CFA Institute Research Challenge hosted by CFA Society India submitted by Indian Institute of Management, Ahmedabad (India)

The CFA Institute Research Challenge is a global competition that tests the equity research and valuation, investment report writing, and presentation skills of university students. The following report was submitted by a team of university students as part of this annual educational initiati ve and should not be considered a professional report.

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Interglobe Aviation Limited Exchange - NSE Ticker Symbol - INDIGO Sector - Services Industry - Airlines Recommendation - BUY CMP – INR 1,159.60 (as of 24-10-17) Target Price – INR 1,463 (26% increase)

Business Description

Indigo, the current market leader in the domestic aviation industry of India, has been able to find its niche since its inception in 2006. After the liberalizing steps taken by the Indian government in 2003, many Low- Cost Carriers (LCCs) – led by Indigo - have entered the market to fulfil the ensuing demand of affordable air travel from the Indian middle class. Apart from providing budget seats to passengers with a no-frills experience, Indigo has successfully created a niche by following a single-fleet strategy (A320s) and placing bulk orders for the same in order to achieve cost efficiencies, thereby ensuring price leadership in an extremely price-sensitive customer segment. This significant competitive advantage has ensured consistently positive bottom lines and free cash flows in what is generally a loss-making industry. A measure of the magnitude of its operations can be gauged by its fleet size of 135 aircraft, an order book of 480 aircraft (including 50 ATRs) and its operations which are spread to over 45 destinations globally, with it enjoying a domestic market share of around 40%.

Indigo was founded in 2006 by two industry veterans – Rakesh Gangwal, who is the former CEO of the US Airways Group and has over 30 years of experience in the airline industry; and Rahul Bhatia, who has more than 25 years of experience in the travel industry. The company’s success led to a successful public listing in 2015, making Indigo one of the only three listed airlines in India. However, it is prudent to note that Indigo still remains a relatively closely held company, with promoter shareholding close to 78% (Exhibit 1).

As the next step in its bid to become the undisputed leader of Indian skies, the company has decided to diversify into ATR 72s, in order to cater to Tier-2 city traffic under the RCS scheme (UDAN). While it followed a model of leasing the aircraft till now, Indigo is making an active shift to the ownership model having achieved stability in the market and on account of superior economic viability. Indigo has also expressed interest in acquiring the stressed national carrier, , as a part of its “low cost long haul” plan of growing in the international market, where it is a very small player currently with a market share of just over 5%.

Industry Overview

India is the ninth largest aviation market in the world as measured by total domestic and international passenger carried (158mn) and the third largest market in domestic air passenger traffic (103mn). Going forward, Geneva-based International Air Transport Association (IATA) expects India to replace the United Kingdom as the third-largest aviation market (both domestic and international traffic) by 2026. It has also projected India’s air passenger traffic to grow to 442 million by 2035 – 4.5 times the current market size, based on Revenue Passenger Kilometres (RPKs) (see Exhibit 2 for Porter’s Five Forces Analysis of Aviation).

Market Growth Since the liberalizing steps taken by the government in 2003, the Indian air travel market has witnessed impressive growth in domestic passenger volume at a CAGR of 19-20% between FY04 and FY10. The global financial crisis tempered the growth rate between FY2010 and FY2014 to a CAGR of 7-8%, however it is again

on an ascent. FY17 witnessed another year of strong volume growth in domestic industry (+22%) as the underlying demand remained robust (Exhibit 3)

Growth Drivers Strong Economic Growth The IMF, in its latest World Economic Outlook (IMF, 2017), expects India to be one of the fastest growing economics in the World over the next two years. With Real GDP expected to grow at 6.7% YoY and 7.4% YoY in FY18 and FY19 respectively, the country is expected to grow at a much faster pace compared to other big aviation markets like China, USA, UK, Japan etc. This will aid the growth and further adoption of air travel in India.

Population and Per Capita Income Growth The UN, in its latest World Population Prospects report (Nations, 2017), has highlighted that by 2025, India is expected to surpass China as the world’s most populous nation. The CAGR of 1.3% is higher than the average growth in population of the top 20 domestic air travel markets in the world, thus continuing to be a major driver of domestic air traffic.

India’s per capita income has grown from INR 46,249 in FY2010 to INR 1,03,219 in FY17 at a CAGR of 12%, according to data from the Ministry of Statistics and Programme Implementation (MOSPI, 2017).

