Shares of InterGlobe Aviation Ltd, which runs the IndiGo airline, rose up to 10% on the NSE in early deals on Wednesday. This, after the firm reported a net loss of Rs873 crore for the March quarter.

What gives?

Note that the Street forecast the company to report a higher loss. Also, IndiGo’s loss was largely due to forex fluctuation. The firm’s results could well have excited investors at a time when expectations are running quite low. Also, outlook for the aviation sector remains uncertain owing to the covid-19 pandemic.

But cash is king and IndiGo has plenty of it, which is reassuring in such testing times. “With net cash of Rs6,500 crore at FY20-end, IndiGo will surely survive this crisis and is well positioned to thrive when normalcy returns,” said analysts from IIFL Securities.

Even as financial year 2021 is expected to be turbulent, many analysts are optimistic on the prospects for financial year 2022.

In the interim though, investors must be cognizant that demand would take a while to return to the pre-covid-19 levels. After the initial high level of pent-up demand, load factors are expected to take time to increase. Of course, lower crude oil prices help but the gains from that are limited to the extent of scale up of operations. “In the interim, fixed costs would result in cash burn,” said IIFL Securities analysts.

IndiGo is now operating at 20% capacity and plans to increase this soon. Under the new rules, airlines are permitted to operate up to 33% of the capacity.

“Capacity ramp-up will thus happen slowly with international (about 25% of pre-covid capacity) to recover even more gradually,” said analysts from Kotak Institutional Equities.

The brokerage firm added, “While we do bake in lower employee and other expense, we still arrive at a fairly sizeable loss estimate of 7,300 crore for FY2021. We assume some normalcy in FY2022 though we expect capacity to still remain lower than FY2020.”

Prabhudas Lilladher Pvt Ltd expects FY21 capacity to decline by 46% year-on-year (YoY) while FY22 capacity is likely to be 90% of FY20 capacity.

IndiGo is now taking various measures to ride through the covid-19 storm effectively. “In times like these, we must shift our focus from profitability and growth to managing cash and liquidity,” said Ronojoy Dutta, chief executive officer (CEO), IndiGo, during the March quarter earnings call.

In the coming months, the company intends to generate additional liquidity to the tune of Rs3,000-4,000 crore. To achieve this, among other steps, the airline will look at curtailing employee costs, not to pay dividends for FY20 and returning older CEOs and taking deliveries of NEO aircraft.

While these measures are helpful, from a long-term perspective, investors would closely follow demand revival. Despite the appreciation in IndiGo’s share price post Q4FY20 results, the stock is still over 40% lower than its 52-week high recorded in September.

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