EY finalises valuation process for Air India, bids to be in by mid-Sept
Presentation to DIPAM sets timeline of August end for valuation
The transaction advisor for Air India disinvestment, EY, has come up with a formula to determine the value of the airline by using the weighted average of four different matrices — comparing the valuation of similar sized airlines globally, analysis of cash flow projections, the replacement value of the assets net of liabilities, and the value of its underlying assets.
Code named ‘Project Royal’, the valuation exercise is expected to be completed by August-end, with bids from interested players coming in by mid-September.
According to a presentation made by EY to the Department of Investment and Public Asset Management, four of the six AI subsidiaries will not be included in the valuation exercise. But the minority stakes held by the airline in Cochin International Airport and French telecom company Orange S.A. will be included to ascertain the business value of the company.
Also included will be Air India Express, the airline’s low-cost subsidiary; and Air India SATS Airport Services Private Limited, which provides gateway services and cargo handling.
Other units, including, the repair and maintenance company Air India Engineering Services Ltd; the ground handling subsidiary Air India Air Transport Services Ltd; Hotel Corporation of India Ltd, which operates two hotels in Delhi and Srinagar under Centaur brand; the two flight kitchens in Mumbai and Delhi under Chefair brand; and Airline Allied Services Ltd, which provides air transport services, are not part of this sale plan. These may be monetised separately to offset AI’s debt.
Air India’s total debt stood at ₹60,074 crore as of March 31, 2019. According to the Expression of Interest notice, floated in January, the new owner is to absorb ₹23,286.5 crore, while the rest would be transferred to a special purpose vehicle.
So far, Air India has received EoIs from Tata Sons and SpiceJet’s Ajay Singh, in his personal capacity.
According to the EY plan, it will undertake three of the four proposed valuation — Discounted Cash Flow, Transaction Multiple, and Balance Sheet, while the fourth, Asset Valuation, will be by an independent valuer. Each will be given a weightage to arrive at the overall value.
“It is assumed that the financial forecast provided would include full utilisation of all assets of AI, including current unused slots, frequent flyers, and bilateral rights, and hence would not be separately valued,” EY said in the presentation seen by BusinessLine.
“We will perform the following procedures in carrying out the valuation: Analyse and review historical operating and financial performance of the company, obtain financial forecasts of the company from management, and analyse the financial forecasts for consistency,” EY said explaining the Discounted Cash Flow method.
Under the Transaction Multiple method, EY will analyse comparable Indian and international airlines. “We will group the comparable companies, assign weight based on Indian airline operators, small global airline operators, and large global airline operators. We will eliminate companies which have either low trading volume or if the implied multiples are outliers,” EY said. Some of the airlines listed for comparison include IndiGo, SpiceJet, Cathay Pacific, American Airlines Group, and Singapore Airlines.
In the Balance Sheet method, EY will take into account the net asset value of the assets or the capital employed, as represented in the financial statements. Thus, even the intangible assets are considered at book value. Along with this, they are likely to evaluate the treatment of liabilities other than debt.
Only for benchmarking
However, EY said, “The Balance Sheet method does not capture the earning capacity of the business and, hence, would not be representative of fair value. This method will be used only for benchmarking. Such a method will be used only if the value from the Discounted Cash Flows or the Transaction Multiple method is lower than the Balance Sheet method.”
“Tata Group is the only entity capable of acquiring Air India given it is wiling to give time to its acquisitions to turn around. Air India will need a lot of management bandwidth to turn around given the inefficiencies. Longer-term, we expect Tata Group to merge Vistara and Air India into one entity running a premium FSC and AirAsia India and Air India Express into one running as LCC,” said Varun Ginodia, Research Analyst, Ambita Capital.