Rudimentary analysis of Indigo Stock - Value Investing

1. Flying high in the air
Views reserved- Ravikiran Komarraju (ravikiran.mit@gmail.com)

2. India is the 3rd largest civil aviation market in the world with a growth potential of ~9% over next 20 years
450 /1300
(No. of Aircraft / Population in
Million)
Market OpportunityPassenger Traffic (In
Mil) (2016)
100
436
719
3
1
2
Passenger Traffic (In
Mil) (2036)
600
1078
(6X in 20 yr)
(1.6X in 20 yr)
5046/1379
5000/323
3
2
1
1744 (4X in 20 yr)
1
2
3
$ 6500/ 8%
$ 15500/ 6%
$ 58000/ 1.5%
Affluence
(PPP Percapita/ GDP Growth 2017-
2022)
• India is world’s 3rd largest market for civil aviation (considering only domestic traffic)
• India’s traffic is set to grow at a multiple of 6X over the next 20 yr (a CAGR of 9%)
• With only 450 aircraft serving 1300 million population, India has the highest potential for air traffic growth in the world
• India’s PPP per-capita income is set to grow at 8% over the next 5 yr as compared to a 6% growth in China and 1.5% in USA
On an average only 8% Indians fly in a year while each American flies almost 2 times a year

3. Indigo is the largest and fastest growing Indian carrier in India with a market share of 40%
IndiGo is India’s fastest-growing carrier and the largest domestic passenger airline with a market share of 40.1% during FY17
ASK* Growth (Indigo/ Market ) (5yr)
Market Share (2017) –
Growth of 2X in 5 yr
40%
24% / 2%
25% / 5%
RPK* Growth (Indigo/ Market ) (5yr)
Indigo Highlights
ASK* – Available seat kilometres (Proxy for capacity and Network growth); RPK *- Revenue Passenger Kilometres (Proxy for Passenger growth)
Regional
Connectivity
(UDAN)
• 43 New Airports
• Regional Connectivity to
Tier-II towns
Tourism India to be part of 10 fastest
growing destinations in the
world for leisure travel
Traffic Growth Drivers
85% Occupancy level (2016 & 2017)
3.04
3.44
Cost per ASK (In Rs.)
Revenue per ASK (In Rs.)
1.88 Cost per ASK (ex-fuel) (In Rs.)
15% Passenger Revenue
growth (2016 to 2017)
84%
12%
4%
Passenger Revenue
accounts for 84% of
total revenue pie for
Indigo
Other Highlights
257/249 Mileage (In Rs. Per
Km) (2017/2016)

4. Indigo rules the Industry with its superior fundamentals and margins
Growth Ratios Average Margins Return Ratios Debt Position Working Capital Risk Ratios
Sales
Growth
(5 yr)
PAT
Growth
(5 yr)
CFO
Growth
(5 yr)
OPM (5
yr)
PAT
Margin
(5 yr)
ROCE
(5 yr)
RoE (5
yr)
RoA
(5yr)
ICR Debt
Equity
WC
Days
Current
Ratio
Promot
er
holding
Pledged
holding
Conting
ent
Liability
/ mcap
27% 67% 33% 12% 9% 38% 97% 17% 12% 0.7 75 1.2 74% 0% 1%
10% -224% -236% -10% -3% 38% NA -2.6% 7.76% -1.9 -64 0.33 60% 34% 5.3%
8% -190% -16% 0% -5% -10% NA 0.31% 1.35% -0.35 -66 0.58 51% 0% 59%

5. 1.73 1.8
2.01
3.42
3.12 3.04
2014 2015 2016
CASK (ex-fuel) CASK
Indigo’s economic moat originates from high brand pull, efficient scale and low cost operations
Moat/ Competitive
Advantage
Source Sustainability
Low cost operations Focus on cost efficiency except fuel: Best in
the Industry
High Entry Barriers • High Capital Intensity
• Regulatory requirements
• Brand Image
High switching costs • Availability of flights
• Reliability: On-time service
Networking effects Not significant
Efficient Scale Indigo runs 1000 flights per day to 46+
destinations with 4.4 million
passengers/month
Telegraph (UK)
IndiGo was named as one of the Best
Employers in India during the AON Best
Employer Survey (Pool: 200 companies
representing 12 key industries.)
Best Employer Award
Cost per ASK has been
on a decline indicting
Indigo’s control over
costs. However, costs
excluding fuel are
increasing as a % of
total cost
CASK Performance
On-Time Performance and Reliability
IndiGo has the best OTP (On-time performance) in India as per OAG,
UK based intelligence agency. It is ranked among Top 10 Airlines in the
world
Indigo recorded a reliability of 99.86% in 2017 (indication of flight
cancellations)

