A Canada-based analyst who had ripped asunder the financials of Reliance Industries and Reliance Communications in July has now decimated the balance sheet of Kingfisher Airlines, virtually calling the company bankrupt.
Neeraj Monga of Veritas Investment Research Corp of Toronto, Canada, said not only Kingfisher, but its parent UB Holdings is also on very thin ice.
Monga, along with analyst Varun Raj said Kingfisher’s book equity has been wiped out, and the airline is burning cash at a rapid rate. It is in a business which requires capital perpetually and it has no pricing power, they said.
The duo also note that UB Holdings has run out of financial room to accommodate the needs of the “capital starved child”.
Interestingly, even Kingfisher’s auditors, B K Ramadhyani & Co, have said in their report (contained in the company’s annual report for 2010-11) that accumulated losses at the end of last fiscal ‘were more than 50% net worth. The company has incurred cash losses during the financial year and in the immediately preceding financial year.’
The auditors have also noted that the company defaulted on repayment of loans and interest to banks and financial institutions; they have also said the net worth of the airline has been completely eroded.
But UB Group’s chief financial officer Ravi Nedungadi refuted the contentions of Veritas, saying the firm was very much a ‘going concern’ and nowhere bankrupt.
He said a figure of Rs461 crore Veritas has used as value of lease obligations (as debt) to say that Veritas has assumed that the airline has unbreakable aricraft leases for 12 years when actually the leases are never more than 5-7 years.
“Veritas has come up with a fictitious figure, without attempting to understand facts. How can they show a lease obligation without correspondingly also putting an asset on the asset side of the balance sheet?” he asked.
Nedungadi has also dismissed Veritas’ calculation of another Rs709 crore of optionally convertible debentures (OCDs) as debt, saying when holders are willing to convert that into equity and the company’s board has agreed, how can the money be classified as debt?
“Veritas has shown a negative equity value of Rs3,875 crore whereas by adding the aircraft lease figure and OCDs, we get Rs5,310 crore. So we are not equity negative,” Nedungadi said.
But Mahantesh Sabarad, sector analyst at Fortune Equity Brokers, told Reuters “resolutiosn have been taken, but its been three years since the airline industry has not been able to raise funds at all”.
In the June quarter, Kingfisher’s net loss widened to Rs264 crore from Rs187 crore in the year-ago period. But the September quarter is usually the worst for all airlines and Kingfisher could well widen losses in it.
Meanwhile, Monga and Raj have also alleged that if non-cancellable operating and financial lease commitments of Kingfisher are included, its enterprise value is less than its contractually required cash obligations, “implying negative residual equity value for Kingfisher”.
A Mumbai-based analyst concurred with Veritas, saying “this problem is not new, it has been with the company since it has consistently faced liquidity problems due to his debt. It continues to have a negative cash flow”.
This analyst, who did not wish to be named, also said that Kingfisher has converted some of its debt into equity and some of the interest payment into debt.
“By doing this, it is merely postponing repayment ... debt should be better managed to improve cash flows.”
He said for different reasons, neither the domestic nor the international operations of Kingfisher are profitable now. “Due to demand slump, the international business isn’t doing well whereas in the domestic business, escalating fuel costs are hurting despite robust demand,” he said.
Only about 20-25% of Kingfisher’s capacity has been deployed on international routes. Recently, Kingfisher chairman Vijay Mallya told DNA Money that he wants to expand international operations further by launching a daily service to Male from Mumbai in the upcoming winter schedule.
Meanwhile, Monga and Raj at Veritas said that unless the banking institutions have provisioned judiciously for the debt provided to the airline - about Rs4,567 crore in loans besides letters of credit, per their calculus - it renders the disclosed capital position of the banks unreliable.
The two analysts also cast doubts over Kingfisher’s accounting practices, citing the auditor’s report.
Ramdhyani has said “Attention is invited to Note 27 of Schedule 19 regarding method of accounting of costs incurred on major repairs and maintenance of engines of aircrafts taken on operating lease during the year, aggregating to Rs12,256.85 lakh......which have been included under fixed assets and amortised over the estimated useful life of repairs. In our opinion, this accounting treatment is not in accordance with current accounting standards”.
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