Underpenetrated market It is a severely underpenetrated market as annual domestic seats per capita of India are around 0.08, which is significantly low compared to other developing markets such as Brazil, Turkey, Indonesia and China, where penetration rates are between 0.35 and 0.65 annual seats per capita, as revealed in the latest report of Centre for Asia-Pacific Aviation (CAPA).

Tourism Growth According to the latest Tourism statistics released by the Ministry of Tourism (Tourism, 2017), the number of domestic tourist visits in India grew by 12.7% in FY17 to over 1600mn. The number of foreign tourist arrivals has also grown at a healthy rate of 9.7% to 8.8mn.

World Travel & Tourism Council has elucidated in its latest report (Council, 2017) that the total contribution of Travel & Tourism to India’s GDP was USD208.9bn in 2016 (9.6% of GDP). It is forecast to rise by 6.7% p.a. to USD424.5bn, 10.0% of GDP in 2027.

Impact of GST While there was a lot of unease in the industry over the prospect of the government imposing a 5% GST on the import of leased aircraft, there was a huge sigh of collective relief when that was pegged down at ‘nil’ by the government. Under the UDAN scheme, the government is making a definite push to make air travel a reality for the masses, and has opted to keep GST on economy class tickets at a lower 5% against the anticipated 6% level. Both of these moves will help the margins of the LCC carriers engaged in a consistent price war.

National Cabinet Aviation Policy In June 2016, Union Cabinet approved the National Civil Aviation Policy (NCAP 2016). Since independence, this is the first time an Integrated Civil Aviation policy has been brought out by the government. The policy focuses on taking “flying to the masses” and making it “affordable, convenient, cheap.” It provides for the Regional Air Connectivity Scheme (RCS)- UDAN, that aims to link all the under-served and un-served areas of the country. To make it lucrative for the operators, tax sops and viability funding will be provided by the Government.

Industry Financials Increasing disposable incomes, narrowing difference between Tier-2/3 railways and airline fares and a concerted push from the government to increase the penetration is set to propel India to become the third largest market by 2030.

The growth in domestic passenger volumes in FY17 was partly driven by competitive fares, as airline operators sacrificed yields to ensure higher yield factors. This was a result of a strong capacity growth (+20%), highest in a decade. On the other hand, the international segment has grown at a steady 9% since FY07 (Exhibit 4).

Over the last three years, there has been an industry-wide increase in load factors as demand (RPKM) growth has outpaced capacity (ASKM) growth (Exhibit 5). However, this increase has come at the expense of an across the board decline in yields (Revenue per RPKM) (Exhibit 6).

Rising oil prices weigh down on margins With a 4% YoY increase in average ATF prices in FY17 (Exhibit 7) and with capacity additions limiting transfer of escalating costs to customers, domestic industry margins saw a sharp decline, compared to the peak witnessed in FY16 (Exhibit 8). Competitive Positioning

Indigo has continued to gain market share since its inception, with its domestic market share further improving by 300bps in FY17 to reach 40% (Exhibit 9). This impressive growth has been driven by volume (RPKM) and revenue growth (Exhibit 10). Indigo has led the robust capacity additions in the industry, contributing 56% of industry capacity (ASKM) addition, alone, in FY17 (Exhibit 11).

Single fleet model providing competitive advantage Indigo continues to outperform its peers based on cost structure. Short-term lease of six years (leading to a low average fleet age) and single kind of aircraft in its fleet gives the company a significant strategic advantage over peers in terms of repair and maintenance (R&M) expenses. Though 200bps higher for FY17, Indigo’s R&M was INR6.9b – 4% of revenue, still the lowest among peers. It has the lowest maintenance cost per ASKM (INR 0.15), compared to its listed peers (Jet: INR 0.41, SpiceJet: INR 0.23).

Bulk ordering of aircraft Due to early and bulk ordering of the aircraft, Indigo receives various incentives from the manufacturers. During FY17, Indigo received deferred incentives of INR11.3b, increasing the deferred incentives before amortization to INR27.2b (FY16: INR19.4b) (Exhibit 12).

Route and flight optimization boost returns Indigo has a best-in-class turnaround time of 30 minutes, which increases asset turnover. Its 135-strong fleet covers 46 destinations, compared to which covers 21 cities with 16 flights. This helps in reduction in staff and equipment costs as the processes are replicated across same routes.

