Analysts are not too enthused with IndiGo's expression of interest for Air India. This was reflected in IndiGo's stock, which fell 5.8 per cent on the Bombay Stock Exchange on Friday. The reason was that, with IndiGo's current operational efficiency, analysts felt that things might take a turn for the worse if they acquired Air India.
"IndiGo has a very good balance sheet right now, with only a small out of debt. Their cash flow is good and the fact that they have an asset-light model has worked in their favour. To add to that, the management has an impeccable record. Acquiring a company like Air India, which is exactly opposite in terms of operational efficiency, could be detrimental," says Vishal Rampuria, aviation analyst at HDFC Securities.
Air India's debt of more than Rs 50,000 crore and how government deals with it is the biggest worry for analysts.
"Air India is not an ideal acquisition target. Even if the contours of the deal take care of balance-sheet stress, operational inefficiencies may be difficult to iron out. We continue to like IndiGo for its efficient cost structure and balance-sheet strength. However, potential acquisition of AI may create an overhang on the stock,” said analysts at India Infoline in a report.
The positive for IndiGo, also indicated by its managing director Aditya Ghosh, in a letter to civil aviation minister, is Air India's international operations. For IndiGo, it is a big plus as the carrier has only nine per cent share in international traffic while Air India has 44 per cent.
IndiGo currently flies to seven destinations overseas in six countries. The locations are all in Asia—three in the Middle East, two in southeast Asia, and one in south-central Asia. Further, its expansion overseas is contingent upon the staggered delivery of the aircraft over the next 10 years.
If the deal materialises, IndiGo would also get access to prime slots at international airports which Air India currently has.
Interestingly, Ghosh, in a letter to employees on Thursday, said that he won't pursue it if it is not profitable for the company. "Let me be very clear that if it is not profitable and does not add value to our employees, customers and shareholders, we will not embark on this journey."
He further said, "In that journey, we are not going to take on debts and liabilities that cannot be supported by the new restructured operations".
Air India has a debt burden of Rs 52,000 crore, with about Rs 28,000 crore in working capital debt, and about Rs 4,000 crore in interest burden alone. It has not turned a profit in 10 years.
