Vijay Mallya‘s Kingfisher stock has been revving up ever since the government allowed foreign direct investment in the sector. The hope is that the debt-ridden airline will finally find a foreign investor to bring in equity and save the airline.
The stock is trading four percent higher today at Rs 13.52 on the BSE even though the Sensex is trading in the red, down 0.14 percent at 18,515 levels. Market analyst SP Tulsian has set a target price of Rs 19-20 for the stock for the next couple of months as he believes the company’s debt repayment process will begin soon. “I see that happening by month-end and, if that happens, the next topic which will be discussed amongst investors is the induction of foreign carriers and normalisation of operations,” he said in an interview to CNBC-TV18 today.
The indebted airline’s shares soared 20 percent on Monday after the Indian government said on Friday that it would open up some sectors, including airlines, to foreign investment. Foreign airlines will now be able to own up to 49 percent in India’s airlines. But Kingfisher may be in too much of a mess to attract any meaningful investment to pull it out of the doldrums.
Kingfisher may struggle to attract FDI in the near term as it owes crores to lenders, lessors, suppliers, staff and taxes to the government. “It has a large outstanding debt ($1.8 billion) and vendor payments, small market share, large proportion of impaired fleet. Additionally, according to reports, a large part of its fleet has already been repossessed by the lessors,” Bank of America Merrill Lynch said in a report.
A report in the Business Line said today the 17-bank consortium that funded the airline now wants other Kingfisher brands to be pledged as collateral, including the market leading Kingfisher beer brand, the company’s music CDs and its mineral water.”As against a net exposure of about Rs 6,339 crore, the total value of pooled security available with banks was Rs 5,213 crore, it is learnt. This translates into security coverage of about 82 percent,” the report said.
Jitender Bhargava, a former director with Air India, was not very hopeful for Kingfisher either. In an interview to CNBC-TV 18 he said that the government’s decision will help SpiceJet and but not Kingfisher as the latter’s debt is too high. “Unless Mallya can get funds from other sources apart from a foreign airline…things will remain tough,” he had said.
Even brokerage JP Morgan has recommended selling aviation stocks because of high oil prices and slowing passenger traffic growth which will likely limit pricing power. It adds that since the Indian aviation sector has already seen consolidation over past 12-18 months, any potential infusion of new capital into the industry will drive up competitive intensity and potentially reverse the benefits of recent consolidation.
Moreover, foreign players will not be in a hurry to sign up deals with Indian promoters due to concerns over high taxation and policy stability in India.
“Allowing FDI by itself is not a panacea. The critical problems of a high-cost environment, insufficient infrastructure and crippling taxes must also be comprehensively addressed within a coordinated government-wide policy framework”, Amitabh Khosla, country director of Iata, said in a statement recently.
The FDI policy change has lifted Kingfisher out of penny stock status (the stock was quoted at Rs 7 a few weeks ago), but one should not rule out the possibility of returning to that same state if things don’t work out.