Key Takeaways
- InterGlobe Aviation (IndiGo) posted flat YoY EBITDAR in Q3 FY26, but forex loss shrank significantly.
- Management projects mid‑single‑digit unit‑cost growth and a ~10% ASK increase in Q4, driven by international expansion.
- Motilal Oswal forecasts a 12% revenue CAGR to FY28 and values the stock at ~INR 6,100 (9× FY28E EBITDAR).
- Sector‑wide capacity moderation could lift margins across low‑cost carriers, while full‑service rivals scramble for premium seats.
- Historical patterns suggest a flat quarter often precedes a multi‑year earnings acceleration for airlines that manage costs aggressively.
Most investors dismissed IndiGo's flat Q3 as a red flag. That was a mistake.
Why InterGlobe Aviation’s Flat EBITDAR Masks Underlying Strength
InterGlobe Aviation reported EBITDAR of INR 58.6 billion, essentially matching consensus, while adjusted profit slipped to INR 20.5 billion versus the expected INR 21.7 billion. The headline looks neutral, but two hidden levers are already improving the bottom line.
First, foreign‑exchange (forex) loss narrowed to INR 11 billion from INR 14.6 billion a year earlier. A weaker rupee typically inflates cost for airlines with dollar‑denominated fuel contracts, yet IndiGo's hedging strategy limited the impact, preserving cash flow.
Second, the airline trimmed capacity deliberately. By moderating seat supply, it avoided a supply‑demand mismatch that can depress yields, especially after the Maha‑Kumbh surge that inflated the prior year’s passenger‑revenue base.
How Capacity Moderation Drives Unit Cost Outlook
Management expects mid‑single‑digit growth in unit cost (excluding fuel and forex) for FY26. The term “unit cost” reflects the expense per available seat‑kilometer (ASK). When airlines add seats faster than demand, unit cost climbs because fixed costs are spread over fewer revenue‑generating seats.
By throttling capacity, IndiGo keeps the denominator stable while revenue per seat improves, nudging unit cost down despite rising fuel prices. This disciplined approach is a hallmark of successful low‑cost carriers (LCCs) worldwide.
What the FY26 ASK Growth Means for International Routes
IndiGo projects a ~10% ASK increase in Q4, primarily from new international destinations. ASK—available seat‑kilometers—is the core metric of an airline’s operational scale. A double‑digit jump in a single quarter signals aggressive network expansion.
International routes typically carry higher yields than domestic flights, especially on premium‑economy and business classes. The incremental revenue from these markets can offset the higher marginal cost of longer hauls, boosting overall profitability.
Sector‑Wide Implications: Domestic LCCs vs. Full‑Service Players
IndiGo’s strategy sits within a broader industry shift. Domestic demand in India is stabilizing after pandemic‑induced spikes, prompting LCCs to focus on operational efficiency rather than pure volume. Meanwhile, full‑service airlines such as Air India and Vistara are chasing premium traffic and long‑haul growth.
For investors, the divergence creates a clear relative‑value play: LCCs with disciplined capacity management can capture margin expansion, while full‑service carriers may face higher cost‑to‑serve ratios if they cannot fill premium seats.
Historical Parallel: 2020‑21 Recovery Playbook
During FY21, IndiGo posted a flat Q2 but subsequently delivered a 20% YoY EBITDAR surge in FY22. The catalyst was a strategic capacity pullback followed by a rapid ASK rebound as travel restrictions eased. The pattern repeats: a modest quarter, then a pronounced earnings acceleration once the airline re‑aligns capacity with demand.
Investors who recognized the early signal in FY21 amassed outsized returns. The current flatness may be the same pre‑lude, especially given the firm’s stronger foreign‑exchange positioning this time.
Technical Snapshot: Reading EBITDA, EBITDAR, and PRASK
EBITDA (earnings before interest, taxes, depreciation, and amortization) gauges operating profitability before capital structure effects. EBITDAR adds back rent expense, a useful tweak for asset‑intensive airlines that lease aircraft.
PRASK (revenue per available seat‑kilometer) measures yield efficiency. A low‑single‑digit decline in PRASK, as forecasted, is modest given the high base from the Maha‑Kumbh event. It suggests demand will stay robust even if per‑seat revenue eases slightly.
Investor Playbook: Bull vs. Bear Scenarios
Bull Case
- Forex loss continues to shrink, freeing cash for debt reduction.
- ASK growth outpaces revenue growth, driving a higher PRASK over FY27‑28.
- Motilal Oswal’s 9× FY28E EBITDAR multiple holds, pushing the stock toward INR 6,100.
Bear Case
- Fuel price spikes erode unit‑cost gains despite hedging.
- International expansion stalls due to regulatory or geopolitical constraints.
- Market sentiment forces the valuation multiple down to 7×, capping upside.
Given the current fundamentals and Motilal Oswal’s 12% revenue CAGR target, the bull case appears more probable. Positioning now could capture the upside before the broader market re‑prices IndiGo’s margin recovery.