India aviation a compelling long term play despite near-term hiccups: Jefferies

Investing.com -- India’s aviation sector presents a strong long-term growth story, supported by favorable demographics, infrastructure expansion, and increasing consumer spending, despite facing near-term operational challenges, Jefferies said in a note dated Monday.

India is currently the world’s third-largest aviation market by passenger volume but accounts for only about 4% of global air traffic, while representing nearly 18% of the global population. 

This gap reflects significant under-penetration in air travel, with air trips per capita still among the lowest globally. 

Jefferies, citing IATA and Airbus, projects India’s air passenger traffic to triple over the next two decades, with Airbus estimating an 8.9% CAGR in revenue passenger kilometers (RPK) through 2044.

International travel is emerging as a key growth driver. IndiGo’s international capacity has risen to nearly 30% of its total, from low double digits a decade ago, and is projected to reach about 40% by 2030. 

Indian airlines, including Air India and IndiGo, are increasing wide-body aircraft orders and expanding direct overseas routes.

This internationalisation trend is also lifting airport retail revenues, particularly at metro airports.

India’s aviation infrastructure is also expanding rapidly. The number of airports has grown from 74 in FY14 to 157 in FY24 and is projected to reach 350-400 by FY47, according to the Ministry of Civil Aviation. 

Meanwhile, domestic air traffic grew at a 14% CAGR between FY09 and FY19, while international traffic is now growing faster post-pandemic, with a 16% CAGR projected between FY23 and FY25.

On the supply side, the registered fleet size has nearly doubled over the past 15 years to around 850 aircraft. 

IndiGo leads the order book, followed by Air India and Akasa. Jefferies noted that 78% of India’s current fleet comprises narrow-body jets, reflecting the domestic-heavy market mix.

Jefferies highlighted several headwinds: aircraft supply bottlenecks, high aviation turbine fuel taxation, weak MRO infrastructure, airspace-related geopolitical risks, and short-term sentiment issues stemming from recent air safety incidents.

Still, the brokerage sees long-term value in key stocks. IndiGo is positioned as the top player in Indian aviation, with a dominant domestic market share, growing international footprint, and a forecast mid-teen earnings growth. 

Its EV/EBITDA valuation of around 12x for FY26/FY27 is seen as reasonable.

For GMR Airports, which operates major hubs like Delhi and Hyderabad, Jefferies forecasts around 25% EBITDA CAGR between FY25 and FY28, supported by revised tariffs, land monetisation, and a recovery in travel retail.

Jefferies also noted that travel is becoming a larger share of household discretionary spending, rising from 14% in 2010 to 16% in 2020 and projected to reach 20% by 2030. 

Despite the rise of premium rail options, the lack of a true high-speed network and long travel times continue to favor air travel.