Peer comparison Among its listed peers, both SpiceJet and Indigo continue to outperform on financial and operating metrics alike. Due to a much higher load factor, SpiceJet enjoyed the best Ebitdar per ASKM. However, both yields and Ebitdar per ASKM have declined fell in FY17 for all listed players (Exhibits 6 and 8). SpiceJet and Indigo also lead their peers in on-time performance metrics. Indigo is an industry leader in cost per available seat km ex-fuel (CASK ex-fuel) – a key operational metric, clearly showing the market leadership position that Indigo enjoys, owing to its supreme operational efficiency (Exhibit 13). Indigo fares well compared to its peers in available seat kilometre per employee and revenue per employee, showing its

efficiency in terms of utilization of work force and also the productivity of its human resources (Exhibit 14). Its S&D cost at INR1.2b (1% of revenue) are lowest amongst peers, due to low cost of global distribution system.

Comparison to the Southwest model While most of the best practices of Southwest have been imbibed by Indigo, one key difference lies in their respective business models. To ensure lower fares and minimizing delays due to the ever-busy major hub airports, Southwest operates on a point-to-point service model. However, Indigo has stuck to the traditional hub-and-spoke model to ensure lower prices due to centralized operations management. The contrast in strategies is also based on the immense traffic – both domestic and international – that major US airports have to bear. However, as Indian aviation sector continues to grow, Indigo will also have to wrestle with other operators for attaining priority at major hubs in India.

Investment Summary

 Indigo is the market leader with more than 40% market share Market Leadership  Led majority of the capacity addition in the industry Business (56%) Overview  Low-Cost No-Frills Carrier & Competitive  Low R&M Costs due to single operating fleet  Purchase discounts and incentives due to bulk ordering Advantage Cost Leadership of aircrafts  Economies of scale in operating costs due to Route Optimisation  Strong Economic Growth  Tourism Growth Demographics Industry  Per Capita Income Growth Overview  Highly underpenetrated domestic aviation market &  UDAN - Proactive stance and investment taken by the Tailwinds government to make airline travel more inclusive Government Policy  Lower GST rate of 5% on Economy Class tickets (vs 6% earlier) DCF: Tapered  Price Band of INR 1,400 to INR 1,600 contingent on Growth tapered growth rate and RoCEs. Price Target  International peers (Southwest) with similar business & models as Indigo enjoy a valuation premium over their Relative Valuation Valuation listed peers due to superior margins and return ratios  EV/EBITDAR(FY18E) of 8.5 and P/E(FY18E) of 16.9 Rating  BUY: Target Price of INR 1,463 with a 6-month horizon  Crude Oil Price Shock  Exchange Rate Shock  Government’s indirect taxes (excise & levies) on ATF Key Risks Exogenous  Competitive intensity determined by pace of Capacity addition in the airlines industry  GoI’s UDAN scheme

 Diversification of fleet due to Regional Connectivity Scheme Endogenous  Shift from lease to owning more aircrafts  Acquisition of Air India’s operations  Foray into long-haul international operations

Valuation

Based on macroeconomic and industry analysis, we prepared forward looking financial statements for two years FY ’18-19 and performed tapered growth DCF valuation & relative valuation to value the firm. Finally, various results were analysed using a football field to arrive at an overall price target.

Tapered Growth DCF Model Adjustments to Financial Statements:

In order to account for off-balance sheet commitments in the valuation, we capitalized the operating leases as fixed assets on the balance sheet financed by debt obligation (at approximately company’s cost of debt). This also makes our valuation model agnostic to the leased versus the ownership model as all the assets are now recognized as owned. Adjustments to WACC, EBIT, RoCE, and Free Cash Flows are done accordingly.

FY13 FY14 F2015 FY16 FY17e FY18e FY19e Comments Adjusted FCFF (Mn) -29,731 -25,076 27,412 29,832 5,231 8,761 Reduced due to investment in aircrafts Adjusted RoCE 70% 13% 19% 29% 30% 32% 28% Normalized to 28-30%

Adj D/E (Book Value) 1.70 8.91 17.08 1.73 0.63 0.76 0.98 Increased due to Capitalization

Key Assumptions

 WACC: 10.6% (Exhibit 15), based on adjusted capital structure  Forecast horizon for two years based on management guidelines, broker estimates and macroeconomic data. Post that, we applied tapered growth rates (Exhibit 17)  Growth: Tapered growth starting from 20% in FY ’20 tapering off to 6% in FY’30, resulting in an overall ten-year CAGR of 12% which is roughly in line with industry consensus. Post FY’30, we assume a terminal growth rate of 6%, close to the long term nominal growth rate for the Indian economy  Reinvestment Rates: In the long run, we assume a tapered RoCE model to account for increased oil prices and increasing competitive rivalry due to aggressive capacity expansion and new entrants. However, given its operational superiority we believe Indigo can still earn consistently higher RoCEs than its cost of capital, as also witnessed by its international peers. We taper off Indigo’s adjusted- RoCE from 28% in FY19 to 20% in FY30.

