Auditors red flag SpiceJet finances, warn of complete net worth erosion

In more bad news coming from the aviation sector, low cost carrier SpiceJet’s accumulated losses has fully eroded its net worth as of March this year, according to its auditors.

In the airline’s annual report for 2012-13, auditors SR Batliboi and Associates has stated “the company’s operating results has been materially affected due to various factors and as at March 31, 2013, the company’s accumulated losses has (sic) fully eroded the net worth of the company. The appropriateness of the going concern assumption is dependent on the company’s ability to establish consistent profitable operations as well as raising adequate finance to meet its short term and long term obligations.”

Based on the mitigating factors discussed in the said note, the management believes that the going concern assumptions is appropriate and no adjustments have been made in the financial statements for the year ended March 31, 2013."

This is the second year in row that auditors have warned of a complete net worth erosion, but after the 2011-12 warning, SpiceJet managed to payoff most of its working capital loans and other liabilities. Will it manage to pull off a miracle this fiscal, too?

Senior SpiceJet officials told Firstpost the company’s net worth is marginally negative and claimed there were no real liabilities on its books. They said their net worth is in the negative by Rs 40-50 crore as of March this year, that their working capital loans on book are Rs 70 crore as of March 31 and that their net loss has decreased significantly in 2012-13 versus the previous fiscal. The official also said that the airline’s promoters are ready to infuse more funds into the airline.

The Maran family, promoters of SpiceJet, have already infused equity by increasing their stake in the airline by 5% this fiscal - so the equity route for bringing in more funds is closed. But the officials quoted earlier said promoters are ready to bring money either throughdebentures or loans. The official, however, did not specify how much money would be infused to keep SpiceJet under the “going concern” definition.

So what is SpiceJet doing to improve it operational health this fiscal?

As per the annual report, the airline is banking on a larger international footprint this fiscal to take on competitive forces. There will also be a possible capacity addition in the domestic market.

The airline, which has seen most performance parameters improve in 2012-13 versus the previous fiscal, plans to take seven more Boeing 737NG aircraft this fiscal and expects a majority of the capacity increase to be deployed in the international markets, for which it says it has already secured rights.

In the annual report, SpiceJet has noted that while the industry outlook for 2013-14 looks a bit challenging, SpiceJet’s international focus will deepen. “This will result in additional aircraft utilisation and secure better yields. This will also offset the risk of infusion of additional capacities into domestic sectors.”

SpiceJet’s international expansion comes when new competition is emerging in the domestic market, most notably through AirAsia India which is also going to be based out of Chennai and may begin operations early next year. But unlike SpiceJet, AirAsia will not be able to fly abroad since Indian laws do not allow overseas operations before completion of five years of domestic flights by any airline.

As of now, IndiGo is the only other LCC besides SpiceJet which flies overseas. Earlier this week, IndiGo President Aditya Ghosh had said that it only flies to five destinations overseas and international revenue accounts for only 10% of its total revenues.

But SpiceJet’s footprint is already much larger. The airline says in its annual report that 2012-13 saw a major change in its strategy in international operations because before that, international operations were were limited to Colombo and Kathmandu.

Last fiscal, SpiceJet launched flights to Dubai, Kabul, Male, Riyadh, Guangzhou and Sharjah. The new routes launched were Delhi-Dubai, Mumbai-Dubai, Ahmedabad-Dubai, Cochin-Dubai, Delhi-Kabul, Cochin-Male, Delhi-Riyadh, Delhi-Guangzhou, Varanasi-Sharjah, Lucknow-Sharjah and Madurai-Colombo.