The breweries business of Kingfisher has been doing excellent over the years now. UB group should continue focussing on the existing brewery business and try to make it more profitable. The Kingfisher Airlines with its existing debt of close to Rs. 7,000 crores facing the acute problem of debt burden, Bank Arrears, Income Tax problems for not paying TDS, Delayed Salaries, Fuel Dues, Aircraft Lease Rental Dues, Erosion of net worth and brand image. With the staff going on strike and airlines on the verge of stopping because of airlines suspended from IATA, the one possibility is to sell off the NPA assets to some other player and exit the business. This would come hard on both the existing debt lenders and the UB group as they would hit hard on their brand image and also the existing NPA would be quite less than the debt amount forcing the Banks to take huge losses on the balance sheet if they would not restructure debt and go for forced sale.
The best way going forward for the kingfisher is to restructure the debt by injecting the equity using FDI either for the Kingfisher Airlines or in the existing breweries business. Also if FDI bill for the airlines industry get passed, a joint venture with a foreign player thereby leveraging the existing capability and operational excellence of the foreign player could be beneficial. This should be backed by solid business plan for the future learning from the mistakes of last 6 years and following the standards set by the existing profitable competitor in the Indian market.
Airlines industry is expected to perform good going forward with expected reforms and lowering of costs by the government. Some of the points which should be taken into considerations are:
1) 1QFY2012/13 marked the best result in 18 months. In the three months ended 30-Jun-2012 all private Indian carriers, with the exception of Kingfisher, were profitable, albeit that in several cases this was as a result of sale-and-leaseback and other income.
2) 1QFY2012/13 reflected two key trends faced by Indian carriers. On the one hand, improved matching of demand and supply (largely as a result of the contraction of capacity by Kingfisher), combined with greater pricing discipline resulted in a substantial increase in average yields which contributed significantly to the improved performance.
But this was offset by a hostile cost environment primarily related to high fuel prices and a weak currency. The particularly strong performance by Air India, which achieved the highest average fare and reported a small operating profit on domestic operations, reflected the changing market dynamics.
After the restructuring and placing the necessary cost effective measures in place which is well explained by the CFO, we have forecasted the revenue and operating income for next 6 years. What we have observed that due to these robust measures we would be able to achieve the profitability which was not the case with Kingfisher ever before. This would increase confidence of the lenders (the consortium of banks) and also the outside stakeholders.
Some of the proposals to restructure the debt and control the oil prices to get Kingfisher Airlines on board with our current plans are:
1. Infuse greater Equity – In November 2011, Kingfisher Airlines had highest operating profit among most of its competitors. But due to high levels of debt – approximately Rs. 7000 crore - and cost of debt about 14%, it had lowest net profit. This suggests that if the debt is reduced which in turn would reduce interest payments; the company could well recover from losses. This can be done by converting debt into equity. This way the major stake holders i.e. the banks will recover a part of their investments in Kingfisher which most of them have already declared to be NPAs.
2. FDI – Kingfisher Airlines aims to bring more FDI into itself by foreign airlines in conjunction with the new law passed by the...
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