IndiGo’s 100% stock rally: What comes next?

Exciting, right? Would you have been tempted to jump in? I certainly was. In fact, I applied. (Spoiler alert: I didn’t get an allotment, but that’s another story.)

Fast forward to 2023, and what a ride it’s been—not just for the airline industry but for IndiGo, too. Over the past seven years, the airline has achieved stunning growth:

• Revenue soared from ₹16,000 crore to ₹54,000 crore by FY23, marking a 19% compound annual growth rate (CAGR).
• Operating profit doubled over the same period.
• The fleet expanded from about 100 aircraft to nearly 300 in operation.

Impressive, isn’t it?

But here’s the twist: the stock price barely budged. From its IPO to mid-2023, IndiGo’s shares delivered a paltry ~5% CAGR return. For investors, it felt like the stock was perpetually stuck on the runway.

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Then came the takeoff.

In just 18 months—from mid-2023 to now—IndiGo’s stock price has soared by nearly 100%. Yes, you read that right: a doubling in just a year and a half!

So, what’s changed? Why is IndiGo suddenly soaring? More importantly, can it sustain this momentum, or are we in for another phase of stagnation where the stock hovers without much action?

To answer these questions, we’ll delve into the business fundamentals, industry dynamics, and what’s fueling IndiGo’s resurgence. That’s exactly what this article will unpack.

Cracking the code of the Indian aviation business

In the airline industry, success hinges on a simple premise: get more people to travel efficiently, and the company will thrive. Yet, many airlines falter in execution. This is where IndiGo stands out.

Punctuality: For domestic travellers, one priority towers above all: reaching their destination on time. IndiGo has built its reputation on consistently delivering industry-leading on-time performance (OTP). This isn’t mere luck; it’s the result of strategic choices and operational discipline.

Aircraft standardization for simplicity and speed: IndiGo operates a predominantly single-type fleet, primarily from the Airbus A32X family. This standardization streamlines maintenance, crew training, and spare parts inventory. By minimizing complexities, IndiGo achieves faster aircraft turnaround times, directly contributing to its stellar OTP.

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Further, 80% of IndiGo’s fleet comprises new-generation aircraft with an average age of just 4.4 years. These newer planes are not only more fuel-efficient but also require less maintenance, further enhancing operational speed.

Why punctuality matters: When flights consistently run on time, travellers naturally gravitate toward that airline. IndiGo’s dependability has translated into a commanding 61.5% domestic market share as of September FY24. 

To put this dominance into context, in the US, the top four airlines—Delta, Southwest, American, and United—collectively control about 69% of the market. IndiGo alone comes remarkably close to that scale within India.

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This market leadership allows IndiGo to negotiate prime airport slots, further boosting its efficiency. It’s a virtuous cycle: on-time performance builds customer loyalty, which reinforces market dominance and unlocks even greater operational advantages.

Riding on India’s aviation boom

India is now the third-largest aviation market in the world, with 184 million passengers traveling annually. While these numbers trail the U.S. (900 million passengers) and China (700 million passengers), India’s aviation industry is expanding at an unmatched pace, fuelled by rising middle-class incomes and government initiatives.

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The UDAN scheme: The government’s UDAN (Ude Desh ka Aam Nagrik) scheme has revolutionized regional connectivity, operationalizing over 500 Regional Connectivity Scheme (RCS) routes.

As of FY24, this initiative has enabled 13.5 million passengers to fly on these routes. Coupled with investments in tourism and infrastructure, regional air travel is booming, extending the reach of airlines like IndiGo into previously underserved markets.

Airport infrastructure on the rise: India’s airport infrastructure is on the brink of a massive transformation. The number of airports is set to rise from 140 in 2019 to 220 by 2028–30. The government has committed ₹1 trillion toward greenfield and brownfield airport projects, significantly boosting passenger-handling capacity.

For IndiGo, this represents fertile ground for growth. Improved connectivity and expanding infrastructure will not only bring more passengers into the fold but also reinforce IndiGo’s position as a market leader in India’s soaring aviation sector.

Dominance and expansion: IndiGo’s moat

IndiGo’s market dominance serves as a formidable competitive moat. With over 61% market share, the airline is in a league of its own. But it’s not resting on its laurels. IndiGo is actively working to consolidate its position and capitalize on India’s aviation boom.

Aircraft orders: IndiGo has nearly 1,000 aircraft on order—a fleet expansion approximately 2.5 times its current operational size. These planes will be delivered in phases, steadily boosting revenues through 2030. This forward-looking strategy ensures IndiGo can meet the anticipated surge in passenger demand head-on.

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Expanding destinations: Over the past three years, IndiGo has added 20-25 new destinations annually, both domestically and internationally. This aggressive network expansion allows the airline to tap into untapped demand while strengthening its foothold in key markets.

Scaling with market growth: India’s aviation sector is poised for exponential growth, and IndiGo is perfectly positioned to ride this wave. With its operational efficiency, market dominance, and robust fleet strategy, the airline is well-equipped to sustain its leadership as the market scales.

Essentially, IndiGo’s success is rooted in its sharp focus on fundamentals—punctuality, operational efficiency, and customer preference—combined with the tailwinds of India’s booming aviation market. With a young and efficient fleet, a massive market share moat, and a clear expansion strategy, IndiGo has set itself apart.

As government investments in infrastructure accelerate and regional air travel grows, IndiGo is uniquely positioned to capitalize on these developments. Its 1,000 new aircraft orders and continued network expansion are testaments to its confidence in the Indian market’s potential.