DCF Summary – Indicates a target share price of 1,499

Sensitivity Analysis

Sensitivity analysis with respect to WACC, growth rates and RoCE do not indicate any major red flag. On oil prices however, we see a risk whereby the share price target is very sensitive to changes in oil prices. For us to retain our price target, the company will need some pass-through of oil prices beyond a 10% increase from current levels.

Relative Valuation (Peer Comparison) We adopt a relative valuation model, comparing forward EV/EBITDA and P/E multiples for FY18 and FY19. We restrict the scope of comparables to Indian aviation players Jet Airways and SpiceJet.

FY18 FY19 Peer EV/EBITDAR P/E EV/EBITDAR P/E Jet Airways 7.90 13.50 7.30 11.70 SpiceJet 9.30 16.90 8.40 13.80 Indigo 8.50 18.40 7.30 14.30 Median 8.50 16.90 7.30 13.80 Average 8.57 16.27 7.67 13.27

Table: EV/EBITDAR and P/E ratios for FY18 and FY19 of competitors

We also look at the premiums that international peers (Southwest) with similar business models enjoy over their listed peers (Exhibit 16) and test the valuations with respect to the same.

Football Field Rating: BUY 6-month target: 1,463 (+26%)

Figure: Football field presentation for IndiGo

Based on the analysis, DCF and forward EV/EBITDA multiples seem to indicate broadly similar equity valuations while P/E based valuations are slightly lower.

 We believe that the stock is relatively under-priced on a P/E basis and slightly overpriced on a EV/EBITDA basis.  Compared to peers, we allocate a slight premium to InterGlobe Aviation due to its superior return ratios and above average growth rates. This is also reflected in the superior multiples its international comparable, Southwest enjoys over its other listed peers.  Overall, we allot a 70:30 weightage to DCF and Relative Valuation due to limited number of peers and short trading history of the company, to arrive at an overall price target of INR 1,463.

Financial Analysis

Return on Equity (RoE) Analysis

푁푒푡 퐼푛푐표푚푒 푆푎푙푒푠 퐴푠푠푒푡푠 푅표퐸 = ∗ ∗ 푆푎푙푒푠 퐴푠푠푒푡푠 푆ℎ푎푟푒ℎ표푙푑푒푟′푠 퐸푞푢𝑖푡푦

푅표퐸 = 푃푟표푓𝑖푡 푀푎푟푔𝑖푛 ∗ 퐴푠푠푒푡 푇푢푟푛표푣푒푟 ∗ 퐸푞푢𝑖푡푦 푀푢푙푡𝑖푝푙𝑖푒푟

 Profit Margin – Measures Operating Efficiency o Crude Oil prices have risen, and the competitive intensity has not allowed the airlines to completely pass on this increase to the customers o Yields have gone down and hence the profit margins have taken a hit o Foray into international operations have led to an increase in the Sales & Distribution costs as the cost of displaying inventory across global agents and global distribution systems has increased

o Diversification of fleet – Addition of A320neos and smaller ATRs have led to an increase in the repair and maintenance costs  Assets Turnover – Measures Asset Use Efficiency o Grounding of several A320neos due to engine reliability issues have led do a reduction in the asset utilisation o Capacity Addition and increased competitive intensity have led to lower load factors and hence lower capacity utilisation  Equity Multiplier – Measures degree of Financial Leverage o Much of the reduction in the RoE is due to reduction in the financial leverage or the Debt/Equity Ratio - Positive o Strong Cash Flow from Operations and equity dilution by way of QIPs is used to pay-off the debt and deleverage the balance sheet

Strong RoCE Numbers – Industry leading RoCE numbers across the entire fuel cycle. They are expected to inch higher because of the following reasons

 Higher fuel efficiency of A320neos - Fuel prices have risen by 16%, but Fuel cost per ASKM is up by just 8%

 Lower Cost of Ownership (Depreciation + Lease Rentals + Interest Change) - due to operating lease to financial lease and ownership; the company will benefit from accelerated depreciation as asset base rises thus lower the tax rate

Solvency Ratios –

10.9 110% Improving Solvency Ratios – 8.6 8.3  Improvement in the Interest Coverage Ratio 69% 5.1 65% 61%  Reduction in the Debt/Equity Ratio

FY16 FY17 FY18E FY19E

Debt/Equity Interest Coverage

Cash Flow Analysis Overall indicates healthy financials typical of a growth company without raising any significant red flags.

