Why InterGlobe Aviation (IndiGo Airlines) Shares Are A Risky Bet?

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A few months back the share prices of pharma companies were sky rocketing. We had mentioned that pharma shares were highly valued. Sun Pharma, Dr Reddy's, Wockhardt and Cipla have lost Rs 99,000 crores in market capitalization, since hitting peaks.

Why InterGlobe Aviation (IndiGo Airlines) Shares Are A Risky Bet?
A few US FDA warning letters and the share prices have come crashing down by 20-30 per cent. The single biggest risk was the US FDA warning letters that have sent stock prices crashing.

Shares in InterGlobe Aviation, which runs the popular IndiGo Airlines is soaring. The shares which were offered at Rs 765 have hit a new 52-week high of Rs 1059. If you have received shares in the IPO, it is better to sell at the current rates.

Like Pharma companies where the US FDA warning letters is the single biggest risk, for InterGlobe Aviation (Indigo Airlines) it is crude prices. The moment crude oil flares, the share price could fall. While most analysts are saying that the ample crude supplies would keep crude prices lower, at times, it could be a good idea to take a contrarian view.

Just take a look at what is happening around the globe, especially terrorism. If any of the crude installations are hurt, or supply is disrupted due to terrorist shocks, you could see crude prices on a boil once again. The first one to get affected would be a company like InterGlobe Aviation, given that for many airline companies jet fuel or aviation turbine fuel, forms 40-50 per cent of costs.

The Middle East has seen uprisings in the past, where rulers were overthrown. The region is known to be politically volatile, which could send crude prices soaring.

From levels of $44 for Brent Crude, there is very little downside risk for crude, while the upside risk is enormous. This makes the shares of InterGlobe a risky bet considering the heavy cost that jet fuel forms, as a part of total cost.

Also, the shares have run-up too fast, making the risk to reward very unfavourable.


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