IndiGo’s big IPO may lead to re-rating of airline stocks

IndiGo’s big IPO may lead to re-rating of airline stocks

Mumbai: India’s leading low-fare carrier IndiGo, run by InterGlobe Aviation Pvt. Ltd, is planning to raise $500 million (Rs2,215 crore) through its initial public offering (IPO), the highest ever for an Indian airline, and this may lead to a re-rating of airline stocks, said sector analysts.

Shares of Jet Airways (India) Ltd, Kingfisher Airlines Ltd and SpiceJet Ltd are traded on Indian exchanges.

The IPO is scheduled for the last quarter of the current fiscal ending March 2011, said two persons close to the development. One of them is an airline executive and the other is an investment banker.

IndiGo has hired five investment bankers, including JM Financial Ltd, Credit Suisse Group AG, Citigroup Inc., UBS AG and Morgan Stanley for the proposed IPO.

Ahead of the IPO, IndiGo is looking at an equity placement that could result in dilution of promoters’ stake of as much as 25%. Last week, the company conducted investor roadshows in Hong Kong and Singapore for the equity placement.

“The exact details of the proposed IPO are yet to be finalized but IndiGo is planning to raise 10 times its earnings," said one of the persons mentioned earlier. He added that the low-fare airline, which held a 16.4% market share in August through 188 flights across 22 destinations, will raise more than the Rs1,899 crore that rival and full-service airline operator Jet Airways raised five years ago.

Aditya Ghosh, president of IndiGo, did not return calls made to his mobile phone nor did he reply to text messages.

“The IPO is expected to leverage the success story of IndiGo," said Kapil Kaul, India chief of Sydney-based aviation consultancy Centre for Asia Pacific Aviation, adding that the airline’s valuation would set the benchmark for industry stocks.

“This could be significantly higher than low-fare airline stock and even higher than full-service carriers such as Jet Airways," he added.

A successful and large IPO by IndiGo could put pressure on other stocks of airline companies such as Jet Airways and Kingfisher Airlines that are also competing to raise funds from the market.

On Monday, airline stocks took a beating, with all three listed airlines losing value even as the Bombay Stock Exchange’s benchmark index, the Sensex, rose 0.15% to close at 20,475.73 points.

SpiceJet slipped 3.25% to close at 74.40, Jet Airways—India’s largest carrier by traffic—fell 1.26% to 806.15, and Kingfisher fell 1.75% to 73.05.

Since January, Jet Airways has risen 45.74%, SpiceJet 31.1% and Kingfisher 15.59%.

According to a senior airline consultant, who spoke on condition of anonymity, full-service carriers will likely find it difficult to command a better price after IndiGo’s IPO as low-fare carriers, given their profit track record, are offering better investment prospects than full-service carriers.

IndiGo reported a marginal profit in 2009, a difficult year for airlines, and strong profits in fiscal 2010.

SpiceJet, also a low-fare airline, also posted profits in fiscal 2010, while Kingfisher Airlines is still in the red and Jet Airways had a slight improvement in its financials.

“Based on the operational performance, IndiGo should fetch a premium on the peer group," said Rashesh Shah, an analyst at domestic brokerage ICICI Securities Ltd.

Meanwhile, other airlines are also looking to raise funds as they expand to keep up with the return of demand for air travel.

Jet Airways is planning to raise $400 million through the sale of shares to qualified institutional buyers after four largely fund-starved years.

Kingfisher Airlines is also in the process of increasing its authorized equity share capital from 900 crore to Rs1,650 crore and an increase in the authorized preference share capital from Rs100 crore to Rs2,600 crore.

This is apart from the company’s plan to raise $250 million through global depository receipts and another Rs500 crore through a domestic offering, subject to regulatory approvals.

“Full-service carriers need to rush to raise funds before IndiGo hits the capital market, if they want to command the price they want," the airline consultant quoted earlier said.

Shah of ICICI Securities said the time is right for airlines to raise funds considering the demand and supply gap.

“Going by the aircraft acquisitions and passenger demand, the next 12 to 18 months are going to be positive for the airline sector," said Shah, who wrote in a 20 September report that the Indian airline sector put up an impressive performance between April and August 2010, with domestic passenger traffic growing 20% year-on-year.

This was driven by strong economic growth, conversion of full-service carriers’ major capacities towards low-cost services (in line with the changing preference of customers) and stable crude oil prices, the report said.

Another consultant to the airline industry, who spoke on condition of anonymity, said that given the cyclical nature of the industry, it is always prudent for an airline to have a sufficient buffer.

“The airline needs to make pre-delivery payments for aircraft acquisitions every year," he said, pointing out that it will also soon be time for IndiGo to start international operations. “An airline cannot go to market every now and then for money."