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Waiting in the wings: Is the time and IPO strategy right for GoAir?

The management of Wadia-group controlled GoAir is in a huddle these days, finalising its plan to raise about Rs 1,500-Rs 2,000 crore through an initial public offer (IPO). While the idea may not be new, for the airline has been toying with it at least since 2015, it has gathered momentum at a time when the Indian aviation sector is dealing with tepid growth in air travel and volatile crude oil prices.

Further, investors’ sentiment has also taken a hit in the past two months. Consider this: the benchmark S&P BSE Sensex had gained around 10 per cent between January and June 2019. The gains, however, are down to just over 3 per cent year-to-date (YTD).

That apart, volatility in the equity market saw the fund mobilisation, during the first half of the calendar year 2019 (H1CY19) via IPO route, hit a four-year low. Analysts have attributed the tepid H1CY19 to the overall market sentiment. Besides, the overall economic scenario has kept companies at bay from raising fresh capital, they say.

“While the Qualified Institutional Investors (QIP) route is available only to already-listed companies, Private Equity (PE) investors target returns over a specific period of time, which is not possible in the aviation sector,” says Mark Martin, founder and CEO of Martin Consulting LLC.

Typically, PE investors eye an investment return of 25 per cent over three-five years, which is not possible in the aviation sector given the uncertainties. Airlines need a gestation period of at least 10-15 years, experts say.

IS IPO THE RIGHT STRATEGY?

An IPO at this juncture, analysts feel, may open expansion routes for GoAir, which hasn’t truly reaped benefits of the vacuum created by Jet Airways.

“It hardly took nine-10 slots of Jet, probably, due to lack of funds… The vacuum that has been created in the market is an opportune time for the airline to expand,” says AK Prabhakar, head of research, IDBI Capital.

The airline has doubled its fleet size in less than two years from just 25 planes in its fleet till November 2007. In July, it added 50th aircraft in the fleet.

At the bourses, stocks of airlines have done fairly well than the benchmark indices. Budget carriers SpiceJet and IndiGo airlines have outperformed the frontline S&P BSE Sensex over the last one year. While the former grew 66 per cent, the latter gained 51 per cent. In comparison, the Sensex has declined 3 per cent during the same period. Beleaguered Jet Airways, however, has tumbled 88 per cent during the period under review.

STRONG FUNDAMENTALS-WEAK MANAGEMENT

Fundamentally, the airline is on a strong footing and has consistently registered growth in profit and operating revenue for the past six years. For the 2017-18, the airline logged a net profit of Rs 295 crore and had a revenue of Rs 4,672 crore, data show.

Strong fundamentals, including low crude oil prices, stable air-travel demand, and a range-bound rupee, analysts believe, make a strong case for the airline’s expansion.

According to Directorate General of Civil Aviation (DGCA) data, the airline has consistently increased its market share between Q4FY19 and Q1FY20. It held a market share of 9.2 per cent at the end of March 2019, which stands at 11 per cent, as of June 2019.

GoAir has good yields and EBITDAR figures has pending orders for more than 140 aircraft, and has the ability to fill the vacuum created by Jet Airways,” says Gagan Dixit, vice-president for institutional equities at Elara Capital.

KEY RISKS

Instability in management, however, remains a concern. The airline has no chief executive officer (CEO) as of now, but recently inducted a chief financial officer (CFO), a vice president, and heads for network planning, to focus on international operations, revenue management and flight operations.

So far, there has been no official communication from the airline confirming the listing, but media reports suggest that the LCC is looking to appoint bankers for its IPO. According to reports, the airline is expected to soon issue a Draft Red Herring Prospectus (DRHP) with an issue price in the range of Rs 700-Rs 1,200 per share. 

Dixit of Elara Capital says the airline should go public before state-owned Air India is privatised as investors’ appetite is likely to reduce after this. Martin advises the airline to get listed by the third quarter (October-December) of FY20.