There is a clarification at the end of the story.
Corporate raids are a usual practice globally, but they seem to be more rampant in India in absence of defined norms for mergers and acquisitions, management controls and hostile takeovers. It is very difficult to assume management control without the consent of the present management due to the laws prevailing in India and the battle goes to court rooms for years. If promoters sell then it is a smooth transition without any hassle.
Even involvement of politics and politicians in the share market could be one reason why smooth transition of a takeover fails to work.
It seems the downfall of Mr Mallya could be a big sabotage against him, knowing fully that if pushed to the wall, he will have no option other than selling the ailing Kingfisher Airlines (KFA) which in fact, is eating out the cash generated from its cash cow business of liquor.
In a systematic effort, he was pushed to the wall and compelled to cut his size, liquidate assets, and now promoted to sell stakes in some of his companies and ventures. F1 and IPL could be clearly hit and the only choice with him now is that of liquor or airlines. In fact in November 2011 Mr Mallya made out a detailed plan of restructuring and fund raising by asset stripping. But before he could implement his plans there were attacks from the all corners like Banks, Government departments, Income Tax departments and even ministry going on record against his industry.
Liqour is a cash cow and the airline is in pain in the short run though its a long vision business. Looking at the current status, he has no choice than to move out of KFA, which will not break even till 2015 and in any case and will become a profitable business probably a decade later when India will have at least 1,000 airports as against 65 odd working today. Also, India is a crawling elephant as far as domestic consumption is concerned. However, we are the biggest spenders overseas. This clearly suggests that the per capita spending on air travels will rise multi fold in time to come.
Undoubtedly the way Govt agencies, banks, IT dept, Service Tax dept etc are cornering KFA, Mallya will be compelled to sell this elephant business which is eating out their liquor business. This was expected once the stock was out from F and O because it is easy to build long positions in F and O and unlock cash by selling stocks in cash segment.
Who will buy out then
The share price of KFA has fallen steeply from Rs 90 to low of Rs 15 bringing down the market cap well below the intrinsic value of the company. Many Industrialists like Reliance Industries or TATA may be looking to enter businesses which has long standing vision with real domestic growth in India as starting a new business in civil aviation could simply mean to go through the same pain which Mallya took to bring KFA to number one slot once.
JRD Tata was the person who had launched the first airlines of India -- Air India. After the nationalisation of the airline, the government took 51% stake and Tata Sons still hold around 40 or 49% in Air India. Ratan Tata was on the board of Air India for a quite while. This could prompt Tata group to bid for the ailing KFA. Though Mallya as well as the Tata group have denied having any talks on the same, insiders reveal that there is a great amount of synergy if Ratan Tata takes over KFA, Mallya will be spared from major dilution in his liquor companies. If he tries to dilute stake in United Spirits where he controls only 28%, there is threat of losing its cash cow business.
One should not forget that Tata group went on record that they wanted to bring Singapore Airlines in India through a JV with the Tata group which did not work as the union minister asked for Rs 15 crs bribe as reported in an interview.
Thus the probability is very high that Tatas may look at the ailing KFA for a strategic takeover. The deal goes through then it should happen at 100% premium to the current market price which could be the fair value of KFA.
If Mallya is able to settle some of debts of KFA, say 200 to 300 mn usd by stripping assets, it could be good case to negotiate for better price.
Pessimism at its best
The big question in the market that remains is, why would one buy the ailing KFA? At Rs 6 nobody thought Mahindra would buy out Satyam and stock went on to cross Rs 100. Companies like Ispat found takers from groups like JSW. This clearly indicates that one has to take risk on sell.In our view 'Sell' seems a better option since Mallya has debts in other companies too and referral to BIFR could mean hitting the Bulls eye and bankers will make life more tough for him.
Valuation
The company’s current market capitalization does not fully reflect the value of its business, looking at the premium segment. Undoubtedly, aviation is an entry barrier business. The company's current market capitalisation works out to be 1,072 crores whereas the debt as per books is at Rs 7,057 crores, of which it owes Rs 5,600 crs to banks and outsiders.The EV stands at Rs 8,700 crs for the current market price. KFA owns 66 aircrafts which could be valued at close to Rs 20,000 crs. Hence the current EV of Rs 8,700 crs is way below the assets value leaving enough scope on the upside for the deal to happen.
Technically break out
The stock made a bottom of Rs 15 before taking sharp U turn and closed at Rs 18.55. The last two day volumes were life time highs.
Charts suggest that the immediate upside in the medium to long term is Rs 32 then 43 and then another new high. The stop loss could be Rs 15 the recent low. Risk reward ratio clearly favour long on this stock.
(The author is the CMD, CNI Research Limited)
Clarification
The figure of 66 aircraft has been from the management presentation. However, out of 66, the majority are on lease and not owned and to that extent the valuation part will change. The error is regretted.