Battered from three years of almost non-stop losses, Deccan Aviation Ltd, owners of India’s biggest low-cost airline, Air Deccan, appears close to running out of all its equity, according to separate analyses of its finances by investment bank JP Morgan Chase and Co. as well as Mint .
Air Deccan has been in the news in recent days as a possible takeover candidate.
On 31 March, the day the company closed its books for the last quarter, Deccan Aviation, which runs Air Deccan and a small helicopter charter operation, had not more than Rs42 crore in equity, and, perhaps, even less than that in available cash for its day to day operations, according to Mint’s analysis.
If the airline is losing money at the same rate today as it did in the January-March quarter—about Rs2.36 crore a day—that equity has likely been already depleted.
“Excluding the IOU that Deccan has from Investec, we estimate that Deccan has close to zero residual equity,” JP Morgan Chase analyst Peter Negline wrote in a note to investors on Friday, referring to instalments from a UK bank still due to the company from a deal completed last year. “If they cannot find private equity to inject funds immediately, we believe that their departure from the market is imminent.”
It is not possible to ascertain Deccan Aviation’s cash reserves since the company hasn’t disclosed the figures since the quarter ended September 2006. Deccan is also likely to have in hand money from advance ticket sales, estimated at between Rs20 crore and Rs30 crore, though the company does not release those figures either.
Deccan Aviation spokeswoman Vijaya Menon said that officials would not respond to a detailed list of questions sent by Mint. Director of finance Ramki Sundaram is currently in Toulouse, France, along with managing director G.R. Gopinath, and chief operating officer Warwick Brady did not return repeated phone calls seeking comment.
Mint’s analysis was done by adding up Deccan Aviation’s paid-up equity; the company’s cash reserves figures, which were last published in September 2006 and included money left over from the company’s successful May 2006 initial public offering; and income from operations and one-time gains.
From this, the analysis subtracted gross losses for the last three quarters. Expenses such as depreciation of Deccan’s assets, which is mostly an accounting entry and does not require the company to pay out any cash, were excluded in this calculation.
There is no suggestion that Air Deccan is having problems funding its operations. Airline employees said they had received their salaries for the month of April and the airline continues to fly over 350 flights a day.
Indeed it appears to be business as usual as the airline, on Friday, announced another one of its frequent promotions that have helped it to become one of India’s three biggest airlines by market share: it’s giving away 100,000 tickets for free.
And investors in the airline seem solidly behind the company. “We have had a lot of faith in Air Deccan since we started partnering with them, and we’re still sure they are the right bet,” said a spokesperson for Mumbai-based ICICI Venture, a venture capital fund that backed Deccan in pre-IPO rounds of financing and still owns a little over 10% of the company.
On Friday, when the Bombay Stock Exchange’s Sensex fell 1.02%, Deccan shares rose nearly 5%, or Rs5.40, to Rs114.30 a share. While below their 52-week high of Rs162.70, they are trading well above the 52-week low of Rs64 share.
Deccan should also see other inflows of funds in coming months. It reached a sale and leaseback agreement three weeks ago with Ireland’s Genesis Lease Ltd for two of its undelivered Airbus A320s, from which it could earn profits of about Rs15 crore per aircraft, say industry insiders. Also, it is still owed $40 million, about Rs160 crore, from a deal with two European lenders, Investec Bank (UK) Ltd and Germany’s HSH Nord Bank AG, in which it sold them the right of delivery for about 60 of its undelivered Airbus A320s.
Money from those deals won’t show start showing up until September, said N. Srivatsa, Deccan’s company secretary, and will be spread out through February 2008. Srivatsa declined additional comment.
Still, analysts say that its current financial condition makes it susceptible to a buyout. Deccan has been trying to secure $75-100 million in private equity financing since January, and companies such as US buyout fund TPG Inc. have shown some interest.
“We expect that Air Deccan is looking to find a buyer or to be merged into a larger airline group,” wrote Negline, the JP Morgan analyst, in what was a report on Jet Airways (India) Ltd, India’s biggest domestic airline. “We believe that Kingfisher is the only logical buyer given their strong financials, existing management team, fleet compatibility, common Bangalore head office, etc.”
Both Deccan Aviation and the United Breweries Group, which operates Kingfisher Airlines Ltd, have denied reports that Kingfisher might be interested in acquiring Air Deccan.