Finmin wants Mallya to sell assets to save Kingfisher

Lenders have asked Vijay Mallya, promoter of Kingfisher Airlines, to identify and sell non-core assets and bring fresh equity capital, a senior finance ministry official said.

?We expect Kingfisher promoters to identify and sell non-core assets and bring in capital,? the same official told FE on Thursday.

UB Group ? owners of United Spirits, India?s largest liquor maker and United Beverages, maker of largest-selling beer Kingfisher ? has asked Goldman Sachs India and Ambit Corporate Finance to identify non-core assets and sell them.

?No comments,? a senior Ambit Corporate Finance official said. Goldman Sachs’ public relation agency too declined to comment.

Apart from making liquor and beer, which earn the bulk of group revenues, UB owns stakes in several companies, including 24.51% in fertiliser maker Mangalore Chemicals and Fertilisers and 37.18% in UB Engineering, show data from Bombay Stock Exchange. Unlisted companies include the Indian Premier League’s Royal Challengers Bangalore and Sahara Force India, a Formula One car racing team.

Seven-year old Kingfisher, which operates 135 flights daily with a fourth of its 64 planes, owes Rs 5,608 crore to public sector banks, Namo Narain Meena, junior minister for finance informed Lok Sabha on March 25. State Bank of India, the country’s largest lender by assets, is the largest creditor to Kingfisher with Rs 1,408.45 crore followed by IDBI Bank with Rs 727.63 crore, Punjab National Bank with Rs 710.33 crore, Bank of India with Rs 575.27 crore and Bank of Baroda with Rs 537.51 crore.

?Kingfisher Airlines is a non-performing asset for us,? SBI chairman Pratip Chaudhuri told reporters in January 4. ?They are in default.?

Since January, the airline’s losses have risen to Rs 6,000 crore. The airline, unable to operate its schedule approved by aviation regulator Director General of Civil Aviation, wound up its international operations in March and pulled out operations from Kolkata and Hyderabad. It is struggling to repay its lessors, fuel suppliers and airport operators.

?The airline urgently needs to reduce its debt by half,? says Rashesh Shah, analyst with ICICI Direct, a broker. ?Fuel costs which add up to 50% of the operating costs, the 15% which goes into salaries and lease rentals cannot be cut.? So, the only window left to bring its operational costs is to prune debt, he added. According to him, importing fuel will save Kingfisher costs by 8-11%.

Purchase of low-cost loss-making carrier Air Deccan, lack of independent management to run both full-service and low-cost carriers and easy access to debt guaranteed by the parent to grow led Kingfisher Airlines into a debt trap.

?Purchasing a loss-making, low-cost carrier to grab market share and urgency to fly international routes in the early days was the first downfall,? says an investment banker with a foreign bank. ?A combination of full-service and low-cost carriers under one management is lethal, unless both fight each other for routes, parking slots and share.? Last year, Kingfisher shut down its low-cost airline Kingfisher Red and focused on the full-service carrier. ?Air Deccan’s revenue did not meet Kingfisher’s cost, says another banker.

?The airline needs fresh cash infusion and win back consumer confidence,? says J Ramachandran who teaches corporate strategy and policy at the Indian Institute of Management, Bangalore. ?Airline is a high-cost business with wafer-thin margins. Once you are on a downward spiral losing passenger confidence, it get into a vicious cycle with ripple effects on productivity and maintenance costs,? Ramachandran added.

Fresh capital infusion and a proposal to allow foreign airlines to owns up to 49% could help Kingfisher stay afloat, the finance ministry official earlier quoted in the story said. The Union Cabinet on Thursday postponed a proposal to allow foreign airlines to own 49% stake in Indian passenger carriers, civil aviation minister Ajit Singh told reporters. ?The Cabinet has sought more clarity on the proposal and that it may consider the proposal next week after industry ministry submit fresh details.?

Mallya has been seeking partners to sell equity and raise money to bring down leverage ratio. ?We have proposals from investors to sell stake,? says Mallya while announcing the shutdown of Kingfisher Red last year. His chief financial officer Ravi Nedungadi said they were willing to reduce promoters? stake to 26% from 52% now.

?I don’t think Kingfisher can be saved now. An equity investor will be willing to put money into the company only with clear-cut debt restructuring package in place,? says an investment banker who has advised many airline transactions. He or his firm does not comment on specific clients.