Notwithstanding Global Vectra’s plight (current price Rs.20 as against its IPO price of Rs 185) Swajas Air Charters vie for a price of Rs.90 to Rs.100 discounting its latest earnings 38 to 42 times! How one justifies such a steep pricing especially when the deflating rupee and rising oil seriously threaten profitability?

OFFER AT A GLANCE
Name	Swajas Air Charters Ltd
Offer Quantity	37.5 to 41.7 lakh shares of Rs 10 each
% on Total Equity	25% to 27%
Offer Price	Rs 90 to Rs 100
Offer Amount	Rs 37.50 cr
Application Quantity	60 & Multiples of 60
Offer Opens	September 26, 2011
Bid/Offer Closes	September 28, 2011
Rated By	ICRA
Rating	2 out of 5
Lead Managers	Aryaman Financial
Registrars	Cameo Corporate

 

Issue Objective 

The proceeds of the IPO (Rs.37.5 cr) are proposed to be utilized towards part funding the acquisition of a helicopter & an aircraft, setting up of a hangar facility to broaden the company’s MRO (maintenance, repair and overhauling) services and purchasing an office facility, besides funding working capital and general corporate requirements.

 

Parentage

The 2008-incorporated Swajas Air Charters Limited (SACL) is the maiden public venture of its promoters R. Jayakumar and Christopher Ian Want.  The 46-year-old promoter-managing director Jayakumar is a commerce graduate who claims to have about 20 years of experience in aviation Industry covering scheduled and general aviation. He was reportedly employed in NEPC airlines as Head-Commercial for a period of 5 years. While the Indian promoter takes care of business development and marketing aspects, the foreign promoter, 40-year-old Christopher Ian Want of USA, is said to be a pilot by profession.

Though only 3 years old, SACL has taken over the assets and liabilities of Swajas Air Charters, an air craft brokerage proprietary concern of the Indian promoter which he was operating from 1996.

 

Business

SACL is a non-scheduled airline operator offering services such as general air charter, off-shore transportation, medical evacuation and maintenance, repair & overhauling (MRO). The services provided range from corporate travel to emergency medical services as well as from aircraft management to maintenance and technical support. SACL predominantly operates in South India and derives a major portion of its revenue from general air charter and off-shore transportation. It now intends to enhance its services to include air ambulance and MRO.

 

Prospects 

SACL proposes to buy one Bell 407 helicopter and also one PC Pilatus aircraft with which the company intends to commence air ambulance services. Further, the company has planned to expand its fleet strength by taking more aircrafts/helicopter on dry lease.

On the positive side, the company has integrated operations covering air chartering, MRO and O & M of third party aircrafts and has established strong client relationship. Thus it is in advantageous position to capture the high-growth medical tourism segment through its air medical evacuation facility and also gain access and dominate the fast growing market for MRO in the southern region.

Nevertheless what would worry SACL is the weakening Rupee which could play havoc on the company’s prospects.  The company pays most of its aircraft/helicopter lease rentals in foreign currency and also imports a significant portion of the spares, special tools and equipment which are subject to foreign currency fluctuations.

 

Valuation 

In fiscal 2011, SACL clocked Rs.32.63 cr revenue and Rs1.34 cr profit which were the highest in last three years.  The pre-issue reserves of the company stood at Rs.2.52 cr without netting intangibles (miscellaneous expenditure) Rs.4.40 cr. Compared to the poor reserves, the IPO premium of more than Rs.30 cr certainly looks steep.

SACL is comparing itself with Global Vectra which went public exactly five years ago (September 2006). This company collected a share premium of Rs 49 cr from the public but, today its accumulated losses have mounted to over Rs.93 cr and the scrip is languishing 89% below the IPO price!

SACL’s offer at a band of 90-100 discounts its latest earnings 38 to 42 times which could worsen further if company does not de-risk the potential foreign exchange loss arising out of the deflating rupee.

How Swajas Air compares with its Peer
SCRIP	PRICE	M-CAP	P/E	P/BV	P/FV	P/R	OPM
(22-Sep-2011)	(Rs)	(Rs Cr)	(x)	(x)	(x)	(x)	(%)
Global Vectra	21	29	-0.8	-1.0	2.1	0.1	8.6
Swajas Air -Hi Band	100	150	42.9	6.7	10.0	3.4	7.6
Lo Band	90	139	38.6	6.0	9.0	3.1

 

Exiting Shareholders’ Cost

Of the pre-issue equity of Rs.11.25 cr the two main promoters hold only Rs 4.91 cr (43.6%) whose average cost is between Rs.5.78 and Rs.6.52 per share. In 2010, the company made preferential allotments at Rs.350 a piece whose cost was reduced in February 2011 to Rs.87.50 through a bumper 3:1 bonus issue. Though the entire pre-issue equity is under lock-in for one year and the promoters’ holding to the extent of 20% of the post-IPO equity is locked for three years, one can expect heavy selling once the lock-in lapses as more than 56% of the existing equity is held by non-promoter groups whose cost acquisition is not even one-third of the public. 

 

Investment Banker’s Track

The Chennai-registered SACL’s IPO is managed by the Mumbai-based Aryaman Financial which brought out nearly three dozen companies during the unprecedented primary market boom in the mid-nineties. Of these, as many as 28 companies are not traded or traceable today! Of the 59 issues that Aryaman managed in last 16 years, only nine are currently quoting above their offer value.

 

Concerns

• Since the business is capital intensive, high fleet utilization is critical for profitability.
• Compliance with regulatory requirements including safety is critical to ensure smooth operations.
• Profitability is exposed to volatility in fuel prices and wage inflation, although price variability clauses with some of the customers mitigate the risk to an extent.
• Small scale of operations (in terms of fleet strength) which limits scale economies and financial flexibility.
• Depreciation of Rupee against foreign currencies may have an adverse effect.
• Orders not placed for 50% of the machinery (in value terms) of which 94% to be imported.
• Extensive focus on just one region (South).
• Unhealthy competition from the larger players.
• Increasing Fuel Prices.

• Negative operating cash flow.
• Yet to pay dividend, present bottom too small to service the post-issue capital.