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When the pandemic hit the global aviation industry, several airlines were bailed out by their governments. In India, with no bailout in sight, some budget airlines have been flying on a wing a prayer. And just when it seemed like they’ll somehow get by, the second covid wave has threatened the survival of mid-sized airlines all over again.

Go Airlines (India) Ltd, which runs the low-cost airline Go First, has come up with a bold solution to escape this predicament. The company plans to make an initial public offering (IPO) of its shares worth 3,600 crore.

“If the company is successful in raising as much as 3,600 crore, it will go a long way in stabilizing its operations," said an analyst at a domestic institutional brokerage requesting anonymity. The situation is now so bad that the company has said a part of the IPO proceeds will be used to repay dues to Indian Oil Corp. Ltd for fuel supplies.

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A moot question is what valuations the company can expect and how much equity it would be willing to dilute in the IPO. In the past month, the company raised 546 crore from its promoters at a post-money equity valuation of merely 2,600 crore.

If the IPO is at similar valuations, this will result in huge dilution and the promoter stake will fall to below 42% from nearly 100% pre-IPO. News reports suggest it is aiming for higher valuations than SpiceJet Ltd, which has a market capitalization of 4,200 crore.

“At this point, it is anybody’s guess what investors are likely to pay for a struggling airline. It’s likely that Go Airlines will aim for a dilution of around 35%, which essentially entails a post-money equity valuation of a little more than 10,000 crore," said the analyst mentioned above.

The carrier’s troubles have nearly mirrored those of SpiceJet. Total passengers carried by the two airlines fell 50% and 47% respectively in March this year compared to February 2020, just before the pandemic hit the country. This is far worse than the 29% drop in market leader IndiGo’s passenger traffic and Vistara’s decline of 40%. Both companies have a negative net worth and their trade payables have risen, given the constraints on cash flow.

This raises the question why Go Airlines should get a higher valuation than its larger competitor. Its passenger traffic market share stood at 7.8% in the March quarter, while SpiceJet reported a 12.6% market share and much higher cargo revenues.

It all boils down to the backing of the promoters, the Wadia group, which infused funds into the airline as recently as this month. This is likely to give prospective IPO investors some comfort, said analysts. It also helps that its per unit operating costs are lower than that of SpiceJet.

However, it won’t be a smooth ride for the Go Airlines IPO. Almost simultaneously, IndiGo has announced plans to raise 3,000 crore through a qualified institutional placement. This could potentially reduce appetite for a large issuance from another airline.

Go Airlines has also had a history of churn at the top, with three changes in CEOs in three years. This will be a red flag for some investors. What’s more, the pandemic has delayed the sector’s recovery by almost eight months, with traffic now back at August 2020 levels.

Of course, at the end of the day, it all depends on how well the primary markets are doing when Go Airlines hits the Street. If markets are flying high, the airline may well walk away with the funds it so badly needs with much lower dilution of its promoters’ stake.

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