Friends,

Here is one stock idea that I am acting on right now.

We all know that, in India, the airlines industry is going through an extremely fast paced expansion.

All our airports need additional capacity – Indians are flying like there is no tomorrow.

One in six aircrafts manufactured by Airbus and Boeing for the next five years will be delivered to Indian carriers.

India is the third largest airline market and the fastest growing domestic airline market and even now, only 1% of Indians are flying. This market is bound to go up.

However, globally, airlines industry is a value destroying industry. When you add up the profits / losses of all the companies in any region, in most years, the industry is a loss maker.

Fuel costs are not in their control. There are only two aircraft manufacturers  -and they do not believe in price wars. Airport costs are not in their hands. Manpower costs are high and market determined. Customers are very price sensitive and not brand conscious (as marketing genius Vijay Mallaya discovered).

So it is very difficult make money in this industry.

BUT there are some companies that have been able to figure a way out – SOUTHWEST in the US, RYAN AIR in Europe, AIRASIA in Asia and now INDIGO in India  – these have been consistently profitable.

They have focussed on the same things – costs and operational efficiencies and they have managed to build a culture of frugalism that makes them profitable. It is this culture that differentiates these winners from others.

Last week INDIGO had a series of bad news  – their CEO ADITYA GHOSH abruptly resigned. And the next day they declared their results where their net profit dropped by 73%. The stock has dropped from Rs. 1498 on 26^th April to Rs. 1182 as of 4^th May 2018 – a 22% drop.

The reason for this drop in profits was given as follows –

• Grounded flights – snags in Pratt and Whitney engines had grounded flights in the qtr
• Rising crude oil prices -prices has gone up by 9-10% over the past qtr
• Falling ticket yields due to increased competition

This was last qtr (Jan to March) – the situation today (April to June) is as follows:

• As per management –all the engines have been fixed and they have enough spares to refit engines if required.
• Crude prices are still around $72-74 a barrel – but we must understand that this will impact all the airlines and not just Indigo and in the past Indigo has been able to manage this issue better than others -even when the crude prices went  to more than $100 a barrel.
• Falling ticket yields is a cyclical phenomenon – most airline companies are financially weak to withstand a prolonged price war and Indigo would be the last man standing in a price war situation in India.

CEO exit surely is a source of concern – however, the company has still got Rahul Bhatia (the founder) and Rakesh Gangwal (former CEO and Chairman of US Airways). Plus the new management will likely have more experience in international operations -that would be the key growth area in the years ahead for Indigo.

I believe that the markets have over reacted – I believe that the next qtr results will show the company back in business. Engine problems are temporary, high crude prices will effect every airline and falling ticket yields will not sustain for long .

My calculations show that this stock price fall gets me to the price that I wanted. I am acting on this stock idea right now and buying  at current price levels of Rs 1180-1200 – and you could do the same and stay invested in India’s aviation growth story.