The Hindu Business Line : PE firms shy away from aviation companies

Although aviation companies such as Kingfisher have been courting PE firms during the last few weeks, not many are enthusiastic about investing in the Indian aviation sector. One of the reasons given was that with traffic dropping by 21 per cent on a year-on-year basis, net earnings of airline companies are not likely to be good this year.

Not keen

The Chief Executive Officer of Kotak Private Equity Group (KPEG), Mr Nitin Deshmukh, said, “Immediately, we are not keen on any investments in the aviation sector.” KPEG has an investment corpus of close to $1.5 million. The PE company already has a substantial investment in Paramount Airways that was acquired at the incipient stages of the company in 2005.

Mr Deshmukh declined to divulge the stake in Paramount but said that Kotak was looking for an exit from Paramount with a rider. “We need the right price to make an exit either through the initial public offering route or by divesting in favour of a strategic investor,” he added.

KPEG’s right price estimate is based on an internal rate of return of at least 30 per cent. This is in line with most PE investors’ return expectations. However, given the current state of the domestic aviation sector, most analysts are sceptical of airline companies generating positive net income in the immediate future to meet these return expectations.

Calling the shots

Consulting firm KPMG’s aviation analyst and senior advisor Mr Mark Martin said, “PE money is available for the aviation companies, but only on the investors’ terms.”

The lack of PE enthusiasm on the aviation sector is also because of high debts. Private aviation companies currently have debts of close to Rs 5,000 crore by way of payment dues to the public sector fuel supply companies. In addition, some of the aviation companies also have dues with cross-border lease financing companies. Almost the entire private sector aviation companies’ fleet consists of leased planes.

As a result, finding bank finance for the companies was becoming increasingly difficult, as lease financiers currently have the charge on the assets. Besides, lessors have a first charge on the airline companies lease revenues during the life of the contract. Any bank financing support for airlines was unlikely without strong covenants.

Airlines like Kingfisher had already approached State Bank of India for funding assistance. However, the bankers said, “Without any asset cover or a charge on revenues or a corporate guarantee, it is difficult for us to finance any of the aviation companies.”

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