The UB Group chairman is trying desperately to bring back the ‘good times’
Even for a man with a hectic lifestyle, the last few months have been busy for Vijay Mallya. The 54-year-old chairman of UB Group, along with Sanjay Agarwal, the new chief executive of Kingfisher Airlines, has been touring the US and the UK, seeking support for the airline’s proposed $250 million (Rs 1,100-crore) issue of global depository receipts (GDR).
The travels come at a time when Kingfisher is negotiating a debt recast with lenders. The king of good times, as Mallya has come to be known, has to deleverage the balance sheet of the group's major companies.
The debt recast is crucial for Kingfisher Airlines, whose books have more than half of UB's combined gross debt of Rs 15,477 crore (this is for the year ended March 2010) — Rs 7,923 crore, to be precise. Other group companies make up the balance: Liquor firm United Spirits (USL) with Rs 5,850 crore, UB Holdings with Rs 908 crore (standalone), and United Breweries (UBL) with Rs 796 crore. The debt of these companies inched up in this year’s April-June quarter, except in the case of UBL, whose debt has declined from the March 2010 level.
Mallya declined to comment as he was finalising the debt recast package with a consortium of banks. But he knows better than anyone that for an issue to succeed he has to bag a favourable debt package for Kingfisher. He is thus attempting to reduce debt on Kingfisher's books using a number of instruments including converting a portion of long-term loans into equity, especially the Rs 735 crore of loans given by UB Holdings to the airline, launching the GDR issue, a Rs 500-crore domestic issue, possibly of rights, and getting an additional facility from banks to the tune of Rs 900 crore.(Click for table)
All this will give the airline about Rs 2,500 crore of funds, which is likely to go towards clearing its dues to allied creditors, including oil marketing companies to whom Kingfisher owes about Rs 750 crore, vendors and suppliers. "The conversion of debt into equity will bring the debt-equity ratio to admissible levels,” says Kapil Kaul, chief executive, South Asia, Centre for Asia-Pacific Aviation, a body that tracks the industry in India and APAC. “But the critical question remains how the company will deleverage its balance sheet.”
For the April-June quarter, the airline reported Ebitda (earning before interest, tax, depreciation and amortisation) of Rs 157 crore (adjusted for the loss of Rs 35 crore incurred on grounded aircraft). This was supported by a reduction in loss in its international operations to Rs 51 crore from Rs 147 crore in April-June last year. Considering the turnaround, the 20 per cent reduction in total debt to about Rs 6,000 crore, and assuming that international operations become as profitable as domestic operations, there would hardly be any money left (after paying interest and providing for depreciation) to repay the remaining debt in the medium term. Mallya needs to do more than what has been said publicly.
He is comfortable with the other companies. The board last month approved the merger of the ailing Millennium Beer Industries (which has accumulated losses of Rs 213 crore) with UBL. Millennium Alcobev, the equal-stakes joint venture between UBL and Heineken, is being merged into UBL. The third largest brewery in India with a capacity of 33 million cases, it will boost UBL’s capacity by a fourth.
As things stand, UBL has more than 50 per cent share of the 200-million-cases-a-year beer market in India. The company's debt-equity ratio was 0.70 for the year ended March this year, indicating that the balance sheet was not too leveraged. “We are comfortably placed as far as our current debt levels go," says Guido Debour, chief financial officer, UBL. "We would like to maintain that.”
While the company reported a net profit of Rs 89.6 crore last financial year, analysts at IDFC Securities estimate this figure to more than double to Rs 191 crore in the current year.
For USL, the leader in the 250-million-cases-a-year market for Indian Made Foreign Liquor, Mallya has been looking to sell equity in the company’s Scotland-based subsidiary, Whyte & Mackay, and in USL itself. Neither has fructified so far. But the company did manage to bring down its debt by over Rs 1,500 crore in 2009-10 through a qualified institutional placement for $350 million (over Rs 1,616 crore), and sale of treasury shares worth $186 million (about Rs 900 crore). These measures saw the promoter stake diluted to 29.16 per cent from 36.57 per cent at the start of 2009-10.
Since the company now holds treasury stock worth Rs 1,280 crore and its net consolidated debt-equity ratio stands at a more manageable 1.55 times, down sharply from 3.3 in 2008-09, Mallya has some elbow room to clean up the books. But the man, who has interests in cricket, football, Formula One racing, and, yes, horse racing, is hardly sitting still.
USL plans to invest Rs 1,100 crore in capacities over three years. It expects W&M to generate annual Ebitda of 60 million pounds (or Rs 423 crore) in five years. While that will be positive for the long term, analysts say profitability and cash flows of USL and W&M could get affected in the near term. That apart, analysts at IDFC Securities say that, given the limited scale and presence of W&M’s branded portfolio, execution will be critical.
