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December 17, 2008

Will Kingfisher Airlines navigate the air-pockets?

Business Today has a Cover Story on the path forward for Kingfisher Airlines.
Kingfisher Airline’s yet-to-be revealed balance sheet may be weak, but there have been enough developments in recent days to help improve sentiment. The reduction in ATF prices and abolition of import duty of 5 per cent on the fuel will, indeed, help in stemming the losses. “If the sales tax on ATF is reduced to 4 per cent, Kingfisher will not have any loss in December for the month. There will be no cash burn and we will save between Rs 300 crore and Rs 400 crore a year on account of saving in taxes, which is 25 per cent on an average now,’’ says Raghunathan. Aware that he cannot get states to slash sales tax rates on ATF to 4 per cent, Mallya has stepped up the campaign to get the Centre to bring ATF under declared goods category so that it becomes taxable at 4 per cent. He has dangled a carrot, too: “If they cut taxes, I will cut fares.’’

The Kingfisher brass is quick to point to the benefits of the integration with Deccan, now christened Kingfisher Red, which have begun kicking in. They point to Sports—a subsidiary of United Spirits Ltd (USL). And, of course, there’s the flagship liquor enterprise, United Spirits, in which Diageo has expressed a keenness to buy. “There is clearly pressure on the financials of the entire group. But there is still enough potential for value unlocking in a lot of the group companies like USL, where they have treasury stocks, and Whyte & Mackay (which was acquired last year for $ 1.18 billion or Rs 4,720 crore) to latch on to. They can sell part of IPL to private equity investors. I think the UB Group will do something in the next 12 months,” says Vora of IDFC SSKI Securities. Mallya, for his part, says he’s not keen on unlocking value in the IPL team, which analysts value at some Rs 700 crore. According to a UB Group presentation, the IPL team has received unsolicited expressions of interest for participating in the equity of Royal Challengers Sports at a significant premium.

From the accompanying interview with UB Group Chairman, Vijay Mallya.

If today you want to raise serious capital for doing anything, a strategic investor would give you a far better value than a normal non-strategic investor would, particularly in this environment of a meltdown. Companies, in today’s bearish scene, are undervalued by up to 80 per cent. A strategic investor thinking long term is likely to value your business far higher than a normal stock market investor. If we are given a level playing field, Kingfisher will become a positive contributor to UB Group. We can make huge money if we are not penalised.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at