Kingfisher-Deccan Aviation: Flying high

Merger with Deccan would give Kingfisher access to lucrative markets like the Gulf, US

It's a good strategy to merge Kingfisher Airlines with Deccan Aviation because it will allow Kingfisher to fly overseas from May next year when Deccan completes five years of existence.

That is important because markets like the Gulf region can be lucrative, especially when there's excess capacity in India.

Besides, there is also a huge opportunity on the India-US route, which Kingfisher has been eyeing. At home, the Deccan-Kingfisher combine commands a market share of just over 28 per cent and accounts for 50 per cent of deployed capacity in the south. That said the domestic market is unlikely to recover in a hurry.

While consolidation will no doubt lead to fares stabilising, high aviation turbine fuel costs will begin to pinch. Even Jet Airways is expected to post a loss in the December quarter, despite it being the best quarter for the industry, because of higher oil prices.

So it will be a while before either Deccan or Kingfisher becomes profitable. However, private equity investors might be more inclined to put money into the newly merged company now that it can operate abroad and because the Kingfisher management will be in full control.

The swap ratio for the merger is likely to favour Kingfisher, which posted a loss of Rs 575.8 crore in FY07, on a turnover of Rs 1,553 crore.

This despite the fact that Kingfisher has higher accumulated losses of around Rs 1,200 crore and a negative net worth of Rs 385 crore because Kingfisher is calling the shots. So shareholders of Deccan might not get the best deal.

For the current year, Kingfisher is expected to record a turnover of Rs 3,000 crore, while Deccan's revenues should be in the region of Rs 2,500 crore. UB Holdings which has a 77 per cent stake in Kingfisher will want to dilute its holding as little as possible.

At the current price of Rs 277 (Deccan), it's better to stay away given that there is little visibility on when the merged entity will become profitable. That's probably the street's feeling too because the stock crashed over 6 per cent in Thursday's trading.

Pantaloon Retail: Improved sales

Pantaloon Retail reported an impressive sales performance in November 2007 with its same store value retailing segment reporting a growth of 39.6 per cent y-o-y and that of its higher margin lifestyle segment expanded 29.8 per cent y-o-y.

No doubt the company leveraged improved demand conditions in product categories such as formal wear clothing and food range, but of crucial importance is the fact that Diwali was celebrated in November this year compared to October in the previous calendar year.

In contrast, in October 2007, due to a high base effect in the corresponding period of the previous year, the company's same store value retailing segment sales declined a whopping 24.7 per cent y-o-y and that of the lifestyle segment fell 6.6 per cent y-o-y.

Pantaloon continues with the expansion of its store network across the country. In December 2007 and January 2008, the company will open five Pantaloons fashion stores and nine Big Bazaar stores.

Meanwhile, Pantaloon Retail's operating profit margins increased about 200 basis points to 8.8 per cent in the September 2007 quarter. Its rival Shopper's Stop, on the other hand, saw a fall in operating profit margins of 210 basis points y-o-y to 4.8 per cent in the last quarter.

At Rs 677, Pantaloon trades at over 50 times estimated its year ended June 2008 earnings, given its growth prospects and strong investor interest for this sector.

With contributions from Shobhana Subramanian and Amriteshwar Mathur