Why UBS downgraded IndiGo's stock from 'buy' to 'neutral'
What's the story
UBS has downgraded IndiGo parent InterGlobe Aviation's stock rating from "buy" to "neutral," and reduced its target price from ₹5,480 to ₹4,940. The move comes amid rising challenges in the aviation sector. The brokerage firm cited increasing volatility in the airline industry as a major reason for its decision. It noted that jet fuel spot prices have nearly doubled due to the ongoing US-Iran conflict and supply concerns remain high across markets.
Financial adjustments
Fuel cost assumptions raised by UBS
In light of these developments, UBS has raised its fuel cost assumptions for financial years 2027 and 2028 by 28% and 30%, respectively. The firm also warned that sustained high crude prices, around $200 per barrel, could continue to pressure margins. Despite these challenges, UBS noted that IndiGo is better positioned than its peers owing to strong liquidity, scale, and a robust domestic franchise.
Market response
IndiGo's stock performance amid ongoing conflict
IndiGo's stock has shown mixed trends amid the ongoing US-Iran conflict. It has gained 16% from recent lows and is now trading 6% below pre-conflict levels. However, its longer-term performance remains under pressure, with the share down 15% over the past year and 5% in the last three months. The airline is set to announce its March quarter results for FY25-26 tomorrow.
Demand challenges
Early signs of demand fatigue flagged
UBS has also flagged early signs of demand fatigue, with April passenger traffic showing both sequential and annual declines. This is partly due to the fare hikes. The firm has moderated its demand assumptions slightly, considering the sustained weakness as fuel surcharges could pose a downside risk to revenue passenger kilometer (RPK) estimates.
Future prospects
UBS cuts EPS estimates for FY27 and FY28
UBS continues to value IndiGo at 10 times its estimated FY28 enterprise value/EBITDA. The firm has decided to cut its estimates for FY27 and FY28 earnings per share (EPS) by 9% and 38%, respectively, factoring in the higher fuel costs and a strengthening US dollar against the rupee. Of the 26 analysts covering the stock, 20 have rated it as 'buy,' four as 'hold,' and two as 'sell.'