6. However, there are a few chinks in the armour for the carrier flying above 33000 feet
Unfortunate
Incidents
Increasing Oil prices
Increasing CASK (ex-fuel)
Decreasing RASK
High levels of Debt
3.95 3.78 3.44
4882
4248
3721
2015 2016 2017
RASK Avg. Ticket Price
Currently, Debt/Equity stands
at 0.7 and ICR at 12%.
However, the debt levels are
improving significantly
CASK (ex-fuel) have
increased at 8% over the last
5 yr

7. Indigo’s margin of safety lies in its Management Quality and its current Valuation
Valuation (Subjective) – As on 10 Feb 2018
Investment Frameworks Lower Higher
EPV 674.54 -
Dhandho 1,506.84 2,474.66
Ben Graham 2,439.44 4,604.11
DCF 1,656.89 -
Expected Return 863
Current Price 1258
• Current P/E – 19
• Buffet’s $1 test – 7.55
• Self Sustainable Growth rate – 32%
• FCF/CFO – 110%
• 6.5 Cr (2017)
• 27 Cr (2016)
• BA and LLB (Delhi University)
Aditya Ghosh, President and
Wholetime Director
• CNN-IBN Indian of the year, 2013
• 27th in Fortune’s 40 under 40 list
• Young Business Leader, 2011 – NDTV
• Low Cost Leadership award at “World
Airline Awards”, London 2011

8. Appendix

9. EPV Model
Calculation of Normalized Earnings
(Rs Crore) Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Sales 9,203 11,117 13,925 16,140 18,581
EBIT 1,066 598 1,996 3,174 2,550
Less - Adjustment 5 3 10 16 13
EBIT (Adjusted) 1,060 595 1,986 3,158 2,538
EBIT Margin'(Adjusted) 12% 5% 14% 20% 14%
Tax Rate 21% 0% 29% 30% 23%
Earnings After Tax (Adjusted) 841 594 1,403 2,221 1,964
Depreciation 86 226 302 505 457
Maintenance Capex (See Table Below) - 1,790 233 - -
Earnings After Tax (Normalized, A) 926 -970 1,472 2,727 2,421
Reported Profit After Tax (B) 787 474 1,304 1,986 1,659
EPV with Different Cost of Capital
Discount Rate EPV Net Cash** Total EPV
10% 24,208 5,750 29,958
12% 20,174 5,750 25,923
15% 16,139 5,750 21,889
Current Market Cap (Rs Crore) 45,264
EPV as % of Market Cap 57%
Calculation of Maintenance Capex
(Rs Crore) Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Fixed Assets (PPE) 1,764 3,956 4,876 4,747 3,794
Net Sales 9,203 11,117 13,925 16,140 18,581
PPE/Sales 0.19 0.36 0.35 0.29 0.20
Change in Sales 3,638 1,914 2,809 2,215 2,441
Total Capex 915 2,324 1,017 249 -376
Growth Capex 915 534 784 249 -376
Maintenance Capex - 1,790 233 - -
Concept of EPV Model:
• Intrinsic Market cap is calculated as a discounted value of
Normalized Earnings with the discounted rate being the cost of
capital (10%-12%)
• Normalized earnings includes adjusted EBIT and deduction for
Maintenance Capex. (Capital required to “stay in the business”
not “grow the business”)
• Maintenance Capex is a combination of change in working capital
and Capex as per FCFF formula.
• In other words, Normalized earnings are a functional equivalent of
FCFF
• The difference between FCFF and Normalized earnings is that
“Growth capex” (a portion of capex which helps the business
grow) is not deducted from the Normalized earnings.

