Kingfisher Airlines

Like its peers in the Indian aviation space, Kingfisher Airlines has been able to show improvement in performance metrics over the past few quarters, aided by an uptick in demand for air travel in the country. Also, the company has been taking steps towards running a tight ship and has received preliminary approvals pertaining to the debt restructuring plan, which, when it comes through, should ease some pressure arising from its bloated leverage.



Nevertheless, investors can consider exiting the stock. The current market price of around Rs. 75 (up almost 75 per cent over the past six months) seems to have factored in most positives, including the critically important debt recast and equity infusion plans. The company currently trades at an EV/Annualised FY 11 EBITDA of around 27 times.

Even if the proposed restructuring goes through as planned, the debt millstone for Kingfisher will still remain sizeable and it may take quite some time for the airline to turn profitable at the net level. In contrast, Jet Airways and SpiceJet, the other listed players, have shown black on the bottomline for some quarters now. In addition, ascending fuel prices may undermine recovery.

Taking flight

Kingfisher has improved its showing in the current fiscal, thanks to buoyancy in demand, and cost control measures.

In the September quarter, the company reduced its losses by 45 per cent to Rs 231 crore, while income from operations grew 24 per cent to Rs. 1,383 crore. Though net margin remained negative, margins at the operating level turned positive with EBITDAR above 20 per cent, and EBITDA at around 4 percent.


Also, improvement in pricing power resulted in yield (average revenue per passenger) growing around 17 per cent to Rs. 4,620.

The company also posted significant improvement in load factor to 79 per cent (domestic - 82 per cent and international - 74 per cent) from 71 per cent in the year-ago period (domestic - 72 per centand international - 69 per cent ).

Overall, the improving performance is a continuation of a trend which saw the company pare adjusted net losses by 18 per cent over the previous year in the June quarter, and by around 20 per cent in FY 10.

Not all is hunky-dory though. To some extent, the sharp improvement in load factor could be attributable to route rationalisation and grounded aircraft, which has seen Kingfisher's domestic market share reduce from 22.9 per cent in March to 19.8 per cent in September.

Besides, while the company has shown operating profits at the domestic level, the international operations continue to bleed, though to a lesser extent.

Also, on a sequential quarter basis, the company's income declined 16 per cent, and net losses increased 23 per cent. Going forward, buoyant domestic demand conditions, accretion of benefits on the international route from the ‘oneworld' alliance, some grounded planes coming on-stream, and the appointment of an accomplished CEO, should help the company improve performance.

However, till such time debt is brought down to acceptable levels, financial strain may continue.

Leverage overhang

Even as there are indications that the SBI-led consortium is working on a debt recast plan, Kingfisher's loan funds have further increased to Rs 8,157 crore, as on September from Rs 7,926 crore in March 2010, suggesting continued capital structure pressures.

In comparison, the company's net worth has slipped further to a negative Rs 4,289 crore from a negative Rs 3,870 crore in March. Interest cost in the September quarter has shot up by 25 per cent over the previous year to Rs. 362 crore. The high quantum of promoter stake pledged (68.48 per cent) is also a cause of concern.

In this context, the finer details of the proposed plan will be quite important.

The plan's broad contours include interest rate reduction to around 11 per cent from 12-12.5 per cent, moratorium period of two years and extended loan tenure of nine years.

Besides, an additional loan sanction of Rs 900 crore is envisaged and Rs 650 crore of loans by the promoter group will be converted to preference capital. Once the debt recast is through, Kingfisher plans to raise funds of up to Rs 5,000 crore (around $ 1 billion), including a $250-million GDR issue. In this respect, the proposed debt restructuring is critical, given that it holds the key to the viability of the capital restructuring process. Delays and/or adverse conditions imposed by the banks could be a setback.

Also, fresh equity infusion could dilute existing holder's stake significantly.

Besides, even if the debt restructuring goes throughas planned, the debt burden would still remain sizeable, if with an extended repayment. Though pressure on cash flows would ease somewhat, impact on profitability will continue.

So, till such time Kingfisher actually manages to pay off a good portion of its debt, the bottomline will remain under pressure although to a lesser extent.

Net-net, the company may have to traverse a long road to profitability at the net level, notwithstanding improvements at the operating level.

Rising fuel cost

After a long period of being in the $70 to $80 a barrel range, crude oil has recently shown signs of an uptick, and has been trading above $80 levels for some time now.

The quantitative easing by the US Fed could put further pressure on prices. Given that fuel cost accounts for almost 35 per cent of Kingfisher's revenue, the impact could be significant.

Also, low fare carrier Indigo's proposed public offer later this fiscal could set new valuation benchmarks in the Indian aviation sector that could have negative implications for Kingfisher.