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Posted on 16-Nov-2018 Comments  0

Tatas eye Jet

Will it really improve the Tata aviation franchise?

In many ways it is a reversal of history. It was JRD Tata who pioneered the concept of Air India, which despite the brilliance of Bobby Kooka ended up in an awful financial mess. Tatas came back into the airlines business via a stake in budget airline, Air Asia. Later, the Tatas also floated Vistaara Airlines, a full service provider in alliance with SIA. Over the last few weeks, there have been talks of the government requesting the Tatas to bail out Jet Airways. While the Tatas have started the diligence it is not clear if they will be interested in the deal. Here is why Tatas need to tread carefully on the Jet deal.

What happened to Etihad

A few years back, Etihad took a stake in Jet Airways with a view to getting a toehold in the Indian aviation market. However, things have only deteriorated at Jet and Etihad has reached a stage wherein it may have to sell out to the largest regional player in the gulf, Emirates Airlines. What happened to Etihad has larger lessons for the Tatas and it only means that the market share of Jet alone may not be enough. Air Asia and Vistaara have a combined market share of 8% while Jet Airways has around 15%. So the combination will give the Tatas some firepower. The problem is Jet has a huge debt burden and its performance will remain unviable unless Jet manages to build up the all important spread between the CASK and the RASK, which looks elusive.

Jet and the full service riddle

If you look at the aviation market, Indigo leads with a 43% market share while Spice Jet and Go Air have a share of close to 23% together. If you add up Air Asia then over 70% of the Indian market is dominated by the budget airlines. Indian aviation market is growing at 18% annually and a chunk of this incremental growth is coming from the budget segment. Jet has typically had a full service model and that has always been vulnerable to the dual forces of price completion and higher ATF prices. Globally, there are two models that have worked in the aviation industry. The full service model has worked where there has been cartelization. Globally, it is the no-frill model that has worked better. To that extent, Jet could be a white elephant for the Tata group.

What can Tatas bet on?

But Tatas may still want to bet on Jet subject to appropriate haircuts taken by banks, lessors and the airports. What the Tatas can bet on is that the deal gives them a much bigger market share of the domestic and the international market where it can truly leverage on the association with Singapore Airlines. US styled cartels may be much harder in a price sensitive market like India but Tatas can surely look to expand their domestic and global franchise. But for that the price has to right!

Binani Cements

Dalmia Bharat makes it complicated but also significant

Among the various companies under resolution at the NCLT, the case of Binani Cements has been one of the most complicated. It has not only raised some serious questions about the role of the Committee of Creditors but also about how the bidding process should be actually conducted at the NCLT. But, first a brief background!

Background to the case…

When the first round of bidding concluded for Binani Cements, Dalmia Bharat had emerged as the highest bidder with a bid of Rs.6800 crore. However, subsequent to this Ultratech of the Aditya Birla group had put in a bid of Rs.7900 crore. Ultratech had also offered the option of an out-of-NCLT settlement directly with Binani Cements which had been turned down by the NCLT. However, the NCLT has accepted the Ultratech revised offer. Dalmia had subsequently approached the NCLAT against the order but the NCLAT had ruled in favor of Ultratech since the deal had the assent of the Committee of Creditors. However, that is hardly going to be the last word. Dalmia has now approached the Supreme Court against the NCLAT order. What shape it takes is not too clear but this case has certainly raised some very interesting questions. These questions will have implications not only for the NCLT process but also for the format of approval in future such cases. Let us look at 3 key issues that arise from this particular case.

What about auction process?

The first question that arises is on the current auction process. If the sealed auction process is used then the highest priced auction has to be respected. That is what Dalmia Bharat has been arguing about. According to Dalmia, Ultratech coming in after the round of auctions is a clear use of financial muscle to distort the entire NCLT process. That is surely a valid point and needs to be addressed.

Role of the COC

The key approvals in case of the NCLT process are dependent on Committee of Creditors, which is represented by the bankers. However, there are a lot of other stake holders like trade creditors, bond holders and the equity holders who are left out of the process. The banks are focused more on recovering their loans with minimal haircut. Hence the decision is driven purely by that one single factor. That needs a rethink! 

Speed is the essence

This issue needs to be addressed early so that the process does not get skewed in favor of large conglomerates. That has been the case in the last few cases where it is the Tatas, Birlas, Jindals and the Mittals who have managed to get troubled companies at fairly attractive prices. This process needs to get a little more democratic in the larger interests of the various stakeholders! 

Rupee Recovers

The question is whether the worst is finally over for the INR


The last few weeks have been positive for the Indian rupee which recovered from an intraday low of Rs.75/$ to a six-week high of Rs.71.95/$. The rupee has shown tremendous strength on the back of falling crude prices and reducing fears of a global slowdown.

Crude prices and global growth

Brent crude fell sharply from a high of $86/bbl to $66/bbl in a span of less than 6 weeks. On the one hand the Iran concerns over sanctions has almost come to zero after the US relaxed sanctions on key importers like India, China, Korea and Japan. On the other hand, the IMF had originally warned about slowing growth due to the trade war. That does not seem likely with the global markets expecting an earlier rapprochement between the US and China. That means the pressure on the Yuan and the rupee is not likely to happen in the near future. That should work in favor of the dollar. 

Macros are improving

But the real takeaway for the rupee is that the macros are actually improving in India. Let us take three aspects of the macro. Firstly, inflation came in at 3.31% for October and that is well within the RBI target of 4%. Contrary to fears that the MSP could be inflationary, the impact of higher food prices is almost zero. Secondly, the green shoots of growth are back. GDP is expected to touch 7.8% in this full year. But more important this quarter had corporate top lines growing by 22%. Profits grew at just about 11% due to input cost pressures. Finally, the trade dispute and the lower crude prices mean that the trade deficit and the CAD going out of control is not necessarily a risk at this point of time. The strong rupee may be actually celebrating the silent shift in the Indian macro story. With crude topping out and rupee bottoming, the worst fears for the Indian economy may be over. That may be the good news! 

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