the past month, 43.9% in the past six months and 38.7% this year, so far.

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