Emptying the company’s coffers to fill the promoters’ kitty on the eve of IPO exposes the caliber of professional management.
Perhaps, the erstwhile Controller of Capital Issues would have grounded the IPO of Indigo Airline citing that the company’s negative net worth wouldn’t be eligible for premium. Also, changing offer terms after commencing the `road show’ undermining the sanctity of the issue prospectus is not heard of in this country. Yet, the present market regulator SEBI looks helpless in preventing such IPOs from luring investing public.
OFFER AT A GLANCE |
|
Name |
InterGlobe Aviation Ltd |
Public Offer |
Fresh Issue of 1.66 cr to 1.82 cr shares of Rs 10 each & Offer for Sale of 2.28 cr shares |
Offer % on Total Equity |
10.95% to 11.33% |
Post-IPO Promoter Stake |
85.78% to 86.15% |
Offer Price |
Between Rs 700 and Rs 765 |
Offer Amount |
Rs 2870 cr to Rs 3018 cr |
Application Quantity |
15 & Multiples of 15 |
Bid/Offer Opens |
October 27, 2015 |
Bid/Offer Closes |
October 29, 2015 |
Listing |
NSE and BSE |
IPO Rating |
Nil |
Book Running Lead Managers |
Citigroup, J P Morgan, Morgan Stanley, Barclays Bank, Kotak Mahindra & UBS Securities |
Registrars |
Link Intime |
The IPO
Fresh issue of 1.66 to 1.82 cr equity shares Rs 10 each at a price band of Rs 700-765 per share aggregating to Rs 2870-3018 cr. Investors should apply for a minimum of 15 shares and multiples of 15 thereafter. The IPO will constitute 10.95 to 11.33% of the post-issue paid up capital of the company (Rs 360 cr to Rs 362 cr). The promoter group would hold between 85.78% and 86.15% of the enlarged capital. For the IPO, Citigroup Global, J.P. Morgan and Morgan Stanley have been appointed as global co-ordinators and book running lead managers. Barclays Bank, Kotak Mahindra Capital and UBS Securities are acting as book running lead managers.
IPO Object
Of the gross fresh issue proceeds of Rs 1272 cr, as much as Rs 1166 cr is to be utilized for retirement of certain outstanding lease liabilities and consequent acquisition of aircrafts. A little over Rs 34 cr is proposed to be deployed towards purchase of ground-support equipments such as ramp coaches, tractors, ground power units and push-backs for airline operations. The balance, net of IPO expenses, is earmarked for general corporate purposes.
Lineage
In terms of industry knowledge and exposure, perhaps, no Indian airline company would have had more experienced promoters than Indigo. InterGlobe Aviation Ltd (IAL), which operates Indigo Airlines, is backed by people who are considered veterans in the industry. In fact, they have a perfect combination. Whereas New Delhi-based Rahul Bhatia (55) has over 25 years of experience in ticketing (as travel agent) and hospitality, Non-Resident Indian-American Rakesh Gangwal (62) has over 30 years of experience in global airline operations. A former President and CEO of US Airways, Gangwal also held senior management positions with United Airlines, Air France, US Airways.
Originally registered at Lucknow in January 2004 by the Bhatias, IAL moved to New Delhi eight months later. While Bhatias’ InterGlobe Enterprises Ltd (IEL) is considered to be the holding company of IAL, Gangwals bought around 48% of IAL’s equity in 2006 from IEL. Of IAL’s present equity of Rs 343.72 cr, Bhatia group controls about 48% and Gangwals hold around 47%. The balance is held by employees and associates.
Evolution
According to the offer document, IAL placed a landmark order of 100 aircrafts (A320) with Airbus in the year 2005. The company took delivery of its first aircraft in 2006 and started domestic operations in the same year. Within a year the company claimed to have crossed the one million passenger mark. IAL reportedly crossed the 10 million passenger mark in 2009. Same year it took delivery of its 25th aircraft.
In June 2011 IAL placed another order of 180 aircrafts of A320neo with Airbus. In September 2011 IAL launched international operations and became the largest domestic carrier in the country by market share. In October 2011 it took delivery of the 50th aircraft and crossed the 50 million passenger mark in December 2012. The company took delivery of its 75th aircraft in February 2013 and crossed the 75 million passenger mark April 2014. IAL took delivery of 100th aircraft in November 2014 and crossed the 100 million passenger mark in March 2015.
