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Rajesh Abraham

Analysts cautious on rising fuel costs, stringent competition

Mumbai , May 10

With stock markets rocking, a clutch of aviation firms led by Air Deccan, Kingfisher Airlines and the two state-owned airlines, Air-India and Indian Airlines, are set to tap the booming IPO market to raise funds for their expansion plans, but analysts remained cautious on the investment prospects in the sector considering the rising fuel costs, stringent competition and wafer-thin margins.

Several other smaller players such as Coimbatore-based Paramount Airlines, Mumbai-based GoAir are also likely to consider IPOs in future to meet the fund requirements arising out of fleet acquisitions and expansion of operations.

"Aviation companies are not blue-chip investments in any part of the globe," points out Mr Kumar Nair, Managing Director of Transwarranty Capital Pvt Ltd, a leading second-tier investment bank. "Of course, the aviation traffic is going up by leaps and bounds and Air Deccan should get a major credit for making air travel more attractive in India," he adds.

Air Deccan plans to mobilise over Rs 400 crore by offering 2.45 crore shares through the IPO at a price band of Rs 150-175 per share. Kingfisher, a part of the Mr Vijay Mallya-promoted United Breweries Holdings Ltd, hopes to raise Rs 900 crore through a combination of IPO and private placements.

Analysts estimate domestic airline companies to mobilise over Rs 2,000 crore in the next 12-16 months through the IPO route. However, this would largely depend on the government's success in pushing through the IPOs of Indian Airlines and Air-India.

They said the low-cost airlines are likely to perform below par in the near future, though there could be growth prospects over the long-term.

In its draft prospectus with SEBI, Air Deccan admitted that "in order to successfully apply the low-cost air carrier model in Indian market, the company must achieve, on a regular basis, high utilisation of its aircraft; low levels of operating and other costs" among other things.

Shares of market leader Jet Airways, which is losing share to the low-cost airlines, are trading at Rs 949 levels, way below its 52-week high of Rs 1,361 registered in June 2005.

Market share

Jet Airways along with Sahara India (which it acquired recently) has about 47 per cent share of the domestic aviation market, followed by Indian Airlines (28 per cent), Air Deccan (11 per cent), Kingfisher (6 per cent) and SpiceJet (5 per cent) as on October last year.

Mr Kunal Bansal, Chief Investment Officer of stock broking-cum-financial services firm Religare, said the aviation sector being a growth sector was expected to do good over a long-term. "There is also a fancy attached to this sector in Indian markets," Mr Bansal said, adding that this would help the airline companies in easily raising funds through the IPOs. However, the returns for the investor depend on the pricing of the issue, he said.

The sector has achieved a CAGR (compounded annual growth rate) of 15.67 per cent from fiscal 2002 to fiscal 2005 in terms of domestic passengers.

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