Flying out of turbulent weather

Unless demand tapers off, measures to restructure debt, infuse equity and rationalise costs should help the company turn around by 2011-12.

With its debt-restructuring plan likely to be implemented and a $300-million GDR offer slated for next month, Kingfisher Airlines could report net profits by 2011-12, say analysts. While these moves will allay market concerns, other positives for the company are full deployment of its grounded fleet and further cost-rationalisation measures. Although rising fuel prices and the recent increase in attrition (senior management as well as pilots) are a worry, the continuing strong domestic demand should help offset the cost pressures, helping the company turnaround in 2011-12. At Rs 61, the stock is trading at 12 times its FY12 estimated EPS of Rs 5, and could deliver 36-42 per cent returns over 18 months, considering analysts’ price target of Rs 83-87.

Restructuring debt
The key reason weighing down the Kingfisher Airlines stock has been its Rs 7,922-crore debt as on March 2010, which entailed an interest outgo of over Rs 1,000 crore for FY10 or over two and a half times its profit before interest, depreciation, tax, amortisation and rentals of about Rs 400 crore. J P Morgan analysts believe the restructuring, which involves converting part of its debt into equity, rescheduling payments over a period of nine years with a two-year moratorium and reduction of interest rates to 11 per cent from 14 per cent, will help the airline save Rs 450 crore in annual interest costs. Fresh issue of equity in the form of a $250-$300 million GDR offer towards end-January 2011 should also help bring down debt further (to manageable levels) and fund expansion.
 

TURNING CORNER?
In Rscrore	FY09	FY10	FY11E	FY12E
Load factors (%)	60.00	71.00	79.00	78.00
Yield (Rs/RPKM)	5.30	4.40	4.70	5.10
Revenue	5239.00	5068.00	6616.00	8231.00
% chg y-o-y	263.00	-3.00	30.50	24.40
Ebidta	-1807.00	-900.00	127.00	801.00
Ebidta Margin (%)	---	---	1.90	9.70
Net profit	-2140.00	-1647.00	-663.00	360.00
RPKM- Revenue passenger kilometre E: Estimates                                                        Source: Company, analyst reports

Concerns & positives
Of Kingfisher’s 34 A-320 aircraft, 14 had been grounded since the June quarter due to engine-related issues. The company has been able to introduce most of the grounded aircraft over the last few months and is likely to bring in the rest before the end of the financial year. This should enable Kingfisher to reduce the cash burn (Rs 20 crore per annum per aircraft) and aid a sharp turnaround in earnings, believe JP Morgan analysts. Going ahead, it is likely to help recoup some of the 370 basis points year-on-year fall in market share to 19.6 per cent in the September quarter.

Another key concern for the company is the rising cost of jet fuel. Last week, Indian Oil Corporation hiked jet fuel prices 4.4 per cent to Rs 47 to the litre. Given that 35-40 per cent of costs are attributed to this, further increases will mean higher fares which might impact demand. Analysts estimate the company’s bottom line could be impacted by 3-5 per cent with every 1 per cent increase in jet fuel prices, unless ticket prices are raised. While higher fuel costs hurt, demand remains key as it gives the players pricing power that helps maintain margins.

For now, demand in the sector has been strong. While the June quarter saw a 22 per cent year-on-year jump in passengers flown, the September quarter saw a growth of 13 per cent. For Kingfisher, despite less capacity, (June and September quarters saw seat capacity drop at 14 per cent and 18 per cent, respectively), the airline was able to stem the losses due to higher load factors (better aircraft utilisation) and cost rationalisation.

The company, which has been rationalising its cost structure and operations, is likely to bring down staff expenses further, negotiate lease rentals and reduce distribution costs. It has also put on hold its international expansion plans and will look to consolidate its current operations. While the top line is likely to grow 25-30 per cent over the next two financial years, the company which turned profitable at the operating level in the current fiscal is likely to turn around at the net level in FY12.