In a freewheeling interview, Aditya Ghosh president and wholetime director, IndiGo, discusses the controversial 5/20 rule, the government's capping of fares and the company's plans to focus on its mobile applications and website.
Referring to the foreign investments Indian aviation players seem to be wooing these days, Aditya Ghosh president and wholetime director, IndiGo says his company never needed the crutches of foreign direct investment (FDI) to help run the company.
Speaking to CNBC-TV18's Shereen Bhan, Ghosh says with its efficient cost structure and steely focus on its own brand, the company has been able to create a story that is tough to replicate.
In a freewheeling interview, Ghosh discusses the controversial 5/20 rule, the government's capping of fares and its plans to focus on its mobile applications and website.
Below is the verbatim transcript of the interview..
Q: Let me start by asking you about a conversation that I had with your competitor Ajay Singh and he said that there is no reason why Indigo should be valued at over Rs 25,000 crore, whilst SpiceJet should be valued at about Rs 2,000 crore and the whole sector is going to be rerated. That comment and the possibility of the Indigo IPO and the valuation that you guys hope that you will be able to extract has got all the airline stocks excited. Do you believe that the sector is poised for a rerating.
A: We have always been very bullish about India, the aviation sector in India and that is not in the last one or two months because we don't play this game for the last one or two months. We ordered the first 100 airplanes 10 years ago. So, even 10 years ago we believed in the India story and the fact that Indian aviation will grow at a tremendous pace. The only thing probably I have a different point of view is that not every browser is Google, not every airline is Indigo.
Q: So, you don't buy the rerating argument, is it?
A: Each person to his own and each person and whether it is an investor in an airline or for that matter investor in the auto industry there are only a few players who get it right. Not everybody who makes motorcycle is a Bajaj Auto, not every pharma company is Sun Pharma and we have been able to create a very unique story which cannot be replicated and that is what makes us so different and what we have been able to prove for the last seven years is that while the opportunities open up for everybody, while the challenges are common we actually always come out ahead. And not in just one or two quarters or one or two weeks but actually year after year after year for the past several years.
Q: You have got a seven year track record on your side. But if I can talk to you about the issue that hasn't gone down well as far as the market is concerned and that is to do with the kind of dividends that you have actually paid out. Do you now in hindsight feel that it was wrong for the promoters to have extracted. There is nothing illegal about it, but ahead of the Initial Public Offering (IPO) to have extracted the kind of money that you have extracted by way of the dividends taking the net worth to negative, that is of course the risk factor that you have mentioned as far as your red herring prospectus is concerned. Do you in hindsight regret that decision?
A: Not at all. We pay dividends with lot of pride. We have paid Rs 3,500 crore of dividends over the last four years. In these last four years there was also a year, 2012, when we made a profit of Rs 140 crore, we generated close to Rs 900 crore of cash and even as a private company we did not pay out a dividend. So, our view on dividends on cash is that we are profitable, we are cash generating, every year we will sit down and see what is our cash requirement, what is happening with the competition and the surplus cash we dividended it out because it is our strongly held view that airlines, or for that matter, any organisation is owned by the shareholders, shareholders put in money for a return and we as a management (interrupted..)
Q: There is no argument with that.
A: And even on the negative net worth thing on that particular day, on June 30 technically and temporarily the net worth goes down by Rs 139 crore. From July 1 the cash starts building up again and the negative net worth becomes positive. And two more facts. On June 30 we had Rs 3,600 crore of cash in our book and Rs 140 crore is 20 days worth of profitability for Indigo. We are now three and half months away. So, it is a non-event for us.
Q: I know you have said this in the past as well. Over the last couple of days that this is a non-event. But you have also said that you don't intend putting in an official dividend policy. Why is it that? Because it would give people more clarity? Do you intend to continue to give out dividends in the manner in which you have? Why wouldn't you provide clarity to the markets now that you will be a listed entity?
A: We are actually focussed on a sustainably profitable business. While in the past most years we have paid out a dividend. As I said there was a year where we did not and we took this very pragmatic view. Even going forward if we say that we are going to pay out a dividend every year then it will limit us from taking decisions which are in the best interest of the business which we did in 2012. So, what we will do going forward if the past predicts the future that we will be similarly shareholder focussed overwhelmingly shareholder focussed, we hardly have any capex requirements.
Q: Help me understand that because I have always heard you say this twice that you hardly have any capex requirements. You are ordering 430 aircrafts, another risk factor that you talk about in your prospectus is that you may incur a significant amount of debt in order for you to be able to acquire the 430 order that you have placed with Airbus. So, help us understand what the debt position is going to be and then you say that you will not require cash?