Today, Indigo boasts of as the fastest growing airline in the world’s most promising aviation market. The company lists its strengths as: Young fleet of 97 A320 aircraft with an average age 3.7 years; Largest domestic carrier with 34% market share; Seventh largest LCC (low cost carrier) globally; One of the lowest costs in the world; Consistent profitable growth and shareholder value creation even during difficult times; etc.
Business Strategy
Since the opening of Indian skies for private sector as many as nine players have entered the field before IAL made its entry in 2006. But, none of them could post a decent performance. In fact, only two of them are visible today. The most hyped private airline, which hit the Indian capital market ten years ago, is currently deep into red and at the current market rate it has inflicted a capital loss of more than 65%. Compared to its predecessors, IAL’s performance is indeed commendable. IAL is said to be the only consistently profitable airline company in India since FY2009. The company has generated more than Rs 8300 cr cash from operations since FY2011 and it has also distributed about Rs 3500 cr as dividends from FY2011.
How IAL made it possible what others couldn’t do? The company attributes its laudable feat to many factors. To start with, IAL enjoys structural advantages through unique aircraft acquisition strategy. The company has placed large orders of 100, 180 and 250 of which the 100 A320 were delivered between 2006 and 2014. The second batch of 180 A320NEO (new generation aircrafts) are scheduled to be delivered between 2015 and 2023. Deliveries for the third order of 250 A320NEO are expected between 2018 and 2026.
Each of IAL’s order was the largest single Airbus orders at that time which has given the company better bargaining power. Besides the favorable terms gained from aircraft manufacturers, the company has also made unique sale-and-leaseback arrangements which mitigate technological obsolescence and create cost advantage.
Apart from the incentives and cost benefits attached to large new technology aircraft orders and sale-and-leaseback arrangements, IAL also enjoys low and predictable maintenance costs through comprehensive fleet hour agreements and attractive OEM incentives. Further, it has the advantage of single type fleet of 97 Airbus A320 aircrafts, high aircraft utilization, exceptional operational reliability, no-frills product 180 all-economy seats, low ticket selling cost, etc.
Financials
While other airline operators have sunk into deep debts in recent years, IAL’s promoters have managed to keep the company afloat even during the high-cost interest and fuel regimes with the help of `cash and non-cash incentives’. In five years and three months up to June 2015, IAL logged gross revenue of over Rs 49000 cr, generated an operating cash flow of more than Rs 8300 cr and netted a profit of Rs 3914 cr. And, more importantly, it distributed as much Rs 3500 cr as dividend.
While the company’s operating revenue has steadily grown from Rs 3800 cr in FY11 to Rs 13925 cr in FY15 its profitability has been wildly fluctuating. EBIDTA, which was at Rs 823 cr in FY11, slumped to Rs 193 cr in FY12 but soared to Rs 1131 cr next year. In 2013-14 once again the company’s profit line witnessed a slide though the easing of oil price from above $100 to less than $50 in last one and a half years helped IAL to post record profits in fiscal 2015.
There is no denying the fact that, operationally, the promoters have steered IAL well to keep the company afloat during the turbulent time. However, their style of fund management raises many eyebrows. Even while its borrowings have steadily surged, the company has made exorbitant cash dividend pay-outs to the promoters in an arbitrary manner. In fact, using the Rs 3500 cr dividend, the company could have easily retired its debts which amount to almost an equal amount.
The promoters have emptied the company’s coffers in such a manner that IAL’s net worth has turned negative Rs 139 in June 2015 after an illogical 3267% dividend amounting to Rs 1003 cr at a suicidal pay-out ratio of 157%. Even a petty shop keeper won’t clean up his cash box like this at the end of the day!