 The company is generating steady and growing streams of operating cash flows which is the major source of case for investing and operating activities. Ratio of CFO/PAT is a healthy 1.5-2, an indicator of strength in business.  The company is consistently using its cash to invest into expansion of its fleet, an indicator for future growth prospects.  Nearly all of the investments and dividends are financed by healthy CFO, without the need for additional funding – an indicator of strong health of the business

 The firm is operating on negative working capital which is ensuring that additional growth does not require any incremental investments in working capital, indicated by consistently positive cash flows from working capital changes as the business is growing. Key Investment Risks

Crude Oil Price Shocks - The uncertainty about aviation turbine fuel (ATF), which depends on international crude prices and government tax policies, and forms a major constituent of the operating costs poses a major risk to the profitability of Indigo o Airlines have not fully passed on the recent fuel hike to the final customers due to competitive pressures, leading to a reduction in the yield of Indigo o Fuel prices have risen by 16%, but Fuel cost per ASKM for Indigo is up by just 8% due to the fuel efficient nature of the A320neos. It is positive that there is a weak correlation between crude oil prices and Indigo’s Fuel cost per ASKM o In India, the correlation between ATF and Crude Oil is weak (correlation coefficient of 0.45 – Exhibit 21) because of large amounts of indirect taxes (excise & levies) charged by the Government. For eg.- in 2014, Crude Oil Prices fell by 45%, but ATF fell by 31% only USD-INR Exchange Rate – Majority of the trade payables of Indigo are to be paid in currencies other than the Indian Rupee – Fuel (Aviation Fuel), Lease Payments for Aircraft & Engine Rentals. It also has international flights going to and coming from 6 other countries, and hence is exposed the forex risks associated with those countries o INDIGO does not hedge its outstanding position for foreign currency payables and receivables. It has net financial liabilities of INR57b (1.5x net worth) Competitiveness of the Airlines Industry in India – The airlines industry in India is on a capacity addition spree. The pace of the capacity addition will determine the pricing power, which the airlines can exercise. o Increase in the competitiveness due to capacity addition leads to a downward pressure on airline yields o It becomes increasingly difficult for airlines to pass on the entire increase in crude oil prices to the customer Shift from Lease & Rental Model to Owning More Aircrafts – o INDIGO’s lower R&M costs is facilitated by lower average aircraft age as it has been using short six- year leases for leasing aircraft. o It would lead to saving in lease rentals, but higher depreciation costs and interest expenses (if acquired through debt) o Asset-heavy balance sheet: Owning aircraft and higher borrowings could lead to a negative impact on INDIGO’s return ratios. o Tax and GST implications on both models - Buying an aircraft and importing it leads to a 5% penalty. But leasing an airplane, even from a foreign entity gets credits to offset those kinds of cost. o Question marks over the superior profitability is driven by the profits from being able to sell the aircraft at a price higher than what Indigo purchased that aircraft for when they do a sale lease back. o Technological obsolescence of A320neos Diversification of fleet due to GoI’s UDAN scheme (mandating the airline players to provide regional connectivity and make air travel more inclusive) – Introduction of smaller ATR 72-600s for foray into regional markets.

o Single type of aircraft together with young fleet of aircrafts helps to keep R&M costs low. o Owning aircraft for more than six years and introducing a second category of aircraft to the fleet may lead to higher R&M costs. o Engine reliability issues with A320neos Foray into long-haul international operations – o Foraying into international long haul flights would entail additional costs, including cost of displaying inventory across global agents (GDS - Global distribution systems, which enables booking of tickets by travel agents across the globe (especially for international operations), constitutes a major part of Sales & Distribution costs for the aviation industry) o Being able to get into agreements with the ultra-busy, slot constrained airports like Heathrow, Kennedy and Dubai o Regulatory constraints with regards to being able to refuel and the price at which it can at international airports Acquisition of Air India’s operations – Indigo is narrowly focussed on Air India’s international operations and . “However, we simply do not have the ability or for that matter, the desire to take on debts or liabilities that could not be supported by a standalone restructured international operation of Air India.” – Rahul Bhatia, Director, Interglobe Aviation o If it is successful in its bid to acquire Air India’s airlines business, the headwinds of R&M costs might impact profitability. o Time-frame of the transaction is completely unknown o Legacy issues like employee issues, massive debts and ongoing losses o Lack of visibility on how the Air India fleet is funded – How many are owned by Air India, how many are leased? Corporate Governance

