An Air India aircraft taxis on the runway in Mumbai Airport (Photographer: Santosh Verma/Bloomberg News)

What Works (And Doesn’t) For An Air India IPO

Having failed to find a buyer for Air India, the government is said to be open to taking the national carrier public. It won’t be easy if the initial public offerings of the last five public sector companies are anything to go by.

That’s because the IPOs were bailed out by government-run firms. And unlike Air India, all of them— three defence and two insurance firms — were profitable and debt-free, their draft prospectuses show. Not only did their revenues grow faster than Air India, they were also operationally profitable in the last five financial years. Still, nearly 62 percent of the Rs 26,472 crore raised from the public offers was funded by state-run peers like the Life Insurance Corporation of India and the State Bank of India Ltd., according to data compiled by BloombergQuint from exchanges and filings.

The government is said to be considering an IPO for Air India after failing to sell its stake in the loss-making carrier. It received over 150 queries, but no buyer stepped forward. The government proposed to divest 76 percent in the airline, along with 100 percent in its low-cost arm Air India Express and 50 percent in the ground handling unit. A potential investor was required to take on more than half of the debt.

Given Air India’s weak financial performance, aviation expert Amrit Pandurangi doesn’t see reason for retail investors to invest in it. “Air India will have to be privatised and become profitable if it wants to choose the IPO route.”

Air India Vs The Last Five Listed PSUs

The revenue of the five public sector companies that went public this year—Mishra Dhatu Nigam Ltd., Hindustan Aeronautics Ltd., Bharat Dynamics Ltd., New India Assurance Ltd., and General Reinsurance Corporation Ltd.—grew at an annualised rate of 5-42 percent in five years through March 2017. In fact, New India and GIC are market leaders in respective businesses. The only exception was HAL whose profit fell during the period because of lower other income and a higher tax rate in 2016-17.

While the five companies have no debt, Air India’s burden stays over Rs 48,000 crore with a negative net worth of Rs 21,000 crore, according to the preliminary bid document. It has been surviving on a government bailout since 2012.

While the airline was operationally profitable in the last three financial years, it offered no return on equity or capital since it reported net losses. And even its earnings before interest, tax, depreciation and amortisation declined in 2016-17.

The airline will also have to meet the regulatory norms covering profitability and net worth before launching an IPO. Among these are:

  • Net tangible assets of at least Rs 3 crore in each of the preceding three full years—not more than 50 per cent of these should be held in monetary assets. The limit is not applicable in case the public offer is made entirely through offer for sale
  • A minimum of Rs 15 crore as average pre-tax operating profit in at least three years of the five preceding years.
  • Net worth of at least Rs 1 crore in each of the preceding three full years.

But if a company fails to meet any of these criteria, at least 75 percent of the net offer has to be allotted to qualified institutional buyers. Usually, companies reserve 50 percent of the offer size for such investors.

Counterview: Why An IPO May Work

All is not lost though.

Nearly a third of Air India’s debt is backed by assets — 86 owned and leased aircraft. Due to an unabsorbed depreciation of Rs 31,806 crore, the airline needn’t pay taxes when it becomes profitable. Unabsorbed depreciation is unclaimed expenditure which couldn’t be accounted for in the profit and loss account due to deficient income. It can be carried forward for any number of years.

Mark Martin, founder and CEO of Martin Consulting, sees taking Air India public as a brilliant idea that may help the government divest stake. It might elicit investor interest as it has value in the domestic and international business, he said. “It’s a legacy company with premium international slots.”

Air India’s market share in national and overseas routes stands at 15 percent and 40 percent, respectively. It has over 4,000 domestic slots in 54 destinations — where air traffic is expected to grow at 20 percent — in addition to 2,800 international prime-time slots per week in 39 destinations. Its revenue grew at an annualised rate of 9 percent in five years through March 2017.

“They [government] may divest 40-50 percent during the IPO and when the company performs well, they can exit by selling it to an airline,” Martin said.