The 2:30 PM pre closing update August 06-10, 2012 – Jet Airways, Euro, Pound, Reliance and Healthcare



Monday pre closing looks dyed steeply in the after effects of a turnaround in Dollar fortunes from tokyo close to London open and the equities are just about holding their opening tricks. The Rupee will likely fall through to 56 all over again, but the Pound Sterling may have better luck in keeping Britain competitive as its data is weaker and the strength in the Euro has been cut short so look for the Pound to let the Dollar a good lead and indian stocks to continue rerating on results. Wockhardt and Divis Labs were eyeopeners , likely moving the move from CIPLA and DR Reddy and SAIL(EBITDA of 13%)  and Britannia not so good. Reliance is hoping for better GRMs in Q2

KOTAK and HDFCBANK brought up the cream of the post morning rise in a surprise move in the last few minutes, HDFCBANK hitting 600.

English: JAI210 arrives SFO Jet Airways – Boei...
English: JAI210 arrives SFO Jet Airways – Boeing 777-300 ER (Photo credit: Wikipedia)

PE transactions have increased volume of resales as these secondary transactions could create additional liquidity of upto $100 B in the Indian deal market allowing PE firms to update valuations based on market price and look for a better profit than ina long drawn out listing Airports and Aviation scrips are getting rerated again, at least I think both should even as BAML tries to jump Jet Airways and Spicejet on the Sales and Lease Back profits. Jet profits of INR113 mln include INR500 mln in sale and lease back and apparently some defered tax credits. Jet Airways revenues are up only 5% in Dollar terms to $847 M (INR471.2B) but have a clear line to add to International Star Alliance for code share push to profits and has a seat factor of 82.7% in Q1  FX losses of $31mln could not erase Net profits either.  ATF prices actually rose 13% over Q1 FY12 International operations have made a minor pretax loss of 2-300 mln

Annual revenue of the quarter is up 31% still under $1 B ( lower by $52 mln) but EBITDA MArgin has doubled to 16% on Konnect rollout and ATF decreases will roll further in Q2 . Jet lite yields are up 43% on the year ago Q1. Passenger growth of 10% domestic Y/Y ith 4.86 mln revenue passengers flying an average of 1749 Revenue kilometers

Ofcourse some bank results did spoil the day in Andhra and dhanalakshmi but nothing out of the ordinary and ING, indusind and Kotak look well slotted for the froth of this run, if there is any while YESBANK and ICICIBANK lead wwith HDFCBANK consolidating another big move

Resturctured Assets bought into equity by majority foreign owned banks like ICICI BANK and HDFC BANK will not count to FDI and will be allowed while new subsidiary stakes (strategic investments ) willnot be allowed beyond the FDI cap in the secotr as Indirect FDI

100% FDI is allowed in Commodity Broking however. In new regulations, Insurance Cos have been allowed to purchase and sell CDS contracts as part of hedging portfolios





The retail lifestyle champions: Jet Airways saves face , buys new Boeings

Jet’s Q3 losses came at a low INR 1 bln as it saved up from asset sales of INR 1.7 bln and kep itself in operating profits. The jet order for 17 boeings will also help india’s Capital goods indices this month

Jet Airways ordered 737-400s and 500s for its fleet, probably exchanging out older Jet lite planes though it was its fourth straight loss since September /December 2010 conditions worsened in fuel cost overheads, wiping out gains from Jet Konect saving plans and this being their first of many sale and lease backs adopted by the Industry at Indigo and Jet Airways

On sales of INR 3437 Crs in December 2010, the airline flew 13% higher year on year and expects to keep growing sales if hikes are passed by AAAI and if no further costs imposed by DGCA action, the airline will keep posting cash profits

According to mint, CAPA revealed a loss of $30 per passenger in domestic flights in India. Kingfisher and Spicejet may not be able to hold their bottomlines to a sane number as they allow losses to reflect their financial uncertainty, demanding policy action/handouts

Godrej Properties purchase of INR 1.06 bln from the BKC premises and FX gains of INR 1.76 bln also stopped out losses but the airline bucked expectations of INR 3.5 bln in losses

  • Sale and Lease back allows it to keep Debt constant and it cana lso start paying the INR 14 0 bln debt from the SLB proceeds. The 17 aircraft are on options thus guaranteed at a good price.

