Liquidity Management Remains the Mainstay in Anticipation of Traffic Recovery for IndiGo, says ICICI Securities
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Liquidity management and traffic recovery remain the two most important earnings drivers for InterGlobe Aviation (IndiGo) going forward. While the company has a plan for raising funds, and gradual domestic recovery is indeed in sight, international recovery remains the bigger challenge.
Due to covid, IndiGo had to transform from a scheduled airline to a hybrid scheduled / charter operation, from cargo in the aircraft belly only to cargo in the cabin. To bolster liquidity, IndiGo raised Rs66bn of additional funds in FY21. Besides, the company has also announced additional liquidity measures of Rs45bn for FY22. It is also considering issue of equity shares through Qualified Institutions Placement up to Rs30bn. IndiGo has initiated a freighter programme, under which it is sourcing four A321CEO aircraft, which will be converted to full freighter configuration. Liquidity measures undertaken by the company include: 1) acquiring NEOs financed through operating leases, 2) securing favourable credit terms from suppliers, 3) sale and leaseback of unencumbered assets, 4) obtaining moratorium towards principal repayment for aircraft on finance leases, and 5) working capital loans from banks. Closing balance of secured loans increased from Rs6.8bn in FY20 to Rs25bn in FY21. Rate of interest on working capital loans ranges from 3.20% to 7% per annum.
As per management, international operations as of date are severely restricted due to the second wave and it is not possible to predict, with any degree of certainty, when scheduled international operations will resume. Company however remains confident that demand for international air travel will rebound as vaccination progresses across the globe and governments collectively establish processes to enable seamless travel of vaccinated persons. IndiGo's international operations in FY21 were only around 17% of its pre-covid operations.
Moreover, the lease obligation per aircraft increased 14% from Rs841mn in FY20 to Rs960mn in FY21. However, the right-of-use (RoU) asset per aircraft increased 16% from Rs544mn in FY20 to Rs631mn in FY21. Higher increase in RoU per aircraft could be due to lower SLB profits from deliveries in FY21.
As per liquidity details stated in the FY21 annual report, IndiGo expects cash outflow of Rs110bn over the next six months. The lease liability driven outflow is Rs73bn over the next 12 months, which gives an approximate idea of the annual rental payments for the company. Total cash outflow due to supplementary rentals is Rs44.7bn over the coming 12 months.