Posts Tagged ‘risks’

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InterGlobe Aviation Ltd, which runs India’s largest airline by market share IndiGo, and its existing investors plan to sell around 10% of its equity.

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Source : Economic Times

Quick facts

  • First big listing after Jet: IndiGo’s IPO will be the first big listing afterJet Airways’ 2005 IPO. Jet Airways (India) Ltd, then India’s largest private airline, raised 1,900 crore in its 2005 IPO. The carrier, which is part- owned by Etihad Airways PJSC, now has a market capitalization of $494 million while SpiceJet Ltd is valued at $172 million
  • Existing Shareholders:

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  • Use of Funds: According to its share sale prospectus, IndiGo will use 1,165.66 crore to retire liabilities and acquire aircraft. It will spendRs.33.36 crore for equipment acquisition and rest for general corporate purposes.

What works for Indigo

  • Only profitable Indian carrier: IndiGo is India’s largest no-frills airline and has been the only profitable Indian carrier for the past seven years out of its nine years of existence. Indigo has won a reputation for its service quality and on-time performance in an industry characterized by debt and accumulated losses. The airline turned profitable in fiscal 2009 and has remained profitable in each subsequent fiscal through FY14. No other Indian airline has consistently remained profitable over the same period, according to consulting firm CAPA India.
  • Order Book: IndoGo maintains largest order book of any Indian carrier. The significant volumes that they generate mean that they have much better bargaining power vis a vis other players, allowing them to keep their costs down.
  • ASK (Average seat kilometers): ASK measures an airlines passenger carrying capacity. IndiGo’s carrying capacity has increase from 2004 to 2014 while in the same period for other carriers it has gone down.
  • Falling jet fuel prices: Falling jet fuel prices in the last one year Fom Rs.165.6 in September 2014 to Rs. 92.24 in September 2015 will reduce the input cost for airline industry dramatically.

Risk factors

  • Continuing to apply the low cost carrier model: The airline industry is characterized by low profit margins and high fixed costs, including lease and other aircraft acquisition charges, engineering and maintenance charges, financing commitments, staff costs and IT costs.

Significant operating expenses, such as airport charges, do not vary according to passenger load factors. In order for them to profitably operate their business, they must continue to achieve, on a regular basis, high utilization of their aircraft, low levels of operating and other costs, careful management of passenger load factors and revenue yields, acceptable service levels and a high degree of safety.  Some of these factors are not under their control. Therefore, profits may vary. Any change in fuel costs could significantly impact profitability.

  • Production delays for Airbus A320neo aircraft: Production delays in the order placed for Airbus A320neo in 2011 could impact their expansion plans.
  • Foreign Exchange Risk of depreciating Rupee against Dollar: With substantially all their revenues denominated in Rupees, they are exposed to foreign exchange rate risk as a substantial portion of their expenses are denominated in U.S. Dollars, including their aircraft orders with Airbus.

Quantitative Factors:

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Comparison with industry peers

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Note: The above shares have a face value of Rs.10

IndiGo is the only profitable airline currently, though Spicejet has just started to turn profitable post the change in its management.

Other Ratios (Source: Mint)

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The company’s track record and focus on the basics provide comfort to investors, whilst its dividend payout strategy prior to the IPO has raised quite a few eyebrows and negative questions around governance. With India being one of the fastest growing markets for air travel, a well managed fleet expansion plan could pay off well for long term investors, especially as low cost airlines have tended to be the only category of the airline business that have made monies for investors.

Investors could look at investing in the Indigo IPO.

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Plan your financial goals for safe future

The World has become a much smaller place in the past few years as we now have more access to media — internet and television in addition to print.  This exposure has also meant that our dreams have also become bigger — a foreign education for a child, a dream home or a summer vacation. As the Indian economy grows, we have started to believe that nothing is impossible.  However, a reality check is always a good idea to see if your beliefs are in line with the reality. If you are newly married or are planning to start a family, a relook at your financial goals and a reassessment of your priorities is crucial — to see if your finances are aligned to the big changes in your life.

Balance short term and long term goals —

When you were younger, you had the option of saving without any particular goal in mind. After your marriage, there are now a whole new lot of financial goals to think about — education for your children, their marriages, asset purchases like homes, and cars, parental support, annual holidays, and of course regular day to day expenses. Make a list of your goals. Put numbers to each of these goals — since each of these goals could have different meanings for different individuals. For example buying a house in Mumbai may be different from buying a similar house in Hyderabad, hence it is critical to put a number on each of these goals based on your expectations.  You may need to seek help from a financial planner to get a better idea of some of these numbers and the impact of inflation on each of these costs.

Prioritise your goals —

You will probably find that achieving all your goals may not be possible at the same time, so you need to know which goals figure at the top of your priority list.  Try to achieve a balance between short term and long term goals. Too often excessive focus on short term goals or any one of the goals tends to compromise on your overall financial wellbeing.  For example, over stretching yourself on your residential home purchase and its interiors could result in a compromise in your child’s education or your own retirement.

Don’t forget the risks

Current lifestyles could expose you to health risks. Ensure that you have adequate life and health cover to insure yourself.   Buying them early and when you are in a good state of health increases the chances of getting the policies at a cheaper cost. The gap between needs and funds can always be funded by insurance. Diversify your portfolio— use a combination of financial instruments —stocks/ equity mutual funds bonds, precious metals, real estate and bank deposits in line with your financial goal requirements and risk appetite. Put the plan into action —Ensure that you put your financial plan into action and monitor and review it regularly.

This article was written by Vishal Dhawan, CFPCM and appeared in the Asian Age  on 16th  April 2011 .


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