Kingfisher Airlines is a bankrupt company: Veritas Invest

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Vijay Mallya is flying out from the low-cost aviation space in what is seen as a last attempt to salvage the debt-ridden Kingfisher Airlines .

Moneycontrol.com first broke the news on August 1, about Kingfisher's exit strategy aimed at shifting focus to its full service operations, which has been struggling to grow in market share. 

While its low-cost rivals like Indigo and SpiceJet were steadily narrowing the gap.

Kingfisher Airlines is a bankrupt organisation, said Neeraj Monga, executive vice president and head of research at Veritas Investment Research. "It has been trying hard to raise money via every means possible," he added.

With its losses mounting, Kingfisher Airlines has been struggling to foot its fuel bills, which led to its dozen flights being grounded on a single day in July.

Monga said the airline has been buring cash at a rapid rate. "Nearly 23% of the airline is owned by banks," he said adding, "UB Holding needs to find rights issue externally."

The company has got shareholder approval for a Rs 2,000 crore rights issue. Mallya said the previously approved GDR issue could not be launched due to various external environmental factors such as the high crude oil prices.

However, Monga feels, it is difficult to believe that KFA rights issue will go through.

According to Monga the cash-strapped airlines may need Rs 3000-4000 crore to get itself back on its feet.

Below is the edited transcript of Monga's interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying video.

Q: What is your 12 month outlook on some of these aviation stocks? In terms of prices do you see them headed lower?

A: I don't cover Indian aviation stocks but we have done work on Kingfisher Airlines. We have specifically referenced Kingfisher's accounting and operations. From overall macro economic standpoint it seems that aviation stocks are having a tough time given rising inflation and oil prices in India.

Q: Yesterday the chairman of Kingfisher Airlines said that the concerns of Veritas are very overdone and they will repair their balance sheet with a rights issue and UB Holdings where the stock is pledged is not a matter of concern at all. How do you read these statements from the management?

A: The management is there to put the best foot forward. I guess the management finds itself pushed into a corner given all the problems at Kingfisher Airlines. They have put their entire investment and credibility at stake by investing in Kingfisher through UB Holdings.

I do believe that Kingfisher Airlines is essentially a bankrupt organisation. It has significant cash flow shortage and management accepts it as such. After our report was published there has been significant noise in the media.

Financial institutions had been putting management under pressure to issue equity and management has been trying to do that. Recently the CFO of UB Holdings was quoted saying that they do need equity urgently.

In the most recent document issued by the chairman of the company at the Bombay Stock Exchange, he outlined plans for raising more equity both in the forms of a rights issue. The company is also asking the banks to enhance their working capital trade limits to sustain operations.

UB Holdings' value of investments is approximately a billion dollar around Rs 4,500 crore or above and the guarantees in company's own words is that they have provided to the banks on behalf of Kingfisher and accept Rs 9,000 crore. Unless Kingfisher comes out of the hole that it is in UB Holdings is also under pressure.

Q: Do you think rights or enhancing the working capital limits will do it though for Kingfisher, or do you think they will be pushed against the corner to do something more dramatic some kind of equity stake sell?

A: The airline is burning cash at a rapid rate and it is no wonder that they are asking banks for additional working capital. The rights issue is a very interesting angle in itself. Approximately 23% of the company is now owned by the banks that are already on the hook for approximately Rs 5,000 to Rs 6,000 crore of debt.

Do those banks really want to subscribe to rights issue for the Airline? Do the banks really want to be a partner with the Airline? This is because they are both a lender to the Airline and an owner of the Airline now. UB Holdings will have to find capital externally for the rights issue to succeed.

The company's market cap is approximately Rs 1,200 crore or less right now, so how much equity will they have to issue in order to get themselves out of this cash hold that they find themselves in is anybody's guess. The company may need upwards of Rs 3,000 to 4,000 crore but where are they going to get that money? I find the situation of Kingfisher really difficult.

Q: Just one quick word on the Reliance and ADAG Group where you have also had some scathing comments to make. Are you as sceptical about some of those group names as well?

A: I am not sure if scepticism is the right word to use in terms of our research. In our research on Reliance Communications we had outlined that company had issued aggressive accounting to boost the presentation of its results. We believe the underlying business operations were under duress compared to the presentation in the financial approach. That has come to perhaps in the marketplace.

Our expectations of company's EBITDA for their upcoming financial year is approximately Rs 6,500 crore which would be at the lower end of Bloomberg estimate for the company on the consensus side. If you give a six multiple on that EBITDA and I don't believe that company deserves bigger multiple you have an approximate enterprise value of Rs 38,000 crore.

With approximate net debt of Rs 32,000 crore there is only Rs 6,000 crore worth of equity on 206 crore shares. That works out to less than Rs 30 in equity value per share. The organisation is talking about selling off Reliance Infratel and some other assets but the fact is once those assets are sold debt needs to be paid off.

An asset selling itself never adds value to the enterprise unless the assets being sold are undervalued in the marketplace. To me it seems these assets in India are already overvalued given the competitive intensity in the marketplace as well as the rising inflation and depreciating currency.

I am not sure any foreign bidder would be actually willing to step in at this time and pay a premium for those assets. Given the macro economic outlook and global capital flows, the Indian rupee could depreciation another 10% ahead. This is a tough time for all the debt-laden Indian companies.