Is the loss-making Air India worth Rs 5 lakh crore as Manish Tewari of the Congress argued in The Indian Express last week (goo.gl/yS5Ket)? Because, if it is, the government is selling it for a song—and when it does, the old suit-boot-ki-sarkaar charge will resurface and, once again, the government will find it hard to take critical decisions for fear of benefitting the rich.
Given Air India’s massive and continuing losses—likely to be around Rs 3,600 crore in FY17 — and debt of over Rs 50,000 crore, it is difficult to believe the value would be anywhere near this. More so since, the world’s most valuable airline is Southwest Airlines and that has a market cap of around Rs 2.5 lakh crore—and that’s when it has a net profit of around Rs 14,300 crore (2016 was Southwest’s 44th consecutive year of profits while Air India has been making losses for several years in a row). Even IndiGo, which is the front-runner to buy Air India today, is worth under Rs 40,000 crore — and that value has to do with its FY17 post-tax profit of Rs 1,650 crore.
Part of the reason why Air India is thought to command huge valuations is because of its real estate like the iconic Air India building in Nariman Point, large number of bilateral and landing slots in most global airports — and yes, a lot of art though some, like a Jatin Das, may just have been lost to theft as The Times of India reported. As FE reported last week, the real estate may be a bubble since the title belongs to various government departments (goo.gl/Yp3Wp9) who may not relinquish this easily. In any case, given the sad VSNL experience where it took close to 15 years after its sale to the Tatas to resolve the land issue, it would be best if real estate was retained by the government and kept out of the sale — as and when the title is clear, the assets can be sold and the money retained by the government.
The bilaterals and the landing slots, it is obvious, will take a long time for an IndiGo to be able to replicate, and so command a premium. The value of the landing slots will depend upon how slot-constrained various airports are, so some will have value, all will not. The bilaterals belong to the government, not to Air India—but if they are assigned to the new owner, they will be worth something, though it is not clear how much.
Valuing Air India is complex and, while there will be an open bid, it is important to have some idea of the numbers — the ministers who are in charge of the sale process will have to figure out how best to get the bids up. Obviously any value depends upon the current ebitda (or ebitdar if you want to take into account lease rentals) as well as future projections. Any valuation the market gives will depend on this. Let’s assume an Enterprise Value (EV)-to-ebitda of 5, on the low side for Asian carriers, but probably realistic given Air India’s losses. Taking into account its Rs 50,000 crore debt and Rs 3,000 crore ebitda, this means Air India’s equity is worth minus Rs 35,000 crore — that is why some have argued it is worth it to sell Air India for as little as one rupee.
But companies are bought for their potential, not their present or past value. So, let’s say a new owner can turn it around and double ebitda in five years. Given the higher earning potential, the EV/Ebitda will also rise, let’s say to 10 (IndiGo is at a 12.7 multiple). In which case, Air India’s 5-year-forward equity is worth Rs 10,000 crore, assuming the same debt of Rs 50,000 crore — that means future aircraft purchases will have to be financed through sale-and-leaseback deals.
But if the government creates, like Yashwant Sinha did in 2002, a ‘good’ Air India and a ‘bad’ Air India and parks half the debt—the debt that is not related to the purchase of aircraft—in ‘bad’ Air India along with the property and the art and 49% of Air India’s equity (we’ll come to why in a bit).The equity value of ‘good’ Air India goes up to Rs 35,000 crore. That’s 5 years from now, so if you discount it at, say a 20% rate per year, that’s a current value of Rs 14,000 crore.
Since the value of Air India’s shares will rise after turnaround, the best way to maximise value is to sell just 51% right now to the new owner, with a firm commitment not to use the 26% veto right and to divest all shareholding in 5 years. That will also lower the immediate purchase price and attract more suitors — in the case of Maruti, the government sold its residual shares over a period of five years to get the best value. The value of the 49% stake can then help pay off the remaining debt — presumably, as part of the sale deal, the government will also be able to get the banks agree to a haircut.