When the pandemic hit the global aviation industry, a number of them were bailed out by their governments. In India, with no bailout in sight, some budget airlines are flying on a wing for a prayer. And just when it looked like they would somehow get away with it, the second wave of covid again threatened the survival of midsize airlines.
Go Airlines (India) Ltd, which operates GoAir, has come up with a bold solution to escape its predicament. The company is considering an initial public offering (IPO) of its shares worth ₹3,600 crore. If public funds are not available, why not use public procurement instead!
“If the company succeeds in raising as much as ₹3,600 crore will go a long way in stabilizing its operations, ”said an analyst from a national institutional brokerage asking for anonymity. Indian Oil Corp. Ltd for the fuel supply.
A moot question is what valuations the company can expect and how much equity it would be willing to dilute on the IPO. Over the past month, the company has raised ₹546 crore from its promoters at a post-money stock valuation of simply ₹2,600 crore.
If the IPO is at similar valuations, it will cause huge dilution and the promoter’s stake will drop below 42%, down from almost 100% before the IPO. Press reports suggest the company is aiming for higher valuations than SpiceJet Ltd, which currently has a market capitalization of ₹4,200 crore.
“At this point, everyone is guessing what investors are likely to pay for a struggling airline. It is likely that GoAir is aiming for a dilution of around 35%, which essentially implies a valuation of post-money stocks of a little more. ₹10,000 crore, ”said the aforementioned analyst.
GoAir’s post-pandemic troubles in the sky almost mirrored that of Spicejet. The total number of passengers carried by the two airlines fell by around 47% and 50% respectively in March of this year, compared to February 2020, just before the pandemic struck. This is much worse than the 29% drop in passenger traffic from market leader Indigo and Vistara’s 40% drop. Both companies have negative net worth and their trade payables have increased, given cash flow constraints.
In this context, the question arises as to why GoAir should obtain a higher valuation compared to its biggest competitor. Its passenger traffic market share stood at 7.8% in the March quarter, while Spicejet reported a 12.6% market share, in addition to much higher freight revenues.
It all comes down to support from the promoters, the Wadia Group, who pumped money into the airline as recently as this month. This is likely to reassure potential investors for the IPO, analysts say. It also helps keep its unit operating costs lower than SpiceJet’s.
But it clearly won’t be a smooth ride for GoAir’s IPO. Almost simultaneously, Indigo announced its intention to lift ₹3000 crore through a Qualified Institutional Placement (QIP). This could potentially reduce appetite for a major show from another airline.
GoAir has also had a history of churn at the top, with three CEO changes in the past three years. It will be a red flag for some investors. In addition, the pandemic allowed the sector to recover by nearly eight months, with traffic returning to August 2020 levels.
Of course, ultimately it all depends on how well the primary markets perform when GoAir hits the streets. If the markets fly high, who knows, the airline may well come away with much-needed funds, and also get away with a much lower dilution of its promoters’ stake.
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