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Mounting losses: UB Group chairman Vijay Mallya. Hemant Mishra/Mint

Mounting losses: UB Group chairman Vijay Mallya. Hemant Mishra/Mint

Mallya may face turbulent shareholders meet

Mallya may face turbulent shareholders meet

Mumbai: Vijay Mallya, chairman of the $4 billion (Rs 19,680 crore) UB Group, faces possibly his toughest test yet in his 28 years at the helm of the ale-to-aviation conglomerate as he prepares to face shareholders at the annual general meetings of several group firms this week.

Mallya’s Kingfisher Airlines Ltd set alarm bells ringing among investors early this month after auditors B.K. Ramadhyani and Co. raised questions on the carrier as a “going concern" unless it infused requisite funds to meet obligations. The auditors said that accumulated losses of the airline were more than 50% of its net worth.

The capital-starved airline, which hasn’t ever made profits since its inception in 2005, had a debt of 7,057.08 crore on 31 March.

It posted a net loss of 1,027 crore on a sales of 6,496 crore for the last fiscal ended 31 March, compared with a 1,647 crore net loss on sales of 5,271 crore in the previous fiscal.

Kingfisher Airlines’ net loss in the June quarter increased sharply to 263.54 crore from 187.34 crore in the corresponding period last year.

In a 12 September report, Toronto-based analysts Neeraj Monga and Varun Raj of Veritas Investment Research said both parent UB Holdings Ltd and Kingfisher Airlines are teetering on the brink of bankruptcy, advising investors to sell both stocks.

Mounting losses: UB Group chairman Vijay Mallya. Hemant Mishra/Mint

Further, they said with negative equity value at Kingfisher Airlines, it should be no surprise that UB Holdings, which has marketable assets of 4,713 crore, compared with guarantees provided on behalf of the airline of 16,852 crore, is also staring down a deep hole.

With losses mounting, Kingfisher Airlines in 2010 hired the services of US-based global aviation consulting firm Seabury Group Llc to help it change course. Sanjay Aggarwal was brought in as chief executive after turning around the fortunes of low-cost airline SpiceJet.

Restructuring debt

Confronted with ballooning debt, the airline appointed merchant banker SBI Capital Markets Ltd (SBI Caps) for restructuring its debt.

“We believe that non-performing loans have been rechristened or repackaged into subordinated debt, and that Kingfisher has defaulted on its obligations.... We do not believe that Kingfisher Airline’s antics would have found any takers in a responsible credit market and that the airline would have been liquidated by now," the analysts at Veritas wrote.

In April, a consortium of 13 lenders, including State Bank of India and ICICI Bank Ltd, picked up a 23.21% stake in Kingfisher Airlines. SBI picked up a 5.67% stake and ICICI Bank, 5.3%.

In the transaction, India’s second largest airline by passengers carried, converted 750 crore of its total debt (back then) of 7,000 crore into equity at a 61.6% premium over its share price. It allotted shares to lenders on 31 March at 64.48 a share.

The shares have slipped since. They rose 1.1% to close at 25.05 on the Bombay Stock Exchange even as the exchange’s benchmark equity index, the Sensex, rose 2.95%.

The lenders got one seat each on the carrier’s board though it isn’t clear why they did not pick a 26% stake in the carrier, which would have given them more powers in terms of the right to block special resolutions and more board seats.

To be fair to Kingfisher, all domestic airlines are suffering the consequences of high crude oil prices and a hyper competitive environment.

Jet Airways (India) Ltd, the country’s largest airline by number of passengers carried, slipped into a loss in the June quarter (it made a profit in the year-ago quarter), owing to high jet fuel costs and the market shifting toward low-fare travel.

The carrier made a loss of 123.16 crore in the three months to June, compared to a profit of 3.52 crore in the year earlier. The June quarter is considered the second best for local airlines, next to the October-December period.

Another listed company and low-fare carrier SpiceJet Ltd posted a first-quarter loss of 71.96 crore against a profit of 55.21 crore a year earlier because of high fuel costs and increasing competition that prevented it from raising fares.

Jet has a debt of 13,000 crore and Air India, 42,000 crore.

Rashesh Shah, an analyst at domestic brokerage ICICI Securities Ltd, who tracks Kingfisher, agrees that the airline is in deep financial distress.

“Only the promoters can save the airline. They will have to infuse 2,000 crore to 3,000 crore to come out of the crisis. We expect promoters will infuse money through a rights issue by December or January," Shah said.

In August, the board of Kingfisher Airlines approved a proposal to raise up to 2,000 crore through a rights issue.

A.K. Ravi Nedungadi, president and chief financial officer at UB Group, agrees with the pressing need to raise equity but points to the deteriorating market.

“Who could raise equity in last 12 months?" he asked.

“Airlines are captive to a larger global scenario. And it is not prudent to sell equity at this point of time. Till then, the business associates of Kingfisher Airlines will pump in money," Nedungadi said.

According to him, the airline is considering all options, including equity capital and selling real estate assets owned by it.

Headquarters shifted

The airline’s headquarters, located near the domestic terminal of Mumbai airport, has shifted to a rented building near international terminal of the airport and the old building could be liquidated for about 100 crore, he said; the airline could also capitalize real estate assets in Bangalore, where the group is headquartered.

Other options include the sale and lease back of planes that it owns.

Prakash Mirpuri, vice-president, corporate communications at Kingfisher Airlines, said it is incorrect to say that Kingfisher Airlines auditors’ have raised serious doubts about the survival and that their report only draws attention of the shareholders to the reasons for preparing the accounts under the going concern concept.

He said that since the start of the year, long term funds amounting to over 475 crore have been infused into the airline.

ICICI Securities’ Shah stressed on the need for the airline to rationalize its fleet size, currently at 66 planes, and focus on profitable routes rather than “irrational expansion in future".

Mallya, ranked 879th in the Forbes World Billionaires Ranking 2011 with a worth of $1.4 billion, has been a compulsive acquirer, even at the cost of ignoring other financial parameters.

After acquiring scotch whisky maker Whyte and Mackay in an all-cash deal in May 2007, Mallya bought low-cost aviation pioneer Air Deccan in December 2007. In the same year, he also bought Formula 1 team Spyker for euro 88 million and renamed it Force India.

He owns Indian Premier League team Royal Challengers Bangalore and two Kolkata football teams Mohun Bagan and East Bengal.

Still, the personal fortune aside, the airline has been in trouble with fuel and catering companies since the financial crisis of 2008-09, defaulting on payments. State-owned oil marketing companies that supply jet fuel have put the airline on a cash-and-carry basis.

An airline consultant, requesting anonymity, said Kingfisher Airlines had faced two major stumbling blocks in the form of its integration with loss making Air Deccan and also battling the economic slowdown before which crude oil reached a high of $147 per barrel.

“These two critical events have led Kingfisher Airlines to become a habitual defaulter of loans to banks, fees to airport operators, payment to jet fuel vendors and remuneration to other services providers including caterers," the consultant said.

The stocks of Kingfisher Airlines and UB Holdings have fallen 62% and 64%, respectively in the year-to-date (compared with the 18% fall in the benchmark Sensex) and institutional investors such as IDFC Asset Management, Sundaram Asset Management Co., Kotak Mahindra Asset Management Co. have all sold their holdings in the airline over the past few months.

pr. sanjai@livemint.com

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