Kotak analysts say debt as much as Rs 10,000 cr, a third more than reported.
The debt woes of Kingfisher Airlines is worse than what the company had been reporting, according to a recent research report by Kotak Institutional Equities.
The airline, owned by the Bangalore-based UB Group, has been saying its debt was around Rs 7,500 crore. The report says it is at least Rs 10,000 crore.
“In our view, the debt number is understated, as current liabilities, a large part of which comprise overdue payments, are very high. For a perspective, current liabilities of the company at Rs 5,000 crore are similar to Jet Airways, even as Jet’s quarterly run rate of sales is 2.2 times that of Kingfisher. Going by that assumption, one could say that almost half of current liabilities of the airline are overdue payments and, hence, equivalent to debt (as punitive interest is charged for overdue payments). Therefore, in our view, actual debt in Kingfisher’s balance sheet is closer to Rs 10,000 crore,” said the report, authored by Jasdeep Walia of Kotak Institutional Equities.
The report further takes a critical view on Kingfisher’s profit and loss. It says Kingfisher is the only publicly held airline in India which did not make a profit at the PBT (profit before taxes) level (excluding one-offs) in the third quarter of 2010-11, the best quarter for the sector till date.
“All the positives – high PLF, high pricing, high passenger growth and subdued fuel price (Nymex in the range of $85-90 per bbl) unfolded in the quarter. In our view, if an airline could not make money (then), it is almost impossible to make profits without a significant capital infusion (which would reduce interest expense). Also, one has to keep in mind that Kingfisher does not show maintenance reserves as part of operating expenses, which is done by other airlines (SpiceJet and Jet). Therefore, on a like-to-like basis, profitability of the airline is even lower than what is apparent in the reported numbers,” Walia wrote in his research report.
Analysing the sector further, the report argued in favour of a policy overhaul, stating it was time the Indian government initiated policy reforms to correct the structural problems in the industry. “Indian carriers pay 40 per cent premium on the international price of jet fuel for their domestic operations. State sales tax, approximately 25 per cent (on jet fuel) on an average basis for domestic carriers, needs to be corrected to an average level of four per cent across the country. As of now, jet fuel doesn’t come under the category of ‘declared goods’ and, hence, falls under the jurisdiction of states. The government needs to bring jet fuel under the declared goods category, so that it would attract a uniform sales tax of four per cent across the country,” the report said.
It says to get the states to agree, the government could offer to compensate them for the loss of revenue, which would be Rs 2,000-2,500 crore per year, depending on the fuel price.
“In our view, it would be better for the government to bear the extra cost of compensating the state governments, rather than risk continuation of the current scenario which could lead to much bigger problems for the banking sector (mostly PSUs) in the coming years,” it noted.
Discussing solutions for this, Walia wrote that the government could look at reducing customs duty (five per cent) and excise duty (10 per cent) on jet fuel in case this rationalisation of state sales tax proves difficult, as building a consensus among states could prove time-consuming.