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

Jefferies projects India's aviation sector as a compelling long-term growth story, anticipating a tripling of air passenger traffic over the next two decades and an 8.9% CAGR in revenue passenger kilometers through 2044. This growth is underpinned by favorable demographics, rapid infrastructure expansion (airports projected to reach 350-400 by FY47), and increasing consumer spending, capitalizing on the market's current significant under-penetration despite being the world's third-largest by volume. While the sector faces near-term headwinds such as supply bottlenecks and high fuel taxes, Jefferies identifies long-term value in key players like IndiGo, forecasting mid-teen earnings growth, and GMR Airports, with a projected 25% EBITDA CAGR, positioning them to benefit from the expanding international and domestic travel market.

Analysis

According to a Jefferies research note, India's aviation sector presents a compelling long-term structural growth opportunity, driven by significant under-penetration and favorable macroeconomic tailwinds. Despite constituting nearly 18% of the global population, India accounts for only about 4% of global air traffic, a gap that signals substantial growth potential. Jefferies projects India's air passenger traffic will triple over the next two decades, supported by an 8.9% CAGR in revenue passenger kilometers (RPK) through 2044. This growth is underpinned by rapid infrastructure expansion, with the number of airports expected to more than double to between 350-400 by FY47, and rising consumer discretionary spending on travel, projected to reach 20% by 2030. A key catalyst is the accelerating internationalization of travel, with international traffic growth (projected 16% CAGR for FY23-25) now outpacing domestic. This trend benefits both airlines like IndiGo, which aims to increase its international capacity to 40% by 2030, and airport operators like GMR Airports. Jefferies highlights IndiGo as a dominant player with a reasonable FY26/27 EV/EBITDA valuation of around 12x and forecasts mid-teen earnings growth. For GMR Airports, a 25% EBITDA CAGR is forecast between FY25-28, driven by revised tariffs and non-aero revenue streams. However, the sector faces material near-term headwinds, including aircraft supply bottlenecks, high fuel taxation, and geopolitical risks, which could temper short-term performance.

Key Decisions for Investors

• Investors with a long-term horizon should consider the Indian aviation sector as a strategic allocation, capitalizing on the structural themes of market under-penetration and rising consumer demand.
• For direct equity exposure, IndiGo presents a growth-at-a-reasonable-price opportunity, given its market leadership and international expansion, while GMR Airports offers an infrastructure-focused play with a strong projected EBITDA growth profile.
• It is crucial to monitor near-term operational headwinds, such as aircraft supply constraints and fuel tax policies, as these factors could introduce earnings volatility and present tactical entry or exit points.
• The ongoing shift toward international travel is a key performance indicator to watch, as its acceleration could disproportionately benefit airlines with expanding wide-body fleets and hub airports with strong retail offerings.