Rising Above Doubts: Indigo’s Journey to Success in the Great Indian Middle Class smallcase

The Great Indian Middle Class smallcase is designed to include companies that are expected to benefit from the growth of the Indian middle class. India, being an emerging economy, is projected to add approximately 45 crore people to the middle class category in the next 15 years. This increase in the middle class population leads to a rise in discretionary income, which is the portion of income available after essential expenses like food and rent are covered.

The rise in discretionary income enables individuals to spend more on luxury items such as skincare products, branded clothes, entertainment, and more. As a result, sectors like transportation, food and beverage, education, and entertainment are expected to experience increased spending.

The inclusion of Interglobe Aviation (Indigo) in the Great Indian Middle Class smallcase was particularly difficult when the smallcase was rebalanced in March 2023. There were multiple reasons influencing this stock which would have discouraged portfolio managers from including this stock back then. Let’s take a look at some of these:

• You see, the Indian aviation sector has been struggling over the last 5 years, due to a series of headwinds. It started with the grounding of Jet Airways in 2019 followed by the COVID-19 pandemic at the start of 2020. Things worsened with several hikes in Aviation Turbine Fuel (ATF) so much so that its price doubled by the end of 2021. 

• First, the Jet Airways episode had an impact on the credibility of the Indian aviation sector. A significant number of jobs were unfortunately lost, and there was a sense of dissatisfaction among industry stakeholders. Investors more also wary about investing in the airline sector, given the downfall of a big-budget airline companies.

• Then came the COVID-19 pandemic which was nothing but a pause button for the aviation sector. Travelling came to a full halt and so did revenues of airlines. For context, Indigo’s revenues fell from ~37k crores to ~15.5k crores from FY20 to FY21, that’s a 58% drop. Net losses accelerated by more than 2000%. Generally, aviation companies have a lot of fixed costs and the business slowdown ate into their books. 

Profitability had become a key concern for the industry in general including, the market leader – Indigo. Over the last 10 quarters (Dec ‘20 to Mar ‘23), Indigo only had 1 profitable quarter. Then, why did we include Indigo? Indigo is a market leader (>50% market share) which gives us comfort coupled with their operational efficiency.

The triggers behind the inclusion of Interglobe Aviation were the following – 

• Market leadership – Indigo has >50% market share in the domestic airline market in India by the end of 2022. This market leadership allows them to be operationally very strong and solidify its position further.
  
• Strong brand – Indigo has been around for 16 years and has built its brand over these years. Building a recognizable brand in India is not easy, given the diversity of our country.
  
• Appropriate theme fit – Indigo is a low-cost airline which caters to the Indian middle class.
  
• Step towards the future – Indigo recently signed the largest deal in aviation history to buy 500 aircrafts from Airbus.
  
• Improving financials – As and when things started unlocking, Indigo’s financial performance kept improving. Their losses narrowed from ~6k crores in FY22 to ~300 crores in FY23. Their revenues rose more than 2x from the COVID times. (Source: TickerTape)

Despite the initial doubts surrounding the inclusion of Indigo in our smallcase, it proved to be a good decision. Indigo’s leading position as the top airline in India, combined with factors such as lower crude oil prices and the fall of Go First, have propelled the airline’s growth to new heights. 

Since the March 2023 rebalance, the stock has surged by 29% and is currently trading at an all-time high of Rs. 2,402 (as of 5 June 2023). This highlights the importance of timely rebalancing to identify market opportunities that can generate future returns. So stay informed and adapt to changing market dynamics to optimise your portfolio. Happy investing!

The Great Indian Middle Class smallcase by Windmill Capital

Windmill Capital Team

Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. For more information and disclosures, visit our disclosures page here –https://windmillcapital.smallcase.com/#disclosures