Financial Performance of InterGlobe Aviation |
||||||
(Amt in Cr) |
Jun-15 |
Mar-15 |
Mar-14 |
Mar-13 |
Mar-12 |
Mar-11 |
Operating Revenue |
4212 |
13925 |
11117 |
9203 |
5565 |
3833 |
Other Income |
106 |
384 |
316 |
237 |
144 |
111 |
Gross Income |
4317 |
14309 |
11432 |
9440 |
5709 |
3944 |
Cash Incentives Recd |
89 |
355 |
361 |
359 |
263 |
227 |
Operating Profit |
1078 |
2253 |
822 |
1131 |
193 |
823 |
Operating Margin(%) |
23.1 |
13.4 |
4.6 |
9.7 |
0.9 |
18.6 |
Interest |
33 |
116 |
123 |
58 |
51 |
45 |
Depreciation |
120 |
302 |
226 |
86 |
67 |
63 |
Pre-Tax Profit |
925 |
1836 |
474 |
987 |
75 |
715 |
Net Profit |
640 |
1296 |
474 |
783 |
141 |
579 |
Net operating cash flow |
874 |
2384 |
1596 |
1741 |
896 |
872 |
Networth |
-139 |
426 |
422 |
389 |
243 |
103 |
Equity Cap |
344 |
34 |
34 |
34 |
34 |
34 |
Reserves |
-483 |
392 |
387 |
355 |
209 |
68 |
Dividend % |
3267 |
3517 |
1239 |
1787 |
0 |
1598 |
Dividend Amt |
1003 |
1080 |
378 |
549 |
0 |
490 |
Div Pay-out % |
157 |
83 |
80 |
70 |
0 |
85 |
Net Block |
4843 |
4876 |
3956 |
1771 |
886 |
831 |
Borrowings |
3567 |
3588 |
3081 |
1699 |
936 |
861 |
Valuation
IAL, whose last audited net worth is negative Rs 139 cr, is asking for a market cap of more than Rs 27500 cr. Perhaps, the current Sensex and Nifty P/E multiples may justify the valuation of IAL which discounts the company’s fiscal 2015 earnings about 21 times. Nevertheless, will IAL sustain its profitability when fuel price moves northwards as it happened three years back? IAL‘s fortune largely hinges on oil price and US Dollar movement. Fuel accounts nearly 40% of the cost and a large portion of the costs are incurred in dollars. Thus, any rise in oil price and Dollar value would give a double blow to IAL’s bottom line.
When the going is good, even an exorbitant price will look reasonable. Remember Jet Airways’ episode? In 2005, the over hype created around Jet IPO was so much that the company and its investment bankers could effortlessly sell the shares at Rs 1100 a piece. See the plight of the stock today. Incidentally, three of IAL’s book running lead managers viz. Citigroup Global, Kotak Mahindra Capital and UBS Securities were also involved in JET’s public float as lead managers.
For a stock whose NAV is negative, IAL has fixed a price band of Rs 700-765. Post-IPO, the promoter group would hold more than 85%. What’s the cost of promoters’ holding? The RHP provides the average cost of acquisition as: InterGlobe Enterprises Ltd Rs 0.99; Rakesh Gangwal Rs 5.91; Rahul Bhatia Rs 144.37; and Acquire Services Private Ltd Rs 215.02. However, this average cost is not adjusted to the hefty cash dividends handed out to the shareholders.
Resident promoter Rahul Bhatia, who invested Rs 44 cr in his personal capacity in IAL, will be realizing nearly Rs 230 cr through the OFS at the upper band of Rs 765 a share. With the dividend received (Rs 46 lakh) and balance holding he will have a gain of 431%. Non Resident promoter Rakesh Gangwal, who invested Rs 37.59 cr, would be getting about Rs 210 cr for offloading a small portion of his holdings through the OFS. With the dividend received (Rs 192 cr) and balance holding (worth Rs 4656 cr), his gain works out to 13355%! The promoter company IEL invested only Rs 15.54 cr against which it will receive Rs 252 cr from part-offloading of its holdings through the IPO. On an investment of Rs 15.54 cr, IEL has already got a dividend of Rs 1789 cr and post-OFS it would have the largest stake in the company valued at Rs 11754 cr on the upper band. All put together, IEL makes a gain of 88687%.
Other major selling shareholders forming part of the promoter group Shobha Gangwal, who holds 10.48%, and Chinkerpoo Family Trust, which controls 17.11% of the present equity, too seem to be realizing far more than their investment cost through the OFS. However, the 592-page offer document does not provide the cost of holding of these selling shareholders. When requested IAL’s senior management to provide the average cost of holdings, it is asking this analyst to work out from the capital history! If it were a direct allotment, anyone can calculate the average cost. But, if the shares were acquired through `scheme of merger’, `conversion of CPS’, `transferred through gift deed’, etc., how can an outsider calculate the cost of such holdings? One wonders, how the watch dog SEBI is allowing IPOs without disclosing the cost of the selling shareholders.
