IndiGo's interest in Air India confuses rivals and investors, stock down

Aditya Ghosh President, InterGlobe Aviation, the operator of IndiGo Airlines.
Last month this reporter met IndiGo President Aditya Ghosh and SpiceJet Chairman and Managing Director Ajay Singh at an industry event. A few days before the event, Singh had gone public with his ambition of operating a long-haul low-cost model and had said that it was “time to think out of the box”. At last month’s event, Singh joked and pointed towards Ghosh saying, “They are the guys with the cash, they should be taking daring steps.”

On Thursday, Ghosh did just that — he expressed interest to acquire state-owned carrier Air India’s international business. Ghosh also said if splitting the business was not possible, IndiGo was willing to take over the entire scale of the business. The move has perplexed competitors and investors, and analysts are trying to make sense of how Air India stake might help IndiGo.

In a letter sent on Thursday evening to his employees, Ghosh said that if acquired, Air India’s operations would require significant restructuring. He also confirmed the company would not take any debt and liability that will be an overhang on the existing business.

“I think what Ghosh is indicating that IndiGo will form a joint venture with a different company for the bid; wait for a few weeks,” said an executive of a rival airline. “They operate the A320 family; Air India has jumbo aircraft like Boeing 777 and 787. In the past, acquisition at premium valuations in a bid to shore up market share has proved to be costly as market shares were not easily transportable compared to growing organically by augmenting fleet. Also, in the process, companies inherited aircraft of different make or models into their fleet, further compounding scheduling, maintenance and management issues,” the executive added.

Brokerage firm SBI Capital, however, has a different view. “It took a decade for IndiGo to scale up market share from 9 per cent to 40 per cent in the domestic market. At present, IndiGo has less than 10 per cent market share in the international market, serving seven destinations, whereas Air India together with Air India Express has a 45 per cent share, serving more than 40 destinations. It also has code share agreements with multiple global airlines that connect many more destinations,” SBI Cap said.

But how much IndiGo will have to shell out if it intends to take the bid forward? According to a report by ICICI Securities, at a possible EBITDAR margin of 15-18 per cent, the enterprise value of Air India could come to Rs 30,400 crore — 7.6 times the EBITDA value of IndiGo’s current EBITDA. In addition to that, Air India has land and building assets worth Rs 8,600 crore and the airline’s international slots and bilateral rights will add to the valuation.

“The key takeaway from IndiGo’s bid seems to stem from the fact that, excluding debt servicing and depreciation, Air India’s operational cost structure has already seen a turnaround — a lot of costs emanate from sub-optimal route networks and sub-optimal fleet deployment, further improvement can be achieved by improving load and on-time performance,” Anshuman Deb of ICICI Securities said.

As of now, IndiGo has maintained silence. Though, the stock has been reacting negatively since the news of IndiGo expressing interest in Air India came out. “There will be an overhang on the stock considering the long process of disinvestment,” SBI Cap said.