'In six months, we'll be under-leveraged'

Q&A/ Ravi Nedungadi

Ravi Nedungadi, Chief Financial Officer and President of the UB Group who, during this year, has driven two of UB's largest acquisitions, isn't resting. Just a day after announcing that Kingfisher Airlines will merge with Deccan Aviation, Nedungadi is looking at the integration process as his next challenge over the next six months. It's dejà vu for him. The Kingfisher Airline and Deccan Aviation merger is like McDowell acquiring Shaw Wallace three years ago. Excerpts from his conversation with Raghuvir Badrinath:

How is the Deccan Aviation management reacting after losing control over Air Deccan?

We are not moving from the Deccan management's vision of making the common man fly. But, at the end of the day, there is a certain level to which individual promoters can take an airline forward. The promoters of Deccan Aviation have to be given credit for having built an airline with such a vast network, given the obvious constraints. They were realistic enough to realise they could not take it further. Instead of diluting to some third party, who could have driven a hard bargain and not brought anything but cash to the table, the choice to align with Kingfisher Airlines was a good one in the end.

When we first met the Deccan management, they were morose. Ninety-nine per cent of Deccan flights were in the red on an operating cost basis and they were trying to figure out how one could change a situation where every flight operated lost more money than when on the ground. We are leading the consolidation and UB's heritage of handling multiple products and different consumers is the key.

How should an investor in Deccan Aviation approach the merger, given that the combined firm will start to take off with losses of over Rs 1,000 crore?

The recent increase in the stock price of Deccan Aviation is the sign of things to come. Kingfisher Airlines comes to the table without any legacy and we operate aircraft of the same make which, after integration, can be leveraged for better returns. The combination of 80 aircraft, 600 flights and 70-plus destinations is a massive undertaking. There have to be levers to pull with all kinds of vendors benefitting from the size which is not open to others. We will use the size to pull our costs down.

The fact of the matter is that while nobody denies there is a place for low-cost offerings in a market, the kind of cost differences that typically exist between low-cost and full-cost carriers in other markets just don't exist in India. While things like manpower cost and airport taxes are almost the same here, the cost of aviation turbine fuel (ATF) is twice the international levels. While the cost of Kingfisher Airlines is more than that of Deccan, on an apple-to-apple basis, Kingfisher is making more money than Deccan.

What has held back these results from being driven to the bottomline and how we can make a difference is where I think the Deccan shareholder stands to benefit. All kinds of decisions can now be made seamlessly which will enable us to run the business to make more money on a collective basis. The obvious things are engineering costs and lower prices on sourcing. I expect between Rs 100 crore and Rs 150 crore to come through that.

What is the way forward for the merged entity?

UB Group Chairman Vijay Mallya and I spent enormous time with the Deccan management on trying to persuade them that their key strength is not low cost but the enormous network that they have built. If you are playing the 'cheapest game', there will always be another player to give away a cheaper ticket. It is a downward spiral and this is not what they should build on. The combined network is like that old Heineken Beer ad, which said, 'Beer which reaches parts that other beers don't.'

The way forward for Deccan is to be low-cost, the cheapest in its class, but not at the cost of service. We will extract value by tweaking the products; sweat it more without the end consumer having to pay more. We cannot continue to be in a situation where, at the same price, a passenger takes a competing SpiceJet or Indigo because they are more courteous and smile, while at Deccan counters there is chaos and people are fighting.

The UB Group has been overleveraging itself to fund acquisitions and expansions. You raised a debt of $625 million to fund the acquisition of Whyte & Mackay. The aviation business is bleeding and will continue to be a cash guzzler...

The fact of the matter is that we are in a far more comfortable position than five years ago. Though the absolute numbers look high, we have been working with a method in the seemingly maddening situation. The treasury stock in United Spirits, which raised debt to fund Whyte & Mackay, is so valuable that within a day, we can settle the total debt of $625 million. We have no re-payment obligation till the middle of 2009 and we will continue to hold a decent amount of debt in our books. The spirits business has substantial growth as we go forward and with the free cash flow we generate, we can manage the resources adequately. For instance, with the McDowell-Shaw Wallace merger kicking in admirably""without hiking end consumer prices, the operating margins are up 300 per cent.

For United Breweries, we are doing a rights issue of Rs 425 crore to build new capacities, which will be self-liquidating funding as volumes will offset costs. As regards UB Holding which controls our aviation business, we recently concluded a Rs 600 crore qualified institutional placement which will replace some of the high-cost debt. In addition to this, we are doing a Rs 700 crore allotment of warrants to the promoters.

In the next six months, as a group, we will be under-leveraged rather than over-leveraged.

Shaw Wallace, Whyte & Mackay, Deccan Aviation "" what's next?

We always keep headroom for possible strategic opportunities. However, at the moment, I think the challenge on our hands is to make these acquisitions deliver. We, as a group, are clearly aligning ourselves to be relevant in the global scenario in each of our businesses. Should an opportunity arise, we will have to take a look, especially at the alcohol beverages business. There is nothing on the horizon we are actively pursuing. However, when two international players do something and that causes an opportunity to leverage and is of great relevance to the Indian market, we have to look at that and we are ready for that.