Bonanza to Promoters |
||||
PROMOTER NAME |
Rahul |
Rakesh |
InterGlobe |
Acquire |
|
Bhatia |
Gangwal |
Enterprises |
Services |
PRE-IPO HOLDING |
3046000 |
63602000 |
156940000 |
10000 |
AVE. COST PER SHARE |
144.37 |
5.91 |
0.99 |
215.02 |
INVESTMENT COST (Rs Cr) |
43.98 |
37.59 |
15.54 |
0.22 |
OFFER FOR SALE QTY |
3006000 |
2741287 |
3290419 |
0 |
OFS AMT @ 765 (Rs cr) |
229.96 |
209.71 |
251.72 |
0 |
DIVIDEND RECD (Rs Cr) |
0.46 |
192.09 |
1,788.95 |
0 |
AMOUNT REALISED (Rs Cr) |
230.42 |
401.80 |
2,040.67 |
0 |
BALANCE HOLDING |
40,000 |
60,860,713 |
153,649,581 |
10,000 |
BALANCE VALUE @ 765 (Cr) |
3.06 |
4,655.84 |
11,754.19 |
0.77 |
PROMOTERS’ GAIN (%) |
431 |
13,355 |
88,687 |
256 |
Concerns
The InterGlobe group looks strange in many ways. Whereas IAL has put up a commendable show, more than a half of the 60-odd companies controlled by the promoters are in losses. The main promoter-company, InterGlobe Enterprises, controlled by Bhatias has capital of less than Rs 1 cr but its reserves are worth more than Rs 1010 cr! This company netted a profit of Rs 691 cr in fiscal at a whopping net margin of 89.6% on a turnover of Rs 772 cr. Another promoter-company, Acquire Services, has reserves close to Rs 400 cr against a capital of just Rs 0.21 cr. This company too has netted a margin of more than 75% in the last two fiscals. What business are they engaged in to earn such an incredible NPM? Instead of clarifying their current businesses, IAL’s professional management is quoting the `objects’ of the Memorandum of Association of those companies!
In the case of IAL, even while the company’s strength lies in the experience of the two promoters in aviation industry, they have chosen to remain out of the core operational (executive) team despite having a stake of more than 42% each. Interestingly, Rahul Bhatia who was earlier managing director of IAL resigned from that post only on June 23, 2015. He has now become a non-executive director. Rakesh Gangwal too has been inducted as non-executive directors only on June 25, 2015. Also, strangely, none of the promoters was present in the IPO road show, at least in Mumbai – the financial capital of the country.
Though holds just a non-executive directorship, Rahul Bhatia and his relatives up to a maximum of 10 are entitled to the value of the air tickets or reimbursement and an additional amount for his personal incidental expenses equaling the value of the tickets utilized by him and his relatives. As a non-executive director, Rakesh Gangwal and his relatives to a maximum of 10 too are entitled to `unlimited air tickets’ or reimbursements in respect thereof for the value of the air tickets. Why should a public company gift so much to so many relatives of the non-executive directors?
IAL’s present professional management is trying to create an impression that they are fully competent to run the company independently. But, the fact is, without the active support of the promoters who are well entrenched in the aviation and travel industry, the professional management can hardly put up a decent show.
Interestingly the president of the company, Aditya Ghosh (40), himself has been in and out of IAL’s board. Ghosh, a lawyer by profession, was earlier the group counsel for Interglobe Enterprises. He was inducted to IAL’s board in May 2007. The offer document claims that he took on the role of IAL’s President in August 2008 but the document does not reveal when he relinquished the President post. According to the offer document, Ghosh was appointed as whole-time director of IAL in April 2011 which he resigned in November 2013. In April 2014 he was once again appointed as whole-time director and was re-designated as President and Whole-time Director in June 2015.
While the president has been in and out of IAL’s board in last seven years, the CFO of the company has joined only in 2014. No wonder, they do not remember even basic financials like the company’s present equity!