The UB Group is no stranger to fuelling growth using debt, but this strategy has backfired in the aviation business. Its alcoholic beverages business, too, has a sizeable interest outgo, but its profits are adequate to service debt. In the aviation business, the situation is quite the reverse. The business itself is capital-intensive and has a long gestation period. Then, rising crude prices have increased costs, which airlines have not passed on in full to customers. Profitability and cash flows both have been affected, a fact made worse by the high level of interest payments, pushing Kingfisher Airlines Ltd deeper into the red.
United Breweries (Holdings) Ltd (UBHL) is a listed firm that also owns stakes in the group’s key companies in the aviation, alcohol, fertilizer and engineering sectors. UBHL is the parent company of Kingfisher, with a 55.6% stake in the airline as of 31 March. It also owns 28% of United Spirits Ltd, 12% of United Breweries Ltd and stakes in other group firms.
UBHL had a market capitalization of Rs550 crore as of Tuesday, much less than the value of some of its investments. That may seem anomalous, given that Kingfisher’s market value is Rs1,087 crore, United Spirits’ value is Rs10,033 crore and that of United Breweries is Rs10,023 crore. The huge debt and the losses contributed by investments in Kingfisher are to blame.
On a consolidated basis, UBHL has debt of Rs9,523 crore and a net worth of Rs1,656 crore. But accumulated losses of Rs2,275 crore have wiped out its entire net worth. The company has also given corporate guarantees on behalf of subsidiaries worth Rs7,232 crore, and Rs178 crore on behalf of associate firms.
In 2010-11, UBHL’s operating income rose by 20.7% to Rs6,733 crore. Its loss of Rs882 crore, while sizeable, was half the previous year’s loss level. Its cash flow position was weak, with net cash generated from operations at a negative Rs457 crore, chiefly due to higher working capital needs. Consolidated figures for the September quarter are not available, and stand-alone performance is not relevant as revenues are just 5.6% of the consolidated figure.
United Spirits did well in 2010-11, with consolidated revenue rising by 17.5% to Rs7,477 crore and Ebitda (earnings before interest, tax, depreciation and amortization, a measure of operating profit) up 16.1%. But net cash generated from operations was a negative Rs18 crore, chiefly due to a sharp jump in its working capital requirements. The firm’s performance in 2011-12 has been good thus far, with its consolidated Ebitda rising 17% to Rs748 crore in the half year ended September, but interest payments took away Rs369 crore. Its debt to equity as of 31 March was 1.7 times, which is relatively high, but its business is in good health, allowing it to service its debt without great difficulty.
United Breweries has a relatively low debt burden, with a debt to equity of 0.4:1 as of September. In the half year ended September, its Ebitda was Rs227 crore, amply adequate to service its interest burden of Rs41 crore. Since its 2010-11 annual report hasn’t been published yet, operating cash flows are not available for comparison.
Kingfisher Airlines’ debt as of 30 September is Rs7,544 crore, 7% higher than its level on 31 March. That increase would have perhaps been acceptable if profit grew at the same rate as income did. Its income rose 8% year-on-year during the September quarter, but it incurred a loss before interest, tax and depreciation of Rs271 crore, compared with a profit of Rs55 crore in the year-ago period. The final loss figure (after taxes) works out to Rs469 crore, compared with Rs231 crore in the year-ago period, chiefly due to a Rs333 crore interest outgo. In the half year ended September, revenue rose 11% and it incurred a loss of Rs732 crore, compared with Rs419 crore in the year-ago period.
Kingfisher’s balance sheet shows a net worth of Rs2,396 crore, wiped out by accumulated losses of Rs6,081 crore (up from Rs5,348 crore) in the March quarter. The company’s working capital position is comfortable. While it incurred an operating loss before working capital changes of Rs1,108 crore in 2010-11, it had a decrease in working capital requirement of Rs1,233 crore. The half year ended September’s balance sheet abstract, too, shows net working capital in the negative.
The company’s attempts at returning to profitability by restructuring operations and debt in 2010-11 have not worked. Its current efforts are, therefore, aimed at lowering costs by exiting unprofitable routes, and by relying on the higher-yielding Kingfisher Class segment to improve profits. Eventually, it must hope that margins improve, giving sufficient headroom to service debt, and also wipe out its accumulated losses. At this juncture, it seems like it has a long road ahead of it. If losses continue in this fashion in the short run, an equity infusion will be needed to give the lenders some more comfort. This will also rescue the UB Group’s image and restore investor confidence in UBHL.