The Air india Debt restructuring package – FAIL

English: The Local Head Office of State Bank o...
Image via Wikipedia

The Airline’s debt restructuring package of $ 4.4 bln rides on a INR 74.08 bln preference share issue that will require additional provision under the original RBI dispensation itself. thuis the package is back on the drawing board with SBI Caps the advisor, having earlier announced as being accepted/proposed by the lender(s)

The Investment banker’s proposal required new provisions of INR 96.18 bln for the INR 224.5 bln debt to be restructured and an additional INR 221 bln guaranteed by the government. It also requires conversion of the existing overdrafts to longer term loans of INR 112 bln leaving INR36.5 as Cash credit used ( and not new avl limits)

India’s Aviation Blues: Preference shares and write offs to bleed banks instead

Air India sat pretty while everyone cried foul on the aviation industry, airlines’ stopped pying the gas billa t the airport and while vendors have been paid and /. or prioritised, banks continue to suffer, printing credit lines, much like the Eruopeans without any collateral, reusing old paper and where loans are dead certain to be lost to fantasies, issue preference shares to themselves. They should have been adminstering the airlines in bankruptcy court buit as of now, no leasing arrangement for athe aircraft, no stoppage to airlines expansion and no money to pay salaries, contagion spreading to banks instead of cutting losses.

1940s-2007 Air India logo
Image via Wikipedia

A random quote to a ftalphacville post on Flynn scores that also segues to my next post on the general increase in abstraction and problem skills as a way of life. So you know I am not really complaining banks made the deal. Banks should.

State Bank of India revamps Air India again

SBI revamped AIR India’s loans to an average 15 year tenure as per a recent plan approved by RBI the company alone accounts for more than half of Indian aviation’s debt overhang and over $1.5 bln of working capital and $3 bln in term loans were restructured in the latest exercise. The bank accepted CCPS issue against the working Capital loans allowing the airline to pay the bank thru redeemable cumulative preference shares, the bank still not becoming an equity holder for the sole reason that it is a government owned airline.

Air India is also getting Govt equity of $5 bln over 10 years with $1.35 bln issued this year ( we still use USDINR=50 as rupee tries to make a 48-53 range)

Something tells me that will only pay for the airline’s immediate default and its daily operational losses will continue nothing changing about the management and operational staff habits that make for the demise of the airline. In the mean time fare hikes by private airlines will happen as highly efficient companies like Jet and Indigo bleed and or resort to sale / lease back despite being anointed full service airlines liable to charging “full fares” for their service. Low fare airlines like Spicejet and premium experience jugglers like Kingfisher remain stuck in the middle, having adopted most global best practices and created sumptuous fare without being able to carry home any profit

India’s aviation blues see more red..

Vijay Mallya’s refusal to call his Air Deccan purchase a low cost airline addition to its portfolio, is not

This is the new United Airlines Logo that will...
Image via Wikipedia

without reason. With sales taxes of 30% and more (depending on state jurisdiction over and above federal taxes) ATf costs are nearly 50% of the airline’s revenues, more for Kingfisher. ATF prices were further increased even as petrol prices were cut nationally and the OMCs reported a huge bleed in Q2 results from subsidising even Diesel and Kerosene and Gas majors flunked the test of bearing the LPG and CNG burden and refused to put up more for the required expansion of India’s energy infrastructure. ATF prices were last cut in September and October at Delhi (

Air Deccan logo
Image via Wikipedia

Just a year and a half ago , Jet fuel prices were 33% lower at nearly 42k per KL including taxes. Internationally too the quarter has been tough for global airlines, ATF prices averaging $3.3 a gallon for American over $2.2 last year but still  these costs were only 35% of its operations and they are at an equal risk from unionisation and staff costs from the same

With fleet rationalisation one can hope for a little economic respite for the otherwise 350 flight srong Kingfisher day schedule, but it needs more Jet Konnect features and efficiencies other than interest rate cuts to show up with a winning plan for that INR 6 bln working capital enhancement/ conversion of overnight lines to LC backed lines presumably for Aircraft lease costs  and the inevitable reduction of debt and interest loads that will let it fly high and join the thin ranks of airlines turning in a profit. United Airlines has testified twice

Business Class, United Airlines
Image via Wikipedia

in the last decade that it can be done, even if Vijay Mallya finds the thoguht of comparing with profitable cousin Naresh Goyal who may have more investors signing up when Aviation policy is released this week allowing 26% to 49% FDI interest in the Airlines incl. from Foreign Airlines.

Do you also realise that steep fare increases make it very difficult for the Airlines to recover their costs as the Rupee falls without end and Oil does not really correct to a material low!!

However, after Kingfisher, there are others and the Airlines sooner than later have to pay up for new aircraft and order 100s more as the current fleets are hardly likely to contain and run with India’s air traffic requirements as passengars continue to grow at double digits every year, enough to warrant continuation of the airport’s expansion plans int o Phase II in Bangalore Mumbai, and even Hyderabad and Delhi to handle 20-30 mln passengars a year as was originally envisaged.

All’s not well at Kingfisher Airlines (KFA)

The weekend has been super busy for the management of the airline at Bangalore as they rush to make

Vijay Mallya
Image by schuey via Flickr

amends with various stakeholders, governments recommend their case, FDI in Airlines gets approved. None of the banks have a large chunk of the exposure as one round of recast touched only 1000 crores in April-June 2011. The 65 bln debt then grew back to 75 bln and the airline seemingly never got around to issuing mor eequity.

