Covid-19 impact: IndiGo may shelve approved QIP plan if air travel picks up

QIP is a capital-raising tool through which listed companies can sell shares, fully and partly convertible debentures, or any securities, other than warrants that are convertible into equity shares

India’s largest airline IndiGo may not go ahead with its fundraising initiative if revenue from sales increases.

Last month, the board of directors of the company had approved a plan to raise up to Rs 4,000 crore through qualified institutional placement (QIP).

“The board has passed an enabling resolution for a QIP to raise funds but whether we ultimately will go for it or not depends on how the sales revenue side develops. At this point of time, I would like to say that there is a 50:50 chance of the QIP happening,” IndiGo Chief Executive Officer (CEO) Ronojoy Dutta said, in response to a shareholder’s query at the company’s annual general meeting.

Dutta’s comments came after a few shareholders quizzed the management about the requirement of a fundraising when the company has a good cash balance and already undertaken multiple measures to cut costs and control cash burn. 

At the end of June 30, IndiGo had a total cash balance of Rs 18,449.8 crore, comprising Rs 7,527.6 crore of free cash and Rs 10,922.2 crore of restricted cash.

Shareholders are normally reluctant for a QIP as such a process results in dilution of shareholders’ stake.

Founders and co-promoters Rahul Bhatia and Rakesh Gangwal own 74.86 per cent stake in the company. People in the know had earlier said the QIP is likely to result in 10 per cent dilution of stake by the promoters.

The company has simultaneously initiated other cost reduction processes like sale and lease back of 13 aircraft owned by it. It is negotiating with lessors and vendors to bring down rates, cut workforce by 10 per cent, initiate pay cuts and not pay dividend for FY 20 in order to shore up cash reserves. 

It is also replacing older A320 Ceo aircraft with A320 Neos, which will bring down maintenance cost.

Analysts, who track the company, said IndiGo’s second thoughts on fundraising is because the company expects sales volume to increase. This is after the government on Wednesday raised the limit of domestic passenger flights that airlines can operate to 60 per cent of the pre-Covid levels from the earlier 45 per cent. Poor financial condition of its rivals makes IndiGo in a position to get the maximum benefit from this.

A cash balance of Rs 20,376 crore gives IndiGo the cushion to operate flights one way with a lower load.

“Flights need to be at least 80 per cent full for airlines to have a chance to break even. Currently, we are nowhere near that as there is traffic primarily from metros to the cities in East India, from where a lot of migrant workers come. By ramping up capacity on these routes, IndiGo may not be able to recover full cost of the trip, but at least recoup the variable cost,” said an airline executive.

Dutta said due to the cost-cutting measures, the company has been able to bring down daily cash burn to Rs 30 crore in August against Rs 40 crore in June when flights had resumed services.

However, local lockdown measures by the authorities, including various quarantine measures and a general anxiety on flying have resulted in people avoiding flights. This resulted in airlines struggling to fill seats. 

“Due to the lockdown measures by the government, we are utilising 3-35 per cent of our fleet instead of the planned 40 per cent,” he said.

At the company’s post results call last month, chief financial officer (CFO) Aditya Pande said the airline’s operations weren’t being able to offset fixed costs though the company managed to bring down its daily cash burn.