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If history is any guide, IndiGo isn’t just flying—it’s soaring.

The battle for market share: Can leadership propel growth?

Let’s pick up where we left off.

IndiGo’s ambitious order of 1,000 aircraft is a clear bid to sustain growth and keep costs in check. But can manufacturers like Airbus or Boeing deliver such a massive number of planes on schedule? This raises critical questions about the feasibility of IndiGo’s expansion plans and what it means for the airline’s future.

Aircraft bottleneck

Last year, IndiGo added just 78 aircraft to its fleet. If this serves as a benchmark, even with ramped-up production, it’s unlikely that all 1,000 planes will be delivered and operational by 2030. A more realistic estimate might be closer to 500 aircraft, effectively doubling its current fleet size.

Even at this reduced figure, the expansion is significant. Adding 500 planes would allow IndiGo to massively scale up capacity, reinforcing its lead in the domestic market and enabling aggressive international expansion. Moreover, securing such a large order ensures IndiGo won’t face supply constraints as the aviation sector continues its rapid growth.

The rise of Tata Group

IndiGo’s market dominance is now being tested by a rising competitor: the Tata Group. With its combined airlines—Air India, Vistara, and Alliance Air—the Tata Group has consolidated a 25% market share. Together, IndiGo and Tata control 85% of the domestic market, creating a near duopoly.

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While this dominance could deter smaller players from entering or expanding in the market, it also sets the stage for a focused rivalry. For Tata, the opportunity lies in capturing more market share, particularly on international routes where Air India already has a strong presence. This intensifying competition will likely shape the future of India’s aviation landscape, creating a high-stakes battle for leadership.

Battle for international passengers 

India’s international passenger market reached 64 million travelers in FY24, with IndiGo and Air India each serving 12 million passengers, capturing 19% and 20% of the market, respectively. However, the competitive dynamics between the two airlines are distinctly different.

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Air India’s Edge: Air India dominates the long-haul segment, a space where IndiGo has yet to establish a strong foothold. With its focus on premium services, including a growing fleet of wide-body aircraft, Air India holds a clear advantage in catering to long-distance travellers seeking comfort and amenities.

IndiGo’s Expansion: IndiGo is steadily building its international presence, focusing on adding more destinations and targeting medium-haul routes where it can directly compete with Air India. 

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“While we are deeply rooted in India, and we’re also continuously adding capacity in international markets, and our capacity share in international markets has reached 28%, we announced 2 new international destinations, Jaffna and Mauritius during this quarter, and we are likely to announce and to launch 2 more destinations, Penang and Langkawi in Malaysia in the coming months,” IndiGo’s management had said in an analyst call for September earnings.

“We aim to add further another 3 international destinations before the end of this financial year. These additions will take our international destinations to a total of 40 by the end of this year. And as a result of these additions, our capacity share is expected to reach the targeted level, our capacity share of International is expected to reach the targeted levels of 30%,” it had added.

The launch of IndiGo Stretch, its business-class offering, marks a significant shift in strategy, signalling its ambition to compete not just on cost but also by enhancing its premium service offerings.

The competition is heating up, and the winner will likely be the one that strikes the right balance between cost efficiency and premium offerings.

What’s next for IndiGo’s stock?

Here’s where things get interesting. IndiGo is currently India’s only listed airline that is both large and consistently profitable—a rarity in the aviation industry. This uniqueness is already reflected in its valuation. For perspective, leading US airlines like Delta and United trade at price-to-earnings (P/E) ratios of around 10, suggesting that expecting a significant premium for IndiGo’s valuation may be unrealistic.

The future trajectory of IndiGo’s stock price will likely hinge on two critical factors:

Industry growth: As India’s aviation sector continues its rapid expansion, IndiGo’s dominant market share and efficient operations position it to grow in tandem with the industry.

Maintaining market leadership: IndiGo’s ability to fend off competition from the Tata Group and capitalize on emerging international opportunities will be pivotal.

For investors, this combination of steady growth and market leadership presents a solid case. While a dramatic re-rating of IndiGo’s valuation seems unlikely, the long-term growth narrative of India’s aviation industry offers compelling reasons to remain optimistic.

Conclusion

IndiGo isn’t without its challenges—delays in aircraft deliveries, intensifying competition from the Tata Group, and the evolving international passenger market are just a few. However, its strong foundation, dominant market position, and strategic expansion plans ensure it remains a formidable player in the sector.

For more such analysis, read Profit Pulse.

The stock’s future performance will likely mirror the growth of the Indian aviation industry and IndiGo’s ability to maintain its leadership in a rapidly changing landscape. It may not promise flashy returns, but in a volatile sector like aviation, stability and sustained leadership are achievements worth noting.

Note: This article relies on data sourced from annual reports. Forecasting is based on our assumptions.

The purpose of this piece is to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you are considering an investment, please consult your financial advisor. This article is intended strictly for educational purposes.

The views expressed here are the author’s and do not reflect those of his current or past employers.

About the author: Parth Parikh has over a decade of experience in finance and research. He currently heads the growth and content vertical at Finsire. Parth has a strong interest in Indian and global stocks and holds an FRM Charter, along with an MBA in Finance from Narsee Monjee Institute of Management Studies. He has previously held research positions at various organizations.

Disclosure: The writer and his dependents do not hold any of the stocks discussed in this article.