A t this stage however, the airline has been quick to line up assets for sale, the banks having asserted a requirement of 800 cr or more in equity before restructuring is taken up and lines are extended for working capital(operational costs incl fuel and Salaries) 120 pilots ahd not turned up for duty on Friday and govt oil marketing companies assert that 2 months dues are pending. Lessors for the 120-140 aircraft fleet want their aircraft back as leases are treated as monthly rentals and each day costs the lessor more than KFA, es as bankruptcy administration becomes an option.

Sale of Kingfisher House (Mumbai) and even UB real estates KF World towers luxury residences in Bangalore will be mulled and prioritised  and the airline management has come back with a plan to reduce debt by half. It is not clear however how much of this will be restructured and how much will come from

Guinness for strenght
Image via Wikipedia

asset sales. We also mistakenly mentioned Diageo as an equity partner for UB, the flagship spirits and beer business of the company worth $1.5 bln in Spirits and $750 mln in beer sales annually at 60% and 50% national share of business. (India’s alcoholic beverages industry s at less than 5% of evental market size today as beer consumption comes to less than 1/2 case a year (per capita) USL owns 40% in KFA and 100% of the sports and real estate businesses(group stake in JV with Prestige and others). In spirits, he owns White & Mackay’s brands ($1 bln) and may bid for other premium brands like Teachers owned by Fortune Brands (US). A great biopic of Vijay Mallya is available on Scribd

Unsurprisingly, promoter Vijay Mallya finds govt taxes and regulation to be the basis of all his troubles. FDI in airlines is probably out by next week as an option for the airline. Nevertheless, quick government and management action has reassured markets with 200 cancelations by the airline on the weekend of iots 469 flights a day schedule

Vijay Mallya also recently sold a majority stake in his Formula 1 team to local baddy Sahara grp being tried for corporate governance overruns by the securities regulator. The IPL team, which has been in the Top 3 in the game of cricket (T20) may also command a similar premium for sake sales but the group is unlikely to make any hurried sales in the fledgling businesses. However , the banks are unlikely to back down in their request for more equity as the leverage is quite high and despite the last restructuring/conversion to equity at a 60% premium to then pricing and a 200% premium to today’s price, banks alrdy hold a 23% stake in the airline.

Energy costs pulling the Indian skies apart

Kingfisher airlines, taxing in Bangalore Airpo...
Image via Wikipedia

Kingfisher Airlines is on the verge of a breakdown on all counts, with losses of more than INR 7 bln every quarter and 1 in 3 flights canceled from the planned 469 flights by the airline, with only 36 announced as rescheduled and none noted to the industry regulator.

Jet Airways losses are the worst in its history at INR 7.13 bln and Spicejet has already reported earlier in the day at a INR 6 bln in losses , the two being in profits albeit less than 1 bln in the September of 2010.

Unfortunately, the only thing you can pin down is apparently something you cannot control and that is the 50% of the costs going to fuel, which goes thru even more hikes than at the retail end. ATF prices are a lowest of INR 61k per kl in Delhi. Energy costs are INR 14.8 bln for Jet Airways on Sales of INR 333.2 bln, and a even higher INR 4.78 bln for Spicejet on sales of just INR 7.2 bln

Airlines woes have led to losses after losses since October 2010, as losses of INR 29.5 bln were reported by indian airline companies last fiscal and have already reported INR 33lbn in losses in the first half of the year

Aviation as a sector needs a lot of gestation and a belief in cash profits. Foreign investments can help and first and foremost the regulators and the Ministry needs to help the beleaguered airline, with only INR 60 bln or $1.2 bln in debt and a fleet of 140 aircraft, it would be unfair for the airline to leave midway. Vijay Mallya’s Kingfisher has asked for more operational credit to run the airline even as dues mount uop for ground handling and fuel with the state oil companies. Some of its staff seems to have gone AWOL yesterday forcing it to cut more flights.

However that the government has to help is also prima facie an issue with india’s bankruptcy protection laws from the examples of GM and United Airlines that has come back multiple times from bankruptcy and earned fair profits. KFA had already restrcutured part of its loans and mismanagement if any has to be monitored and weeded out. Banks already own 23% of Kingfisher. UB spirits is processing a sale of more equity to its global spirits partner Diageo

But all these are just bemused observations as Aviation remains a requirement and unavailability of cheap and extensive airline connections in a country like ours or without quality from being a state carrier make our enterprise no better than that of Greece and its wayward ways. and Indi ais much better off. One cannot dole out aid at will or single out Kingfisher for its cabin amenities at this juncture as the cost charts show up the problem of keeping fares low in an incendiary fuel price on the ticker. Till last year, more may not have been said, but operational efficiency at all the three airlines mentioned can be seen to have been maintained and no cash saving avenues seem to have been unexplored, leading to an inevitable uptick in fares which governments have not alllowed them in the last 2-3 years as also rules of flying low fare competition.

(mint) KFA will now run 300 flights daily to 54 destinations.

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