There’s much that separates Interglobe Aviation Ltd, which runs India’s largest airline IndiGo, and Jet Airways Ltd.
While Jet has been running losses and has a bloated balance sheet, Interglobe boasts of healthy profit margins and free cash flow generation. It’s little wonder that while Jet is valued at 0.52 times revenue, IndiGo is demanding a valuation of over 1.25 times revenue.
But rewind about 10 years, when Jet Airways launched its initial public offering (IPO), and many of the differences disappear. On the contrary, there are many similarities in the state of the two companies just ahead of their respective IPOs.
Back then, Jet was in a far better shape financially, enjoying far higher profit margins than what IndiGo does currently. Of course, the onset of competition from low-cost carriers such as IndiGo—which would start operations well over a year after Jet’s IPO—has since changed things dramatically. But this begs the question—can investors take IndiGo’s current cushy position for granted? Will the disruptor be disrupted in the future?
Consider that in 2005, Jet was the clear market leader, with a share of 42.3% in the domestic market; IndiGo now leads the pack with a share of 38.9%. Jet’s earnings before interest, taxes, depreciation and aircraft rentals (Ebitdar) margins were among the highest globally at 29.6%. IndiGo enjoys Ebitdar margins of 24%, far higher than the average for other Indian airlines.

Back then, Jet Airways was in a far better shape financially, enjoying far higher profit margins than what IndiGo does currently. Photo: Abhijit Bhatlekar/Mint

In 2004-05, Jet was set to more than double earnings vis-a-vis the preceding year, having reported 60% higher earnings in the first nine months of the year, compared with the whole of FY04. IndiGo’s annualized earnings for the nine months till December 2014, too, represent a growth of over 100%, compared with FY14 earnings.
Such was the dominance of Jet Airways in those days that it demanded a steep valuation of about 7.8 times its estimated FY05 Ebitdar at the higher end of the IPO price band. It got away with it, too; eventually pricing the issue just shy of the higher end of the band. IndiGo’s estimated enterprise valuation of about `17,000 crore discounts its current year’s expected Ebitdar by about 5.2 times.
In hindsight, investors clearly overestimated the gains from market leadership and underestimated the possible setbacks from new competition. Could IndiGo face a similar fate? If the government permits unbridled competition from international companies such as AirAsia, the situation could well change. However, compared with Jet in 2005, IndiGo has the advantage of already running a tight ship. Its costs, on a per kilometre flown basis, are considerably lower than other Indian carriers and is more or less in line with the average for low-cost carriers in the Asia-Pacific. Besides, IndiGo has a net debt-to-equity ratio of 0.26 times just ahead of its IPO. Jet’s net-debt-to-equity was as high as 8 times in end-2004; although it was set to fall to about 0.8 times after the IPO fund-raising. As things turned out, Jet would eventually get into a debt trap of sorts. IndiGo is certainly far better placed, with a strong balance sheet.
Still, it’ll be naive to assume that it is immune to the dangers of competition. What Jet’s experience in the past 10 years shows is that investors may not even be aware of the dangers lurking in the near future. After all, when Jet listed on 14 March 2005 at a premium of about 20% to its issue price, who knew that IndiGo’s first order of 100 Airbus aircraft, three months later, would change the face of India’s aviation industry.

Compiled By Ravi Vyas
Shining Star Panel Member

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