The corporate governance of IndiGo can be said to be objective due to a fair representation of non-executive independent board members. The Board of Directors (Exhibit 18) is headed by Mr. Mangalore Devadas Mallya who has served on the board of several prestigious companies including, but not limited to, Coffee Day Enterprises Limited, Emami Limited and State Bank of India. The board consists of a total of six members, two of whom are non-executive independent members with a tenure of five years each, including the Chairperson, Mr. Mallya, himself. Of the remaining four, three are non-executive directors while only one is an executive director. Hence, the independence and objectivity of the board in the decision making of the business is hard to question.

Of the four committees (Audit, Nomination and Remuneration, Stakeholders Relationship and Risk Management), three (except for Risk Management) have non-executive Chairpersons while all the committees have at least one non-executive committee member (Exhibit 19). It is commendable to note that the Nomination and Remuneration Committee has all the three members as non-executive member, two of whom are also independent, thus adding objectivity to one of the most critical aspects of a company – management compensation. Besides the board members have years of business experience (Exhibit 20) and hence, add credibility to the corporate governance of InterGlobe Aviation Limited.

As far as related party transactions are concerned, the management and board has been cleared of any wrongdoing. Owing to 94% management ownership, the management was accused of having skimmed a huge amount of earnings through dividends payout, however, the concern was brushed aside attributing the practice as a regular event.

References

1. Council, W. T. (2017). Travel and Tourism: Economic Impact, India.

2. IMF. (2017). World Economic Outlook.

3. MOSPI. (2017). Data and statistics.

4. Nations, U. (2017). World Population Prospects.

5. Tourism, M. o. (2017).

Appendix

Exhibit 1: Shareholding pattern

Source: Company reports

Exhibit 2: Porter’s Five Forces Model

Bargaining Threat of Competitive Threat of New Bargaining Power of Substitutes Rivalry Entrants Power of Buyers Suppliers •High •Low •High •Low •Medium •Few fuel and •No other means •Competition •High barriers to •Although aircraft of transport is high in LCC as entry due to demand for air suppliers as swift or competing for capital travel is robust, convenient price-sensitive investment and but cost of •Fare differential customers regulations switching is low with railways •Paucity of flight narrowing slots at busy airports

Exhibit 3: Domestic passenger traffic has been on a rise since Q2 FY15

120 25%

100 20%

15% 80 10% 60 5% 40 0%

20 -5%

0 -10% FY12 FY13 FY14 FY15 FY16 FY17

Domestic passenger traffic (in mn) YoY growth (r.h.s.)

Source: DGCA

Exhibit 4: International passenger traffic has grown at a steady 9% CAGR since FY07

International pax (in mn) 60 18% 16% 50 14% 40 12% 10% 30 8% 20 6% 4% 10 2% 0 0% FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Indian airlines (mn) Foreign airlines (mn) YoY growth (r.h.s.)

Source: DGCA

Exhibit 5: Across the board increase in load factors since FY14

100%

90%

80%

70%

60% FY11 FY12 FY13 FY14 FY15 FY16 FY17

Indigo Jet Airways SpiceJet Air India Go Air

Source: DGCA

Exhibit 6: Yields declined in FY17 thus hurting revenues

Passenger Yields (in INR) 5

4.5

4

3.5

3

2.5 FY16 FY17 2

1.5

1

0.5

0 Indigo Spicejet Jet Airways

Source: Company reports

Exhibit 7: Average ATF prices increased 9% YoY in FY17

Source: IOC

Exhibit 8: EBITDAR Margins came off from peaks witnessed in FY16

40%

30%

20%

10%

0% FY11 FY12 FY13 FY14 FY15 FY16 FY17

Indigo Jet Airways SpiceJet

Source: Company reports

Exhibit 9: Indigo has consistently gained market share

Source: DGCA

Exhibit 10: Indigo and SpiceJet record impressive gains

35%

30%

25%

20% Indigo Spicejet

15% Jet - Domestic Jet - International

10%

5%

0% RPKM Growth Revenue Growth

Source: Company reports

Exhibit 11: Indigo has led the industry-wide capacity additions

Source: DGCA

Exhibit 12: Deferred incentives (INR bn) have risen in FY17

Deferred Incentive FY16 FY17 Opening Balance 17.5 15.8 Additional received during the year 1.8 11.3 Less: Utilized during the year 3.6 5.3

