BackKey takeaways from InterGlobe’s draft prospectus for share sale
The DRHP filed by the company details how the airline has claimed the top spot in the aviation industry by sticking to a single-aircraft model with no frills
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Mumbai: InterGlobe Aviation Ltd, which runs India’s largest airline by market share IndiGo, and its existing investors plan to sell around 10% of its equity to raise around ₹ 2,500 crore, the company said on Tuesday.
The draft red herring prospectus (DRHP) filed by the company on Tuesday details how the airline has claimed the top spot in the aviation industry by sticking to a single-aircraft model with no frills. The firm has been consistently profitable since 2009. The closely held firm, founded by Rakesh Gangwal and Rahul Bhatia, has also tweaked its ownership structure in a manner that could help them bring in strategic foreign investors at a later stage.
Here are the five key things the draft prospectus reveals about the airline:
Fleet strategy
As of 30 April, the IndiGo fleet consisted of 96 Airbus A320 aircraft. The airline had placed a firm order with plane maker Airbus SAS for 100 A320 aircraft in June 2005, all of which were delivered by 3 November 2014, two years ahead of scheduled. IndiGo placed another order with Airbus for 180 A320neo aircraft in June 2011. “We believe the magnitude of our 2005 and 2011 aircraft orders helped us to negotiate favourable terms with Airbus and our other aircraft-related suppliers and service providers, which provide us with a structural cost advantage by reducing the overall costs associated with the acquisition, maintenance and operation of our aircraft," IndiGo said in the prospectus.
Airline consultants agree.
“Bulk orders ensure the ability to get volume discounts on fleet and on maintenance contracts. It helps the airline maintain a very young fleet (average age around three years) and retires airplanes before six years, which helps avoid the costly “D checks", which are extremely expensive and takes the aircraft out of service for up to 60 days (which has an impact on schedules)," said an airline consultant, requesting anonymity.
The average age of IndiGo’s fleet is 3.26 years as of 30 April 2015.
Of IndiGo’s fleet of 96 aircraft, 22 are on finance leases and 74 are on operating leases, including 12 aircraft on short-term operating leases, which work out to be cheaper for the airline.
Profitability
The airline turned profitable in fiscal 2009 and has remained profitable in each subsequent fiscal through FY14. No other Indian airline has consistently remained profitable over the same period, according to consulting firm CAPA India.
IndiGo was the most profitable carrier in India for fiscal 2014, as measured by Ebitdar (earnings before interest, tax, depreciation, amortization and rentals) margins, with a margin of 19.8%. GoAir, Jet Airways, SpiceJet and Air India had Ebitdar margins of 16.9%, 5.9%, 2.3% and 9%, respectively, during the same period, IndiGo’s prospectus said quoting a S-A-P Group LLC report without disclosing the date of publishing.
IndiGo posted a net profit of ₹ 720.83 crore for the nine months to 31 December 2014 on a revenue of ₹ 10,359.79 crore. For the fiscal to March 2014, IndiGo has reported a net profit of ₹ 473.32 crore on a revenue of ₹ 11,432.11 crore.
The airline reported a net profit of ₹ 140.59 crore, ₹ 579.46 crore ₹ 479.09 crore for fiscal 2012, 2011 and 2010, respectively. As of 31 December 2014, IndiGo had a total debt of ₹ 4,002.82 crore. All of this debt is aircraft related and not on account of working capital expenses.
Business model
IndiGo employs a single type of airframe and engine within its current fleet, resulting in a reduction in expenses related to maintenance, spare parts, operations, crew training and labour. It also helps manage crew rosters more efficiently. The airline has also pushed aircraft utilization to 11.4 hours per day per aircraft in fiscal 2014—the highest of any airline in India, according to CAPA. IndiGo maintains high aircraft utilization rates by keeping the turnaround time between flights at a minimum.
Additionally, it operates a point-to-point route network with no interlining or code-sharing with other airlines for passenger traffic, which further helps reduce turnaround time.
“We offer a single class of economy service, which allow our A320 aircraft to have the maximum seating capacity of 180 seats. Unlike most full-service carriers, we do not offer a frequent flyer programme, free lounges or include food and beverages in our ticket price for non-corporate passengers. These items have helped to further reduce our cost base," IndiGo said in the prospectus.
According to the analyst cited above, IndiGo has stuck to a basic model.
“It is not rushing to buy widebodies to go after international markets or attempting to create a business class (although it’s only a matter of time)," the analyst cited above said. He said IndiGo stuck to basics by not offering any frills unlike other airlines.
Going forward, IndiGo seeks to reduce its distribution costs by increasing direct sales via website, airports, call centres and mobile apps, which will help it scale down commissions paid to online and traditional travel agents. Approximately 20.9% of IndiGo’s ticket sales were made through these direct channels in fiscal 2015.
Ownership structure
Ahead of the proposoed IPO, IndiGo’s promoters tweaked the airline’s shareholding structure to enable the share sale and create headroom for getting in foreign investors. One of the company’s promoters, Gangwal, brought his 47.88% shareholding into the NRI (non-resident Indian) category.
Earlier this holding was considered as foreign direct investment since it was held through a foreign company, Caelum Investment LLC. Indian law allows a foreign company or airline to own up to 49% in a domestic airline. However, an NRI is allowed to hold 100% in an airline.
By making this change, the company can create headroom to potentially bring in a strategic foreign investor at a later stage.
The rest of the stake is held by IndiGo’s other promoters, including Rahul Bhatia, who holds 51.12% in the company.
Apart from the holding company (InterGlobe), those selling shares as part of the IPO include Bhatia and Gangwal. The airline’s former and first chief executive officer, Newton Bruce Ashby, and current chief commercial officer Sanjay Kumar will completely sell their shareholding in the company.
Preference share conversions
Ahead of the IPO, IndiGo has converted several CPS or convertible preference shares into equity shares. Besides, some preference shares changed hands.
For instance, 2,004 CPS of ₹ 1,000 each were transferred from Chesapeake International Investments LLC to Rakesh Gangwal on 24 July 2014 for cash at a price of ₹ 145,905 each CPS.
This effectively works out to a per share value of ₹ 145.9, since each CPS converted into 1000 shares after a share split and a 9:1 bonus issue. According to news reports, the IPO is expected to garner ₹ 2,500 crore, which means the issue price could be around ₹ 420 per share.
The transfer in ownership last year, therefore, was at rates substantially lower than market rates, as there’s no reason for Indigo’s valuation to rise by three times in the past one year.
In another transaction, 1,503 CPS of ₹ 1,000 each were issued to Paul Carl Schorr, IV (nominee of G5 Investments) on 29 September 2006 for cash at a price of ₹ 7,630 (including a premium of ₹ 6,630) each CPS.
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