On Monday, UBS maintained a Buy rating on InterGlobe Aviation Ltd. (INDIGO:IN) stock but lowered its price target to INR5,300 from INR5,400. The revision followed the company's second-quarter financial results for the fiscal year 2025, which showed earnings before interest, taxes, depreciation, and amortization (EBITDA) falling short of UBS and consensus estimates by 16% and 23%, respectively.
The shortfall in EBITDA was attributed to a rise in the airline's cost structure, despite revenues matching expectations. Costs escalated due to aircraft on ground (AOG) incidents and related mitigation efforts, coupled with inflationary pressures affecting airport fees, staff expenses, and lease rentals. Management anticipates a reduction in costs as the number of AOGs is expected to decrease from the mid-70s in the second quarter to below 60 by the end of the third quarter and to the mid-40s by the fourth quarter.
InterGlobe Aviation also faced some unique cost pressures, such as expenses stemming from bomb hoax calls and the potential impact of a harsher winter in the second half of the year. The company reported a robust addition to its fleet, increasing from 382 to 410 aircraft during the quarter, leading to a strong 7% quarter-over-quarter increase in seat capacity. This expansion supports the company's guidance of a low, double-digit year-over-year capacity growth, which is projected to be around 6-7% quarter-over-quarter and surpasses initial expectations.
The airline expects yields to moderate, with a projected decline by single to mid-single digits in the third quarter, compared to the relatively flat year-over-year levels observed in the first half. In light of these factors, UBS reaffirmed its Buy rating on InterGlobe Aviation, adjusting the price target to INR5,300. The rationale behind the continued positive outlook is the duopolistic nature of the industry, which is seen as favorable for long-term pricing and profitability.
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