A: So, when lawyers write risk factors you take the most conservative view. I have been a lawyer in the past. So, there is no capex requirement really because most of our planes overwhelmingly are on operating leases. Our capex requirement is IT expense, some ground services equipment. Our total capex requirement is about Rs 40-50 crore a year other than aircraft. For aircraft we are doing operating leases. Rs 40-50 crore versus the Rs 10,000 - 11,000 crore of our total operating cost.
Q: So, you dont see debt going up significantly?
A: No, we don't because for the next foreseeable future, for the next 5-7 years we will again do primarily operating leases. So, we don't see debt going up. Even in the past, in the 9 years that we have been around, our non-aircraft debt has been zero. We have never taken any working capital loans, never taken any non-aircraft debt.
Our total interest expense last year even on the debt that we have was something like USD 19 million. That was our total interest expense last year. The primary proceeds that will come from this IPO will shave that debt by another 30 percent. So, the interest expense comes down even further. So, when you take the total operating cost versus our interest expenses - look at our EBITDA.
Q: Let me talk to you about the future and I want to talk to you about foreign direct investment (FDI) because you have taken a position saying that we are not in need of foreign direct investment, we are not looking at bringing a partner onboard despite the fact that everybody in the business has been trying to woo you and very publically so. Is this no for now, is this no over the next five years, is this no forever?
A: Definitely no for the foreseeable future because we have never considered it. We have never considered it because we never needed the crutches or the walking stick of somebody else. We are standing up on our own two feet and running.
Q: That was an oblique reference to the fact that your competitors needed crutches to fly on, not walk on.
A: The way I look at it is we have a strong track record, we are cash generating, we are profitable, we don't need that foreign direct investment into us.
Q: Is there the possibility of regional connectivity becoming a bigger play for you and that then changing the way you strategically look at this?
A: If you look at three buckets of routes in India, metro to metro, metro to non-metro, non-metro to non-metro, in non-metro to non-metro top 10 domestic routes in India, we are 54 percent of the Indian market. So, in that sense we are actually the biggest regional player. The only thing we have a problem with, problem for us, may not be for somebody else, is we don't want to add complexity and add new types of airplanes and new types of spare parts and training and cost structure goes through the roof.
Q: Let me talk to you about your international expansion plans and we do not know what happens to 5/20, whether 5/20 stays, comes back in some sort of frankenstienian form or format. You have publically stated that you are not.
A: Completely agnostic to it.
Q: You have not said that you are completely agnostic to 5/20, let us be very clear about this.
A: I am telling you now. I am completely agnostic to it.
Q: You have not been completely agnostic to it. You have very categorically stated that there should be a level playing field and as part of that level playing field for a Greenfield airline, should have to comply with the 5/20 rule.
A: My view is different. As far as 5/20 is concerned, I am completely agnostic to it because today there is nothing that stops us from flying international. If we wanted to fly more international, we could have. Similarly, or by corollary, if other players want to fly more international, in a strange way it benefits us, because the domestic market becomes even more open to us. Let us get the market to determine what is best for a particular operator. Some operator may say I am going to do only international, some operator may say I am going to do only regional and some may say I am going to do a mix of both.
Q: So, where are you going to be as far as this mix of both is concerned between domestic, regional, international?
A: By far, the priority is domestic, by far. The world is coming to India to take opportunity over here.
Q: So, are we to understand that you would perhaps now scale back, slow down your international expansion plan?
A: Actually we slowed down quite a bit. We used to be as much as about 85 percent of our total revenues used to come from domestic. Now it is about mid-90s. So, that basically means that we have actually scaled back. And it is not because we have scaled back, we have not even dropped one flight. We have actually increased flights. The domestics have grown at such a fast pace, that as a percentage, international has come down. And that again proves the same fact that I have been going on and on about for the past 10 years. Domestic Indian aviation is growing at a compounded annual growth rate (CAGR) of 9.5 percent of the next 20 years, this is a market to be in.
Q: You have done a great job as far as costs are concerned and you have publically stated that you have been able to bring cost down literally to the bone. How much more can you eke out as far as costs are concerned and I ask you this also in the context of fuel costs because that is about 40 percent of your operating costs today. With the Neos coming in Q4 I believe that could further impact your fuel cost, by how much and what kind of possibilities does that open up?
