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Indigo IPO

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We were recently asked about EPS, P/E ratio for Indigo IPO on Quora as these weren’t readily apparent from the red-herring prospectus. Below is our reply(with some edits) for the benefit of our regular readers.

We aren’t covering the IPO, but here are the details as per prospectus:

Total Shares Outstanding: 338536000 out of which 30146000 is being offered as part of this IPO (a little less than 9%). The proceeds from the IPO will not go to the company but to the promoters who are offering their stake for sale. Most noteworthy is the fact that one of the promoters, Mr. Rahul Bhatia is offering most of his personal equity shares as part of the sale (around 3006000 shares). Although since majority of shares are held by Interglobe enterprises and Rahul Bhatia happens to be the whole time director at Interglobe enterprises, there really isn’t much to be read into here. Other shares being offered by other promoters and investors, refer to page 92 in the document.

Net profit for FY14-15: 1304 crore rupees. (as per Page on livemint.com)

So, going by these figures EPS is around Rs. 38. With a price band of Rs. 700-765, this amounts to PE ratio of between 18-20. Also the figures in the prospectus don’t take into account a dividend of 997 million Rs. for FY14-15 and an interim dividend of 10029 million for FY15-16 (to put it bluntly the existing shareholders have already given themselves dividend for this FY and are now offering the shares to new investors who won’t receive this declared interim dividend as they were not shareholders when the dividend was declared). If one takes this into account, the effective EPS to new investors would go down to this extent for the current FY (15-16). This is fair to the extent that the investor would only be owning the stock for 4-5 months this financial year and so should have rights to profits made after they made their investment.

Also one should consider the fact that like other airlines Indigo undergoes sale and leaseback agreements for new air crafts and Indigo has commitments to Airbus for purchasing 180 aircrafts under 2011 agreement. Indigo has signed a memorandum of understanding with Industrial and Commercial Bank of China Limited (ICBC), under which ICBC will provide with aircraft financing for upto USD2.6 billion through sale and leaseback agreements, financial leases or commercial leases. Thus continued profitability would be very important for the airline to ensure its finances don’t deteriorate rapidly due to the financing costs related to these air crafts, and we can only hope that the Chinese bank isn’t fickle about this financing as situation deteriorates in China.

We are not tracking this IPO and don’t consider aviation as a preferred sector for investment, simply because globally this sector has proved to be an un-profitable sector in the long run. But, we will surely be watching the post listing price action in this stock as a listing premium would indicate heating up of the IPO market and following action in the IPO market can provide us with some contrarian sell indicators for the long term. Currently the IPO market is too tepid to be a thread to the current bull run.

Disclosure: At the time of publication of this post, our analyst is not registered with SEBI as a research analyst. Our analyst has an application for registration as a research analyst with SEBI pending for registration.

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