10. Dhandho Model
Concept of Dhandho Model:
• Intrinsic Market cap is calculated as a
discounted value of expected future
cashflows of the company including the cash
available on the Balance sheet currently
• Terminal Value is calculated a 10-15 times
(Lower and Higher ranges) the cashflow of Yr
10
• Yearly cashflows are calculated using a 3
step growth model
• Yr1 cashflow is calculated as average of
FCFF of recent 3yrs.
• Discount rate is assumed as 12%
Lower Range Calculations
Year FCF (Rs Cr) PV of FCF (Rs Cr)
0
Excess Cash
(Latest)
8,346
1 FY18 3,217 2,872
2 FY19 3,699 2,949
3 FY20 4,254 3,028
4 FY21 4,680 2,974
5 FY22 5,148 2,921
6 FY23 5,662 2,869
7 FY24 5,945 2,689
8 FY25 6,243 2,521
9 FY26 6,555 2,364
10 FY27 6,883 2,216
10 68,827 22,160
Intrinsic Value 57,910
Current Mkt. Cap. 45,264
Premium/(Discount) to IV -22%
Assumed FCF Growth (for Lower Range)
Year 1-3 15%
Year 4-6 10%
Year 7-10 5%
Discount Rate 12%
Higher Range Calculations
Year FCF (Rs Cr) PV of FCF (Rs Cr)
0
Excess Cash
(Latest)
8,346
1 FY18 3,357 2,997
2 FY19 4,028 3,211
3 FY20 4,834 3,440
4 FY21 5,559 3,533
5 FY22 6,392 3,627
6 FY23 7,351 3,724
7 FY24 8,086 3,658
8 FY25 8,895 3,593
9 FY26 9,785 3,528
10 FY27 10,763 3,465
10 1,61,446 51,981
Intrinsic Value 95,104
Current Mkt. Cap. 45,264
Premium/(Discount) to IV -52%
Assumed FCF Growth (For Higher Range)
Year 1-3 20%
Year 4-6 15%
Year 7-10 10%
Discount Rate 12%

11. Higher Range
Avg 5-Yr Net Profit (Rs Crore) 1,242.3
PE Ratio at 0% Growth 8.5
Long-Term Growth Rate 67.0
Ben Graham Value (Rs Crore) 1,76,942
Current Market Cap (Rs Crore) 45,264
Lower Range
Avg 5-Yr Net Profit (Rs Crore) 1,242.3
PE Ratio at 0% Growth 8.5
Long-Term Growth Rate 33.5
Ben Graham Value (Rs Crore) 93,751
Current Market Cap (Rs Crore) 45,264
Ben Graham’s Model
Concept of Ben Graham’s Model:
• Ben Graham's Original Formula: Future Stock Value = Average 5-yr Net Profit* (8.5 + 2Gr)
• Ben Graham’s Intrinsic value of a company is estimated as sum of Present Market Value
and Future Market Value of the company
• Present Value= Average 5-yr Net Profit *8.5 where 8.5 is PE of a no growth stock.
• Future Value = Average 5-yr Net Profit *2Gr; where Gr is the growth rate of PAT over the
last 5 yrs multiplied by 100
• Lower range G= 50%*Gr
• Higher range G= Gr

12. Final Calculations
PV of Year 1-10 Cash Flows 31,113
Terminal Value 32,563
Total PV of Cash Flows 63,676
Current Market Cap (Rs Cr) 45,264
DCF Model
Concept of DCF Model:
• Intrinsic Market cap is calculated as a
discounted value of expected future
cashflows of the company
• Terminal Value is calculated by assuming 2%
as the terminal growth rate over the times the
cashflow of Yr 10
• Yearly cashflows are calculated using a 2
step growth model
• Yr1 cashflow is calculated as average of
FCFF of recent 3yrs.
• Discount rate is assumed as 12%
Lower Range Calculations
Year FCF (Rs Cr) PV of FCF (Rs Cr)
1 3,217 2,872
2 3,699 2,949
3 4,254 3,028
4 4,892 3,109
5 5,626 3,192
6 6,301 3,192
7 7,058 3,192
8 7,904 3,192
9 8,853 3,192
10 9,915 3,192
Assumed FCF Growth (for Lower Range)
Year 1-5 15%
Year 6-10 12%
Terminal Growth rate 2%
Discount Rate 12%

13. Estimated CAGR in Net Profit over next 10 years 12%
Estimated Net Profit after 10 years (Rs Cr)
5,153
Current P/E (x)
27.3
Exit P/E in the 10th year from now (x, Estimated)
20.0
Esti. Market Cap (10th year from now; Rs Cr)
1,03,064
Cost of Capital/Discount Rate
12%
Discounted Value (Rs Cr)
33,184
Current Market Cap (Rs Cr)
45,264
Sanjay Bakshi’s Expected Return Model
Concept of Expected Return Model:
• This methodology works on Exit P/E multiple
• It is implicitly assumed that the investment horizon is 10
years
• Intrinsic Market cap is calculated as a discounted value
of expected future Market Cap of the company after 10
years
• Estimated Future Market Cap of the company is
calculated by assuming that the company will have a
P/E of 20 after 10 years from now
• Estimated Earnings after 10 years are worked out by
projecting Earnings on the current date is projected at
12% CAGR over the next 10 years
• The Market Cap is discounted at a discount rate of 12%
Particulars Mar-07 Mar-08 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Net Profit (Rs Crore) -202 -235 551 650 128 787 474 1,304 1,986 1,659