By Geetanjali Kedia

Interglobe Aviation is entering the primary market on Tuesday 27^th October 2015, to raise Rs. 1,272 crore, via a fresh issue of equity shares of Rs. 10 each and an offer for sale of 2.28 crore equity shares, both priced in the band of Rs. 700 to Rs. 765 per share. The issue will raise Rs. 2,870 crore and Rs. 3,018 crore at the lower and upper price band and represents 11.33% and 10.95% of the post issue paid-up capital, respectively. To be listed on NSE and BSE, issue closes on Thursday 29^th October.

Operating Indigo Airlines, Interglobe Aviation is 94% promoter-owned, with balance being employee shareholding. It operates 97 aircrafts (75 on operating lease, 22 on finance lease) with an average of 603 flights per day. Fresh issue proceeds will go to retire the outstanding lease liabilities of 7 aircrafts for Rs. 1,166 crore and purchase of ground support equipment of paltry Rs. 34 crore.

For FY15, company reported total revenue of Rs. 14,309 crore, with PBT and PAT of Rs. 1,836 crore and Rs. 1,296 crore respectively, thanks to crude prices halving to ~US$ 50 per barrel from ~US $ 100 per barrel prevailing at the start of the fiscal. In Q1FY16, which is seasonally a strong quarter, coupled with crude prices remaining soft, PBT improved to Rs. 925 crore, on revenue of Rs. 4,317 crore. The jump in margins is purely a factor of fuel prices, as depicted by the extract of financials below:

*Earnings before Interest Tax Depreciation Amortisation and Aircraft Lease Rentals

As aircraft fuel expenses contracted in FY15 and Q1FY16, EBITDAR improved by the same proportion in those periods. However, one must not give undue weightage to FY15 and Q1FY16 performance, as the profit and loss statement is extremely sensitive to macro factors like forex rates and crude prices.

While FY14 witnessed 21% jump in topline, PBT nearly halved YoY to Rs. 472 crore in FY14, as rupee depreciated from Rs.54 levels in April 2013, to Rs.66 in September 2013, against the US dollar. Again, in FY12, company’s PBT fell 90% YoY to Rs. 75 crore, from Rs. 715 crore in FY11, despite 45% jump in revenues, as rupee moved sharply against US$, from sub 45 levels to about 54, between Aug 2011 to Jan 2012.

Thus, on one hand FY15 and Q1FY16 profitability present a rosy picture, profitability took a hit FY14 and FY12 thanks to wild fluctuations in forex / crude movement. This exposes an investor to unpredictable macro risks. On an average, two-thirds of the total costs are denominated in the US dollars, while approximately half the cost is towards fuel, both beyond the company’s control. If one wants to play on crude prices or dollar-rupee exchange rate, take a direct exposure to them on MCX or NSE. Why choose a derivative play like this?  

In addition to this, attention is also drawn to a few deviations from normal financial prudence:

When it has cash and bank balances of Rs. 2,269 crore, as on 30^th June, 15, why is it coming to public, to raise Rs. 1,272 crore, via a fresh issue of shares? It has nearly double that money already! Moreover, interim dividend for FY16 (including dividend tax) of Rs. 1,207 crore, which was paid in June quarter only, could have very well been deferred by few months, knowing that equity is ‘the’ most expensive form of financing. Why empty the coffers and then structure an IPO?

Having negative net worth of Rs. 139 crore, as of 30-6-15, doesn’t bode well by any standards - accounting or financial or moral. See the greed, apart from paying dividend, entire Capital Redemption Reserve of Rs. 155.40 crore and about 80% of General Reserves, being Rs. 153.94 crore, were used for issuing bonus, of 9 shares for every 1 share held, on 25^th June,2015. Have some control on greed?

Inspite of this, management is seen defending negative net worth, as also, justifying payment of dividend, on the pretext that the company has free and restricted cash of Rs.3,675 crore, as at 30-06-15, as stated on page 364 of RHP. This explanation looks too childish, unconvincing and immature. A company with negative net worth can never have cash balance. This cash balance can well be created by borrowings or by enjoying on the current liabilities and sundry creditors, which is what has been done by the company. Even of the above cash of Rs. 3,675 crore, only Rs. 500 crore is the free cash, as Rs.3,175 crore is restricted cash, comprises of all bank deposits under lien and non current investments, as of 30-6-15.

Strangely on 30-6-15, Current Liabilities of the company was at Rs. 3,248 crore, with Current Assets of Rs. 3,068 crore (including cash balance of Rs. 2,270 crore) on that date. Hence, hefty cash balance, as relied upon by the management, has been created by delaying payment to suppliers, and largely used for Restricted cash, as referred to above, which is seen a risky and an imprudent financial move. This has largely been the practice, during FY 14 and FY15 as well, when the liberal dividend distribution policy was followed by the company.

Thus, the IPO is largely to facilitate an offer for sale, since the macros (read crude) seem favourable. Make hay while the sun shines, seems to be the mantra! 

Jet Airways came out with its IPO of Rs. 1,900 crore, 10 year ago in Feb 2005, at Rs. 1,100 per share. (i) At that time, Jet was India’s largest domestic airline with 42 aircrafts, commanding 42.3% market share (H1FY05). Indigo currently has a market share of 37.4% (5 months ended 31st Aug 2014). (ii) A decade ago, Jet also boosted of a young fleet with average aircraft age of 4.5 years and average utilization of 9.8 hours per day, in 2004, while that of Indigo now is 3.7 years and 11.4 hours per day, respectively. (iii) As seen from the Red Herring Prospectus, then, Jet was also a profitable airline with PAT of Rs. 163 crore and Rs. 259 crore for FY04 and 9MFY05 respectively. Thus, Jet then and Indigo now hold similarities, making them comparable. In over a decade, share price of Jet has lost two-thirds its value – from IPO price of Rs. 1,100 to Rs.410 now. While we are not saying that history will repeat itself, it only highlights the risks and uncertainties facing the aviation sector, wherein, the best have also fallen flat, explaining the apathy of prudent investors to this sector.

Indigo currently operates in top 33 cities of India. So far, company has focused on growing in few cities, adding just 1-2 airports each year. The company served 25 airports in FY11, 27 in FY12, 28 in FY13, 31 in FY14 and 31 in FY15. As its fleet size expands, given the order book of 430 aircrafts, over 10 years, it will be compelled to look at more aggressive expansion in tier 2/3 cities, where incremental return vis-à-vis investment will not be as high. Plus, competition is already present in those cities, making the expansion challenging.

FY16 earnings can be estimated with some certainty, with expected EPS of over Rs. 65 per share. Beyond this fiscal, it is simply crystal ball. Such stocks cannot be held as portfolio stocks, given the risks involved, mostly unsystematic i.e. beyond company’s control.

If one has to pick even 10 stocks for investment, clearly this company does not feature in the list, as the volatility in financial performance is very severe. Since the company lacks respect for accounting prudence and consistency and predictability of bottomline in the longer term, it remains an uncertain bet beyond 12 months.

Disclosure: Not applying in the IPO.