Mallya battles to keep Kingfisher flying
News that Vijay Mallya's struggling Kingfisher Airlines has suffered yet another record loss causes hardly a ripple any more.
June 13, 2012 / 15:30 IST
News that Vijay Mallya's struggling Kingfisher Airlines has suffered yet another record loss causes hardly a ripple any more.
What seems to perplex investors more is how India's self-styled "King of Good Times" - owner of a 311ft yacht, a Formula One racing team and a cricket club - has kept his cash-strapped carrier flying despite the headwinds it faces.More News From Financial Times
Kingfisher Airlines cuts international operations Kingfisher scraps international flights Heineken set to gain control of UB United Spirits profits hit by India taxes Grim trading for Kingfisher and Halfords Mr Mallya, a flamboyant billionaire liquor baron and member of India's upper house of parliament, enjoys a high political profile. "If market forces were allowed to operate in India I can guarantee you that Mallya would have shut down ages ago," says the head of a competing Indian airline.Kingfisher has never turned a profit since it was founded in 2005 and its market share has shrunk, from the second largest to the smallest among India's six carriers.Mr Mallya's friends say he has performed a miracle keeping the airline aloft, considering its net debt of about USD 1.5bn, by scaling down its fleet and pruning routes to a handful of profitable links between major cities.Suhel Seth, managing partner of Counselage, a New Delhi-based marketing consultancy, says Mr Mallya "is too smart to fail".He "knows how to work the system and to my mind he was worked it to the advantage not only of himself but even to his customers," Mr Seth says.However, over the past six months Mr Mallya's troubles have begun to spread from Kingfisher to other segments of his multiillion-dollar empire.United Breweries Holdings, his aviation-to-brewing conglomerate, which generated about USD 4.5bn in revenues in the fiscal year that ended in March, has exposure to Kingfisher of some Rs122bn (USD 2.2bn) - mainly guarantees for banks loans and aircraft leases for the carrier.Analysts fear the impact on the group's beer and spirits business, which reported last month that net profits plummeted more than 80% in the first three months of 2012, despite substantial on-year growth in revenue.Net profit at United Spirits, the world's largest spirits company by volume, tumbled 83% to Rs100m in the first quarter, while United Breweries, India's biggest beer producer by revenue, posted an 82.5% fall in net profit."The [alcohol] business has been a cash cow for the company for a long time and I think this cash has been deployed in non-performing aviation assets," says Deven Choksey, a Mumbai-based analyst."I think the shareholders have knowingly [or] unknowingly supported this type of move of promoting or supporting Kingfisher - [but] it's a lesson that we cannot be building a business on the strength of other businesses that are successful."Some analysts suggest that Kingfisher's troubles have distracted Mr Mallya from opportunities in his core businesses, noting that as he focuses on the carrier, his competitors are expanding their reach. Diageo, for example, last week announced a �1bn investment to expand production of Scotch whisky.Deals involving Mr Mallya's empire have been the subject of constant speculation. Mr Mallya himself told the Financial Times in November that he was nearing agreement on a USD 250m equity infusion, though that has yet to materialise.There was also talk of raising cash for Kingfisher by selling a 13% stake in United Breweries to Heineken, which owns 37.5% of the company but that has not gone through yet either.Investors have been unsettled by the spillover of Kingfisher's financial woes into United Spirits and United Breweries - which generate combined annual sales of about USD 3.5bn."The problem is that we don't know what is going on: there is a lot of uncertainty and this massive exposure UB has to Kingfisher is extremely destabilising," says one large investor in Mr Mallya's liquor businesses.Nevertheless, Mr Seth says it would be a big mistake to write off Mr Mallya, an industrialist who embodies the spirit of the "New India" - rich, confident, and connected.Ajit Singh, India's aviation minister, agrees: "Vijay Mallya is an astute businessman," he says, though is quick to add that Mr Mallya's future depends on his ability to raise fresh funds.The government says it is considering letting foreign airlines invest up to 49% in domestic carriers - a move analysts and Mr Mallya say would help turn things around. Foreign carriers are currently barred from any investments in India.But given the decision-making paralysis in New Delhi, such a law may take more time to go through than Kingfisher has.And regardless, says aviation analyst Sharan Lillaney, Mr Mallya "will have to cut debt and make the airline look a little more attractive" before any global airline would decide to invest. "It's not a simple operation."Still, Mr Mallya has been counted out before, and somehow, he's managed to keep the good times rolling. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
