The government has sweetened the deal a fair bit for prospective bidders of Air India Ltd. It is now retaining a far greater share of the airline’s debt and has given up the condition of retaining a 24% stake in the airline it had set about two years ago.
For bidders, having full operational freedom without government interference is a huge positive. The reduction in debt and hence, interest costs, will be about 61% under the new terms, as against 35% under the earlier terms set out in March 2018.
From the government’s perspective, it seems like it is really bending backwards to attract bidders and make a deal happen.
But even under the new terms, valuations remain high. Besides, as Praveen Sahay, deputy vice president (equity research) at Edelweiss Broking Ltd, points out, “One reason why the deal may not go through is that investors may find it difficult to gulp the entire piece at a go. A sale done in parts is more feasible."
Air India’s enterprise value (EV) works out to a minimum of about ₹47,000 crore, assuming even a nominal ₹1 value for its equity. EV includes the present value of future lease rentals, using a rough capitalization factor of seven times current rentals.
That works out to an EV/Ebitdar multiple of as high as 11.6 times, using average earnings in the past three years. Ebitdar stands for earnings before interest, tax, depreciation, amortization and lease rentals, and a three-year average is used to iron out volatility in earnings due to fluctuating crude oil prices.
Note that Singapore Airlines Ltd (SIA), a fairly profitable entity, trades at a far more modest EV/Ebitdar multiple of 5.8 times. In the past three years, SIA had an average Ebitdar of 3.264 billion Singapore dollars ( ₹17,200 crore), which represents a profit margin of 20.8%. In contrast Air India and its subsidiary, Air India Express Ltd, reported an average Ebitdar of ₹4,090 crore in the past three years, with a profit margin of 15%.
Therefore, for someone to bid even a nominal sum for Air India, there needs to be a firm belief in their ability to cut the airline’s costs drastically. Assuming an EV/Ebitdar multiple of seven times is fair, Air India’s Ebitdar needs to rise about 65% compared to the past three-year average, which is clearly a tall order. All this is assuming there isn’t much value ascribed to the equity of the airline.
Still, some analysts believe advantages such as prime slots for airline departures and bilateral rights will add to the value Air India brings to the table, and should attract bidders.
A moot question is what happens even if, in a worst-case scenario, there are no bidders this time around as well. In such a scenario, the government can seriously consider selling Air India in parts, given that there will be greater demand for some of its businesses such as international routes.