After having successfully negotiated a debt recast for Kingfisher Airlines, UB Group President & CFO A K Ravi Nedungadi is looking ahead to consolidate the financial position for Kingfisher Airlines and is embarking on a crucial equity infusion step by being actively involved in meeting various global investors. In a conversation with Raghuvir Badrinath, Nedungadi details how Kingfisher Airlines will now be able to leverage its position and how UB Group’s other two businesses — United Spirits and United Breweries — will grow from strength to strength. Edited excerpts:
Now that the debt recast of Kingfisher Airlines is done, the much talked about equity infusion through the GDR route looks like it is getting delayed… How is it all stacking up in relative terms to the kind of debt you are carrying?
By March 31, 2011, UB Holdings as well as the lenders will be converting debt of around Rs 700 crore each into equity or into preference shares. As part of the debt recast, the banks have extended an additional Rs 500-600 crore debt. We should be looking at an increase in our valuations, which will bring sanity to the debt–equity ratio. The fresh equity infusion will enable us to conserve cash and in turn enable us to negotiate better terms with a range of our suppliers — right from aviation turbine fuel to spare parts.
Indigo Airlines has been pretty aggressive in the recent past with major positive announcements…. It’s neck to neck between you two in terms of marketshare. What are the steps Kingfisher is taking to pull ahead?
With Sanjay Aggarwal at the helm, we have a dedicated person to drive efficiency and chase that on a daily basis. In the context of India, there are estimates that we should be witnessing a 20 per cent plus growth in passenger traffic over the next few years. There is a concerted effort by the government of India to increase the number of secondary airports and take the count of airports to 150 from around 90. The secondary airports are not the ones where you land wide-body jets. Without fleet of 27 ATRs and 30 more on order, we will be able to start operations, whereas other operators may have to wait. During 2010, as much as 70 per cent of our seats were in Kingfisher Red and during this year, it will go down to 60 per cent, giving us more value per seat.
Do you think the rising crude prices will play a spoilsport at this crucial inflection point for the growth of civil aviation in India?
Given the composition of air traffic in India — 85 per cent on people travel on some kind of work, they will take the price increase and pass on the hike…. provided there is growth and good economic activity in India. According to us, increase in crude prices will not have a major factor in the near future. However, if crude touches uncomfortable levels, then there are issues.
UB Group’s UB Holdings has been at the receiving end of having had to pledge shares and offer guarantees for both Kingfisher Airlines and United Spirits? Majority of promoters holdings are pledged and Vijay Mallya has offered personal guarantee for some borrowings. How is it all panning out and when do you think you will be able to take back the pledged shares?
When you have to incubate a business… you have to raise resources and lenders do want comfort. UB Holdings gives that. I am not concerned about this aspect… Vijay Mallya is not. It is not an irrational thing we are doing. When United Spirits’ stock price has fallen from Rs 2,200 a share as low as Rs 800 per share, the pledges have come down, which shows the sturdiness of our businesses.
United Spirits and United Breweries have been growing at better than industry average and is pulling ahead of all players in the marketplace. What are the challenges do you think these two will face as you steer the two industry leading players?
Both these businesses are growing at 15-20 per cent on humongous volumes of more than 100 million cases each… which means there is validation of what we are doing in the front end. We are making strategic investments in spirits and packaging. We are looking at investing Rs 1,000 crore for tightening up the backend for both these businesses.
The debt of around Rs 5,500 crore on United Spirits’ balance sheet on a leverage of around 1.4 times is not really comfortable. With hardening of interest rates and inflation looming large, will it be a problem for USL to borrow and invest further in business?
The growth of these businesses will fetch far higher IRR than the inflation rates. Even if we are talking about hardening of structural interest rates by another 25-50 basis points, it will mean a maximum blended rate of around 10 per cent for us. USL will report an EBIDTA of Rs 1,000 crore plus and with no significant repayment obligation, we should be comfortable.