A: What you have raised, if there was one question as to why should an investor invest in Indigo, the answer to your question lies in that. 50 percent of our cost is fuel, the Neos start bringing in 10-15 percent less fuel burn. 10-15 percent of 50 there is 4 - 7.5 percent margin improvement in every Neo that comes in. It is a game changer in our business. By 2018 March which mean two and half years from now a third of our fleet - we will be flying a 154 airplanes at that time - a third of our fleet has already become the Neos, by 2021-2022 almost the entire fleet has become the Neos. So, we have actually fundamentally brought our cost structure down from being the very best in the world and that is what really brings about this confidence to us as well as probably a new investor.
Q: There has always been this talk about Indigo's sale and lease back arrangement. Explain this to us for the benefit of the lame viewer because there has always been inflated profit and so on and so forth, sale and lease back, that is what working as far as Indigo is concerned. Explain that to us once and for all and let us rest this case?
A: For us an airplane is like a factory. Just like a motorcycle company sets up an assembly line to manufacture motorcycles we buy airplanes to run our business. Just like you finance an assembly line we finance our airplanes. Just like you would finance your assembly line at the sharpest level to be able to make sure that your end cost is right we get our airplanes at the sharpest levels and finance them at the sharpest levels so that our cost structure stays low. Every airline in the world who does operating leases gets discounts. Every airline in the world who does operating leases and sale and lease back gets a gain. Almost every airline in the country does sale and lease back just like us and there is absolutely nothing unique about us. The only thing that is unique is that our level of discount maybe more than other because we negotiated sharper and we ordered 530 airplanes (interrupted..)
Q: So, it is more of the volume game?
A: Absolutely. And then we did it over a period of time while the others haven't. So, you cannot blame Sachin Tendulkar for being a great batsman because he has got a great bat. You can't say Sachin Tendulkar you are a great batsman that is because you have got a great bat. Of course he has a great bat, he is the world's best batsman.
Q: Since we are talking about the sale and lease back arrangement on this commission business, because that being something that is being raised on the profit and loss (P&L) it comes in at about Rs 1,694 crore received and on the balance sheet it shows up as Rs 1,685 crore as receivables. Can you explain?
A: This is the deferred incentive. The deferred incentive is nothing but that various types of incentives we would have got, not just from Airbus, it would be from variety of other manufacturers, because they have the same assembly line thing. So you have got an assembly line, maybe the robotics, you have got a certain amount of discount, the tooling you would have got a different discount, from the belt you would have got a different discount. So, when it all comes together, it sits as deferred incentive and to answer even the previous question, and I want to dispel this myth, we do not take it into our P&L, although Indian Generally accepted accounting principles (GAAP) allows it, and a lot of people do, we do not take that sale and lease back gain into our P&L. We actually amortize it over the life of the lease, to smoothen up our cost structure down, we actually take it in the most conservative way and we net it off against our lease rentals, it is just another way of bringing our cost structure down.
Q: So since we are speaking costs and this was something that you were working on as well is to try and bring distribution costs down further. What can we expect on that? What is going to be the strategy going forward?
A: Our focus is now more and more onto our website, our mobile app, our call centre, more on mobility. We are in the midst of revamping our mobile app, we have started issuing some new additions, today to go to our mobile app, it keeps asking you whether you want an update or not. So we are going to keep focusing on our own channels not to say that travel agents are not a big part of our distribution but our focus is going to be more on our website and mobile app.
Q: And how much would that bring your costs down further?
A: So whatever commission that you are paying, our commissions are anyway lower than others, because of the volume that we have with our travel agents and so it may not move the needle too much, but frankly this business and especially Indigo is not about a billion dollar idea, it's about a billion one dollar ideas, so we will keep chipping away, it is kind of in our DNA.
Q: So speaking of ideas, and this is something that a lot of people who fly Indigo, including myself want to know, frequent flier miles; are we headed that way finally? Because I know it took you 3-4 years to finally decide whether you are going to serve hot beverages on air or not, but are we going to see you move towards things like frequent flier programs or not?
A: Look your demand is justified and your surprise is justified too, because we must be the only airline of our size anywhere in the world which probably does not have a frequent flier program. We are not going to put a frequent flier program. Our frequent flier program is our reliability and the reason for that is, the frequent flier programs add a lot of costs, they add a lot of complexity and more often than not, it disappoints the customer because you have these blackout periods. We are so profitability focused, we are so cost focused, that we do not want to compromise on that yield. We keep our fares at a predictable level when neither does it go to Rs 500 fire sale, nor does it climb up to Rs 30,000, and that ensures that a general regular customer and very important customers know exactly what they are paying for.