Closing Balance 15.8 21.8 Source: Company reports

Exhibit 13: Indigo leads in major operational metrics

Indigo Spicejet Jet Airways Ryan Air

Description % % % %

Revenue from Operations 100% 100% 100% 100%

Aircraft Fuel Expenses 34% 30% 26% 29%

Selling and Distribution 5% 3% 11% 5%

Aircraft Maintenance 4% 14% 9% 2%

EBITDAR 28% 24% 20% 32%

Aircraft and engine rentals (net) 17% 16% 15% 1%

EBITDA 12% 9% 5% 31%

Less: Depreciation 2% 3% 4% 7%

Less: Finance Cost 2% 1% 4% 1%

PBT 12% 6% 2% 22%

* only selected headers shown

Particulars FY17 FY17 FY17 FY17

Yield 3.5 4.1 6.3

RASK 3.4 3.8 4.3

CASSK 3 3.7 4.3 Not Available CASK ex-fuel 1.9 2.4 3.2

RASK - CASK 0.4 0.1 0

Fuel cost per ASK 1.1 1.2 1.1

Source: Company reports

Exhibit 14: Indigo delivers good employee productivity as compared to peers

ASK PER EMPLOYEE REVENUE PER EMPLOYEE (MILLIONS) (MILLION RS)

VISTARA 2.2 VISTARA 7.3

SPICEJET 2.4 AIR ASIA 8.7

AIR ASIA 3.1 SPICEJET 9.5

JET AIRWAYS 3.2 GOAIR 11.9

GOAIR 3.3 INDIGO 13.1

INDIGO 3.5 JET AIRWAYS 14.3

JETLITE 3.6 JETLITE 15

0 1 2 3 4 0 5 10 15 20

Source: DGCA Handbook on Civil Aviation Statistics

Exhibit 15: WACC Calculation

*D/E ratios used are based on market values D/E ratios for Indigo are based post-capitalization of operating leases

1. Calculation of Unlevered Beta

Peer 5-yr Beta Mkt Val D/E Unlevered Beta Jet Airways 1.10 1.66 0.51 Spicejet 1.03 0.12 0.95 Indigo NA 0.14 NA

Average Asset Beta 0.73

2. Calculation of Cost of Equity

Indigo Market Value D/E 0.14 Unlevered Beta 0.73 Tax Rate 30%

Indigo Equity Beta 0.80

Rf 7.3% Rm - Rf 5% Required Cost of Equity 11.3%

3. Calculation of WACC

Mkt value D/E 0.14 D/(D+E) 0.12 Cost of Debt 8% Cost of Equity 11.3% WACC 10.6% *Capital structure based on long-term expectations post-ownership model. Benchmarked against international peers with similar models viz. Southwest and RyanAir.

Exhibit 16: Premiums of Southwest over Peers

Source: S&P Capital IQ

Exhibit 17: Financial Statement Summary and Forecasts

Profit and Loss Statement INR mn F2016 F2017E F2018E F2019E Passenger revenue 140,722 161,971 199,668 241,997 Other operating 20,681 23,835 26,673 29,839 revenue Revenue from 161,403 185,805 226,341 271,836 operations

Fuel 47,793 63,415 74,624 90,566 Staff 17,899 20,482 25,113 31,948 Aircraft & engine 26,122 31,254 38,767 48,434 rentals Other expenses 39,530 49,221 59,037 70,864

EBITDAR 56,180 52,687 67,568 78,457 EBITDA 30,059 21,433 28,801 30,023 Depreciation 5,031 4,573 4,362 4,535 EBIT 25,028 16,861 24,439 25,488 Other Income 4,614 7,891 9,469 10,766 Finance costs 1,349 3,308 936 991 PBT 28,293 21,444 32,972 35,263 Taxation 8,392 4,852 9,562 10,226 Net Profit 19,901 16,592 23,410 25,036

EPS 57 46 65 69 DPS 43 34 46 49

Balance Sheet INR mn F2016 F2017e F2018e F2019e Net fixed assets 47,794 38,190 30,193 26,852 Other non-current assets 18,516 14,299 14,980 14,981 Total Non-current Assets 66,310 52,489 45,173 41,833

Cash & liquid assets 47,048 83,460 94,690 107,661 Other current assets 13,244 16,445 33,251 39,959 Total Current Assets 60,293 99,905 127,942 147,620

