Oil markets extended a blistering rally, with Brent jumping 25%, hot on the heels of a 28% surge just last week. The immediate trigger was escalating supply disruptions so severe that vessel-tracking data showed ship traffic through the Strait of Hormuz had effectively ground to a halt.
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Yet even as retail investors rushed for the exits, Kotak Institutional Equities moved in the opposite direction, upgrading InterGlobe Aviation—operator of IndiGo—to Buy with a target price of Rs 5,500, implying substantial upside from current beaten-down levels.Kotak’s call, however, came with a frank admission of the fog of war engulfing the sector. The brokerage flagged airlines’ heavy exposure to crude prices and jet fuel spreads as severely limiting their ability to forecast cost structures or gauge the price elasticity of near-term demand—an unusually candid acknowledgment of just how difficult this environment is to model.
But in Kotak’s view, investors may be focused on the wrong risk entirely. What they should be far more mindful of, the brokerage argued, is the fast-growing losses piling up at IndiGo’s peers. The aggregate investments of this subset are meaningful enough to require better-than-IndiGo’s own peak post-Covid pre-tax operational profitability just to generate high-single-digit post-tax returns.
In other words, IndiGo’s competition is burning cash at a rate that makes the oil shock look like a secondary concern.
Underpinning the upgrade is a longer-term structural thesis. Kotak argued that airlines are best understood not as oil proxies but as a play on consumer spending. Consumers will ultimately absorb inflation over time, while airlines stand to benefit whenever deflation gives them a cost tailwind.
For now, though, with the Strait of Hormuz in paralysis and crude showing no signs of retreat, IndiGo investors may be in for a white-knuckle ride before any of that thesis plays out.
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