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Mar 21, 2012, 05.39 PM IST | Source: CNBC-TV18

No equity value in Kingfisher business: Veritas

Neeraj Monga, EVP at Veritas Investment Research said that there is no equity value in Kingfisher Airlines.

Cash-starved Kingfisher Airlines , which is currently reeling under massive debts, is facing collapse as banks have refused to lend any further. The carrier is set to shut all international operations by April 10.

Neeraj Monga, EVP at Veritas Investment Research said that there is no equity value in Kingfisher Airlines. The only way the equity value can come back is if there was less debt. For that to happen, the business has to go into bankruptcy or restructuring and debt has to decline.

He further added, ďAs and when Kingfisher finally does shut down, it will also be better for some of the other aviation stocks. Perhaps, some pricing power might come back to the market for the airlines that do stay afloat.Ē

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

Q: What are your thoughts on Kingfisher Ė do you have a price there and what kind of value you think should be attached to that?

A: We have no price target for Kingfisher. We have always believed ever since we initiated coverage on the stock or wrote that accounting based report that the company is effectively insolvent. So, we think the valuation is irrelevant because there is no equity value in the business.

Q: A lot of people are talking about a potential turnaround on curtail services over the next few months. Do you expect to see such kind of a turnaround given Kingfisherís current resources?

A: It appears that they are shrinking their business operations and they continue to shrink as time passes. The issue is the business was setup with an expectation of being an international full service airline. Over time, it has become a domestic carrier serving higher end customers. It is not clear because they keep on missing flight schedules and are not able to pay their staff. Can they turn it around again? One has to see the operational details of the new plan. Whatever has happened over the last six months suggests that it is unlikely this business can be turned around and that it will be shuttered.

Q: What is the end game because the management has been talking about examining term sheets with prospective investors local and global; the government is trying to give them an ECB window to borrow funds. Do you think investors will get into such a beleaguered entity?

A: I donít believe so. Anybody who looks at the business can clearly see that there is no equity value in this business. The only way the equity value can come back is if there was less debt on this business. For that to happen, the business has to go into bankruptcy or restructuring and debt has to decline. The current management will lose equity ownership of the business that instant. A new entity will then come in and thatís how the whole business will be recapitalised. But as of today, I donít see any hope of that happening anytime soon.

Q: The management has been clear about the fact that they are not going to lean on other group companies in order to bail Kingfisher Airlines out for e.g. United Spirits. But do you think that could be the likely direction of things? The government as well has made it clear that the promoters are now solely responsible for the situation of the company.

A: When we had published our report in September, we had already highlighted that a significant proportion of various holdings of UB Holding had already been pledged to the banks in order to secure the loans of Kingfisher.

All those loans have become non-performing assets over time. The company doesnít have the cash flow to either pay interest or principal, leave alone pay salaries etc that they has not been paying. So I donít believe there is any room available at any of those businesses. When the management says these businesses will not support Kingfisher going forward, they are speaking the truth because there is no room.

Q: Is it likely in your eyes that Vijay Mallya loses control over any of his other liquor businesses to fund and keep Kingfisher afloat either because of pledges getting converted or him trying to examine a strategic sale of one of his companies to raise capital to be able to pump into Kingfisher?

A: Itís not clear how the entire restructuring process in India is likely to unfold. But when this company does shut down, it will be unlikely that the chairman would want to sell another business and fund the cash consuming business. I donít think that is likely. So that is not going to happen.

Q: What do the banks do now; they have been waiting by patiently having classified Kingfisher loans as NPAs. Do they throw more good money after bad or do they just take the call that money is lost and just treat it as a bad investment?

A: I think they will have to treat it as a bad investment. Whether they lend more money to the company remains to be seen. So far, it appears that they donít want to do that. This is a good thing for the shareholders of the banks and the Indian banking system in general.

As and when Kingfisher finally does shut down, it will also be better for some of the other aviation stocks. Perhaps, some pricing power might come back to the market for the airlines that do stay afloat.

Q: Is it shutting down or is it going the distress sale way because there has been talk about a lot of interesting parties including some influential PE players looking at Kingfisher Airlines. So maybe not a great price for minority, all key shareholders but does it look like it could get sold?

A: My best guess would be it cannot be sold.

Q: Why is that?

A: Given the fact that it has done equity value, why would somebody want to buy its poor brand positioning and massive obligations? They need to get off all these obligations whether they are operating lease obligations on the aircraft and debt servicing obligations associated with the banks. Perhaps, they are now using only 20 planes for their schedule. The airline was setup for 65 aircrafts and around 400 flights a day. So, they have massive employee base and unpaid tax dues. Why would anybody want to enter into this mess at this time?

Q: You are training your guns on some of the Indian companies with bad balance sheets first Reliance Communications, then Kingfisher, more recently DLF. What is the next Indian company you are writing a report on?

A: I cannot share that information. But Veritas Investment Research is focussed on covering the top PSU 100 stocks over time. During this year, we expect to write on six or eight of the largest capitalisation companies in India. Our basic premise is to review governance standards, accounting standards, disclosures, consistency and comparability of disclosed financial statements over time, operational effectiveness of the organisation as well as management and do they deliver what they promise to the market. So these are some of the facts we focus on. Ultimately, we try to provide a holistic valuation of opinion on the stocks that we write on.

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