TOTAL ASSETS 126,603 152,394 173,114 189,453

Shareholders’ equity 27,232 37,792 41,304 45,059

Total Debt 30,071 23,957 22,938 22,938 Unamortized 15,833 21,838 19,615 14,975 Incentives Deferred Revenue 1,368 1,967 2,361 2,833 Liability Other long-term 17,972 22,760 35,538 42,613 liabilities

Total Non-current Liabilities 65,244 70,522 80,451 83,359

Total current 34,127 44,080 51,359 61,035 Liabilities

TOTAL LIABILITIES 126,603 152,394 173,114 189,453

Cash Flow Statement (in INR mn) F2016 F2017e F2018e F2019e Net Profit 19,901 16,600 23,410 25,036 Depreciation 5,031 4,573 4,362 4,535 Increase in Net WC 12,769 6,752 -9,527 2,968 Others -2,723 599 393 472 Inc in Unamortized -1,684 6,005 -2,223 -4,640 Incentives CF - Operations 33,294 34,528 16,416 28,372

Capex -3,744 4,963 3,635 -1,195 Aircraft Pirchase -315 68 0 0 deposits Others -2,461 4,217 -681 -1 CF - Investment -6,520 9,248 2,955 -1,196

FCF 26,774 43,776 19,371 27,176

Incr/(Decr) in Equity 21,701 8,568 0 0 Incr/(Decr) of Debt -8,011 -1,325 11,758 7,075 Dividends -18,577 -14,608 -19,898 -21,281 CF - Financing -4,887 -7,365 -8,140 -14,206

Net Change in Cash 21,887 36,411 11,230 12,971 Cash at Beg of Year 25,161 47,049 83,460 94,690 Cash at End of Year 47,049 83,460 94,690 107,661

Exhibit 18: Board of Directors of InterGlobe Aviation Limited

Board of Directors

Devadas Mallya Anupam Aditya Ghosh Rahul Bhatia Rakesh Rohini Bhatia Mangalore Khanna Gangwal

Chairperson Non-executive Executive Non-executive Non-executive Non-executive Non-executive Independent Independent

Source: Company filings Chairs

Cf

Exhibit 19: Composition of Committees at InterGlobe Aviation Limited

Name of the Committee Committee Members Category 1 Audit Committee Devadas Mallya Mangalore Chairperson – Non-Executive – Independent Anupam Khanna Non-Executive – Independent Aditya Ghosh Executive 2 Nomination and Anupam Khanna Chairperson – Non-Executive – Independent Remuneration Devadas Mallya Mangalore Non-Executive – Independent Committee Rohini Bhatia Non-Executive 3 Stakeholders Rohini Bhatia Chairperson – Non-Executive Relationship Committee Aditya Ghosh Executive

4 Risk Management Aditya Ghosh Chairperson – Executive Committee Devadas Mallya Mangalore Non-Executive – Independent Rohit Phillip Member- Chief Financial Officer

Source: Company filings

Exhibit 20: Profiles of Board of Directors at InterGlobe Aviation Limited

Director Name Business Profile  A work experience of 36 years in various positions and sectors Devadas Mallya  He serves on the board of various companies like Emami Ltd., Coffee Day Mangalore Ltd., and Tata Capital Financial Services Ltd.  Previous experience includes director in the board of State Bank of India  A work experience of 30 years at World Bank, Washington DC  He has been the chief economist and director-general at Policy Outreach Anupam Khanna  He has also worked as chief economic advisor for various companies and the chief economist for Royal Dutch/Shell group in London  Practices Corporate Law with J. Sagar Associates and K&S Partners  Member of reputed law societies like Inter-Pacific Bar Association and Bar Aditya Ghosh Council of Delhi  Mentioned in Fortune magazine’s “40 under 40” list  He has more than 25 years of experience in the travel industry Rahul Bhatia  Developed several travel-related businesses  Previously worked with IBM  He has been the CEO of various reputed companies like Travelport, Worldspan Technologies and US Airways Group Rakesh Gangwal  Previously employed at Wolf United Airlines and Air France  Served as Director at Office Depot, Travelport and CarMax  She serves on the board of various companies in travel and hospitality industry Rohini Bhatia  She is also a director of the board ARC Hospitality Pvt Ltd, Pegasus Buildtech Pvt Ltd and Pegasus Utility Maintenance & Services Pvt Ltd Source: Bloomberg

Exhibit 21: Crude Oil – ATF Linkage

Source: IOCL