Investors can expect upside in long term from Rs 3,600-cr GoAir IPO

Fresh funds will reduce pressure on balance sheet but a lot will depend on the company's ability to return to growth

Go Airlines (GoAir) has just filed a DRHP with a target to raise Rs 3,600 crore. It has rebranded itself as “Go First”. The airline is promoted by members of the Wadia family, which also controls Bombay Dyeing and many other Wadia Group companies.
 

Individuals of the Wadia family, and investment vehicle, Go Investments, hold 73.3 per cent of stakes in GoAir. Go Investments is owned 100 per cent by family members. Other group companies hold the remaining stake in GoAir. But 22.56 per cent of the pre-issue paid up capital held by Go Investments has been pledged to a lenders’ consortium of Bank of Baroda, BNP Paribas and Central Bank of India against a working capital facility of Rs 2,405 crore.
 

As of 2019-20, GoAir claimed about 10.8 per cent market share in domestic aviation. The money raised will go towards prepayment, or repayment of outstanding borrowings, with Rs 2,015 crore allocated for this purpose, repayment of dues to Indian Oil Corp (Rs 255-crore allocation) and replacement of LCs issued versus aircraft lease payments (Rs 279 crore).
 

The balance is for general corporate purposes. The airline has firm orders for delivery of 144 Airbus A320 NEO aircraft. It has taken delivery of 46 Airbus A320 NEO aircraft and is awaiting delivery of 98 A320 NEO from 2021 onwards.

Investing in an airline now has contrarian logic. Travel is down. Last fiscal was bad, with revenues falling from Rs 7,258 crore (April 2019-March 2020) to Rs 1,438 crore (April-December 2020) for the 9-month period. The lockdown effectively grounded aviation for months. Losses have accumulated in the last three fiscals.

However, this must be close to rock-bottom, given it’s the worst possible circumstances for aviation. In that sense, any investor could be hopeful about long-term upside. The restated financial statement indicates revenues grew from Rs 4,601 crore (2017-18) to Rs 7,258 crore (2019-20). Can GoAir return to that growth rate once the economy recovers?

The balance sheet is under great pressure, with negative net worth of Rs 1,962 crore (Dec 2020). Outstanding debt is Rs 1,839 crore, including Rs 986 crore long-term debt. Current Liabilities exceed Current Assets by Rs 4,363 crore.
 

Material risks obviously include the impact of the pandemic. Apart from that, there’s the need to fix the balance sheet, and prevent future defaults. There are the normal business risks of not being able to successfully implement a growth strategy. Any aviation company must contend with the rising cost of fuel, high levels of competition, complicated regulations and forex risks.
 

The IPO would help shore up the balance sheet and give a breathing space until the pandemic eases. The two listed aviation companies, InterGlobe Aviation (IndiGo) and SpiceJet, have outperformed the Nifty in 12 months but done worse in calendar year 2021. IndiGo has gained 72 per cent since May 2020 and lost 2 per cent in CY21. SpiceJet gained 73 per cent since May 2020 and lost 24 per cent in CY21.