No logic behind SBI giving KFA money: Veritas Invest

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No logic behind SBI giving KFA money: Veritas Invest

Neeraj Monga, executive vice president and head of research, Veritas Investment Research tells CNBC-TV18 that the rate at which Kingfisher is losing money in the last two quarter, makes it unviable.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets Kingfisher Air BSE | NSE 31/05/12 Are Mutual Funds betting on Kingfisher Air? Other Stocks in this news State Bank of India |

Time seems to be running out for  Kingfisher after the DGCA pulled up the ailing carrier to come up with a realistic flight schedule saying it cannot compromise on safety. Civil Aviation Minister Ajit Singh has ruled out any bailout plans for KFA as it is a private carrier. I-T authorities had earlier frozen the airlines bank accounts.

Neeraj Monga, executive vice president and head of research, Veritas Investment Research tells CNBC-TV18 that the rate at which Kingfisher is losing money in the last two quarter, makes it unviable.

Also Read: KFA flies higher on a likely Rs 1000 cr infusion from SBI

He doesn't see Kingfishers problems ebbing. "Any business that is burning through that kind of cash cannot survive and that's exactly what you are seeing at Kingfisher."

Even though bank lenders are asking promoters to step in and do something, Monga says they are left with few options to save the carrier.

Below is an edited transcript. Watch the accompanying video for more.

Q: How have you read the recent development in light of the situation as it stands for Kingfishers cash availability? What would your call be on the stock?

A: Our call hasn't changed since we published our report in September. We don't believe it's a fundamentally sound company. We do not believe it is generating the underlying free cash flow to deleverage the balance sheet in the Indian airline industry as per the company's own admission capacity growth outstripping demand growth. As long as that happens there will be no pricing power.

In addition to that the depreciation of the rupee has impacted fuel costs significantly and the airline industry has gotten some relief in the form of the government allowing them to direct import of fuel but that also has it's own challenges in terms of being able to execute it.

I don't see the challenges going away for Kingfisher. If you read through the most recent quarter, the company burned through approximately Rs 500 crore in cash on top of approximately Rs 600 crore in the previous quarter. Any business that is burning through that kind of cash cannot survive and that's exactly what you are seeing at Kingfisher.

Q: Some OCD's got converted but the management has been clear that they will not lean on any other group companies in order to help Kingfisher out. What kind of options do you think are available to the promoters at this point because the lenders have been leaning on them in order to step in and do something?

A: There are very few options available to the extent we are talking about UB Holdings. UB Holdings has pledged its entire asset base to guarantee the debt outstanding at Kingfisher and to guarantee the liabilities of Kingfisher.

Kingfisher on its own has also pledged its entire infrastructure that it has at its disposal to the banks in order for them to stay in operation. But for any business to work in the longer-term, liquidity is paramount and liquidity comes from free cash flow. The company can't generate it. So the problem is not going to go away and the promoters when they say that they have no more room to help Kingfisher, I believe you are telling the truth because what they own is already pledged.

Q: The government has very clearly said that they will not look for Kingfisher to go under but they will also not look for any kind of bailout either from private industry players or from the government itself? What do you think the way forward for Kingfisher could look like?

A: Given the competitive scenario in India and given the problems faced by all airlines, Kingfisher is in a very difficult spot. I believe they would be the first to acknowledge it and if you look at the company's presentation they do try to show and present a picture that in terms of benchmarking their performance to competitors they are doing better than them. It's very difficult.

State Bank of India had its standalone debt rating downgraded by Moody's and Moody's has also put the credit rating of other Indian banks under watch. The Government of India had to step in to recapitalise SBI. If SBI is going to take that money and once again relend it to Kingfisher on which it already has approximately Rs 1,500 crore of non-performing assets (NPA) outstanding, I don't understand the convoluted logic of all these shenanigans. It would be best for the banking consortium to just let Kingfisher be. If its management cannot put money in, I am not sure why banks are throwing good money up to that.

Q: Do you think it's possible for Kingfisher at all to secure any fresh equity given its background? With respect to earnings, what kind of a trajectory do you expect KFA to see because this time as well it's doubled its losses and the debt does not seem to be reducing at all?

A: I don't believe the situation will turnaround over the next three-six-nine-12 months at all. The problems remain as the company's revenues are way less than its cost. First of all, the company has to come out with a cash burn rate of Rs 500 crore of the last quarter. That's going to be a difficult task to accomplish. Once that happens, then you can start thinking of what else needs to be done. But I don't think much can be done. The business was positioned to be a full service global high-end premium airline and now it's shrinking to be a regional low-cost carrier. Clearly the business plan doesn't work.