Interglobe Aviation, which runs the popular Indigo Airlines is planning to raise money through an IPO, which will make it the 4th airline in the aviation business to get listed in India.
The details of the public issue are as follows:
Issue Open/Closing Date: Oct 27/Oct 29
Price Band: Rs 700-765
Bid Lot: Multiple of 15 shares
Listing: NSE and BSE
Positive features of the Indigo Airlines IPO:
1) Most profitable Airline in the business.
2) Robust cash flow.
3) Traffic growth of 40% between 2011-2015.
4) Immensely benefiting currently due to low Aviation turbine fuel.
5) Young fleet has helped build operational efficiency.
Negative features of Indigo Airlines:
1) The company paid a massive dividend to existing shareholders just before the IPO, resulting in a negative networth for the company.
2) Shares are heavily priced at the upper end of the price band.
3) If crude oil flares up, expect share prices to fall.
4) Company can be exposed to exchange rate volatility.
5) Perception on safety concerns can impact business.
Should you subscribe to the Indigo Airlines IPO?
The biggest risk that Indigo Airlines faces is the risk of crude oil flaring and hence aviation turbine fuel becoming more expensive. This is because 41% of the company's costs are fuel costs. How long crude oil will remain as low, is very difficult to say. The Middle East region has been on a boil in the past, which could push crude prices higher.
But, at the moment, the company is an a sweet spot, benefiting from lower aviation turbine fuel, a growing market and super operational efficiencies.
Coming to valuations, at the upper end of the price band of Rs 765, the company is trading at a price to earnings multiple of 21 times. This is not exactly cheap. But, investors these days are willing to pay a premium for great brands, with a solid business model and great strategy in place. Despite its high valuation, it would not be a surprise, if Interglobe Aviation lists above the offer of Rs 765. Buy and sell on listing is the right strategy. This is because the fortunes of the company are linked to crude oil prices and we are not sure when tensions in the Middle East could push oil prices higher.