Kingfisher a goner, says analyst who tore into RIL, RCom:
A Canada-based analyst whohad ripped asunder the financials of Reliance Industries and RelianceCommunications in July has now decimated the balance sheet of KingfisherAirlines, virtually calling the company bankrupt.
Neeraj Monga of VeritasInvestment Research Corp of Toronto, Canada, said not only Kingfisher, but itsparent UB Holdings is also on very thin ice.
Monga, along with analystVarun Raj said Kingfisher’s book equity has been wiped out, and the airline isburning cash at a rapid rate. It is in a business which requires capitalperpetually and it has no pricing power, they said.
The duo also note that UBHoldings has run out of financial room to accommodate the needs of the “capitalstarved child”.
Interestingly, evenKingfisher’s auditors, B K Ramadhyani & Co, have said in their report(contained in the company’s annual report for 2010-11) that accumulated lossesat the end of last fiscal ‘were more than 50% net worth. The company hasincurred cash losses during the financial year and in the immediately precedingfinancial year.’
The auditors have also notedthat the company defaulted on repayment of loans and interest to banks andfinancial institutions; they have also said the net worth of the airline hasbeen completely eroded.
But UB Group’s chieffinancial officer Ravi Nedungadi refuted the contentions of Veritas, saying thefirm was very much a ‘going concern’ and nowhere bankrupt.
He said a figure of Rs461 crore Veritas has used as valueof lease obligations (as debt) to say that Veritas has assumed that the airlinehas unbreakable aricraft leases for 12 years when actually the leases are nevermore than 5-7 years.
“Veritas has come up with a fictitious figure, without attempting to understandfacts. How can they show a lease obligation without correspondingly alsoputting an asset on the asset side of the balance sheet?” he asked.
“Veritas has come up with a fictitious figure, without attempting to understandfacts. How can they show a lease obligation without correspondingly alsoputting an asset on the asset side of the balance sheet?” he asked.
Nedungadi has also dismissedVeritas’ calculation of another Rs709 crore of optionally convertibledebentures (OCDs) as debt, saying when holders are willing to convert that intoequity and the company’s board has agreed, how can the money be classified asdebt?
“Veritas has shown a negative equity value of Rs3,875 crorewhereas by adding the aircraft lease figure and OCDs, we get Rs5,310 crore. Sowe are not equity negative,” Nedungadi said.
But Mahantesh Sabarad, sector analyst at Fortune Equity Brokers, told Reuters“resolutiosn have been taken, but its been three years since the airlineindustry has not been able to raise funds at all”.
But Mahantesh Sabarad, sector analyst at Fortune Equity Brokers, told Reuters“resolutiosn have been taken, but its been three years since the airlineindustry has not been able to raise funds at all”.
In the June quarter, Kingfisher’snet loss widened to Rs264 crore from Rs187 crore in the year-ago period. Butthe September quarter is usually the worst for all airlines and Kingfishercould well widen losses in it.
Meanwhile, Monga and Raj havealso alleged that if non-cancellable operating and financial lease commitmentsof Kingfisher are included, its enterprise value is less than its contractuallyrequired cash obligations, “implying negative residual equity value forKingfisher”.
A Mumbai-based analystconcurred with Veritas, saying “this problem is not new, it has been with thecompany since it has consistently faced liquidity problems due to his debt. Itcontinues to have a negative cash flow”.
This analyst, who did notwish to be named, also said that Kingfisher has converted some of its debt intoequity and some of the interest payment into debt.
“By doing this, it is merelypostponing repayment ... debt should be better managed to improve cash flows.”
He said for differentreasons, neither the domestic nor the international operations of Kingfisherare profitable now. “Due to demand slump, the international business isn’tdoing well whereas in the domestic business, escalating fuel costs are hurtingdespite robust demand,” he said.
Only about 20-25% of Kingfisher’s capacity has beendeployed on international routes. Recently, Kingfisher chairman Vijay Mallyatold DNA Money that he wants to expand international operations further bylaunching a daily service to Male from Mumbai in the upcoming winter schedule.
Meanwhile, Monga and Raj at Veritas said that unless the banking institutionshave provisioned judiciously for the debt provided to the airline - aboutRs4,567 crore in loans besides letters of credit, per their calculus - itrenders the disclosed capital position of the banks unreliable.
Meanwhile, Monga and Raj at Veritas said that unless the banking institutionshave provisioned judiciously for the debt provided to the airline - aboutRs4,567 crore in loans besides letters of credit, per their calculus - itrenders the disclosed capital position of the banks unreliable.
The two analysts also castdoubts over Kingfisher’s accounting practices, citing the auditor’s report.
Ramdhyani has said “Attentionis invited to Note 27 of Schedule 19 regarding method of accounting of costsincurred on major repairs and maintenance of engines of aircrafts taken onoperating lease during the year, aggregating to Rs12,256.85 lakh......whichhave been included under fixed assets and amortised over the estimated usefullife of repairs. In our opinion, this accounting treatment is not in accordancewith current accounting standards”.
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