Q: I do not know whether it was mentioned as part of your risk factors or not, but how are you reading A; the competitive environment, and B; the business of whether the government is actually going to come in and intervene as far as pricing is concerned? I know there has been bunch of consultative meetings with industry saying alright toe the line or we are going to come down hard and get you to cap pricing. Do you really see that happening and do you think that is a threat at this point in time or will it be a reality? And also in terms of competitive pressures, now with capacity coming back as far as SpiceJet is concerned, and I know before I was leaving office, I got a press release saying 93 percent passenger load factor (PLF), tops the charts for the sixth month in a row and so on and so forth. How do you rate the competitive landscape?
A: As far as the pricing cap is concerned, even to be fair, even in the consultative meetings, the government has frankly never told us and full credit to the government, they are actually going to put a cap. The government has always said, look, do not do these Rs five fares and do not do these Rs 30,000-40,000 fares which we actually agree with.
Our view is that let us find a way that people run their business in a more sustainable manner where if you are not selling below cost, you also do not have to charge exorbitant fares right at the end which is the way we follow it.
Now, in the unlikely scenario and in the hypothetical scenario, if there is a price cap, then the airlines which have the higher cost structure suffer the most. On the other side, if there is some kind of a guidance, that you cannot sell below cost, then again, every other airline who has a higher cost structure than us will actually have to charge above us. So, we are actually completely insulated from that fear, risk or whatever.
Q: And you think that it is unlikely.
A: It is unlikely and if it happens, we benefit the most. Now, let us talk about competition. Irrespective of what the competition is and who or where it comes from, whether it comes from India, whether it comes from overseas, whether it is a new player who comes in, or whether it is a new player who grows up here, it all again comes down to cost structure. Today, our cost structure excluding fuel is the lowest in the world. Our cost structure including fuel is the lowest in India. So, irrespective of who the competition is, we are actually competing with ourselves. The way we look at our business is our total profitability and can we each year find a way to bring our cost structure down. That is the thinking behind bringing Neos as well where our cost structure starts coming down.
Finally as far as load factor is concerned load factor is the easiest thing to do. We neither chase load factor nor do we chase market share. I know it sounds very ironical coming from the airline with the largest market share but our market share was as much as 39.8 percent some months ago, it is now at 36.5 or something of that sort. Maybe it is 35, I don't track it. And our profitability in the first quarter was Rs 640 crore. It is as simply as this. The pen that you are holding it can be sold for Rs 10 and you can sell one pen. That pen can be sold for Rs 2 and you can sell five pens but each time you are selling those five pen you are going to lose money. So, our focus is completely on profitability, load factor doesn't matter. We can give tickets for Rs 500, load factors will be 100 percent but the cash burn is so much that there is no way to recover from that.
Q: Do you see this benign crude environment continuing because as far as whether it is the Modi government or it is the aviation sector this has been the biggest windfall benefit and the windfall gain. But if we actually see prices inching up there is no possibility of that, at this point in time it looks a little remote but once we see prices inching up again because of costs for you have been a big advantage. Do you see that changing the picture significantly?
A: When crude prices are down, every management team looks like a hero. What we focus on - and I have no idea how crude prices will move, we do not understand how crude prices will move. What we focus on is how much fuel are you burning. If you are burning less fuel than your competitor then you will always win and with the Neos coming if you are burning 10-15 percent less fuel that gap becomes wide. Now, if fuel prices go up actually that gap widens. So, in some ways if the fuel price went up Indigo again stands to gain the most and the pressure on the competitor is so much that they have to take some dramatic decisions.
Q: Since we are talking about your IPO we have had this conversation for several years and every time I ask you are you looking at an IPO and you have said no, we don't need to, we dont need the cash, we are not in talks, we are not looking at that possibility. So, we were joking about this in office and they said Rahul Gandhi is a reluctant politician and Indigo is a reluctant IPO. So, why, and I heard you say in Bombay the other day that the decision to do an IPO is for legitimacy, what does that mean exactly?
A: For the last seven years we have been saying we make money and people were like no, it can't be. Last seven years we have been saying we have the lowest cost structure in the world and people would say there is no low cost in India. Last seven years we say that we do the most conservative accounting, no there must be something on. Now, with a 600 page prospectus people have gone through it page by page and they can't find a single hole in that.
Q: So, you don't care about PLF, you don't care about market share but you care about what people think of you?
A: I think so, and the reason for that is that it is important that when we are an airline of our size, the country's largest airline people should feel that same confidence and people should feel good about something that has happened in India.
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