Air India wants to go public for a shocking reason!

Jun 22, 2012

In this issue:
» CCI slaps Rs 63.1 bn fine on 11 cement companies
» The reason why Bangalore is India's leading realty market
» Greece to go from developed to developing economy?
» SEBI raps continually underperforming mutual funds
» ....and more!

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Why do companies get listed on stock exchanges? Generally, the purpose for raising money is to fund future expansion plans and to create liquidity by facilitating trading in the share market.

But what if a company issues an initial public offering (IPO) just so that it can facilitate employee stock options for its employees? And what if that company is none other than debt-ridden loss-making public sector firm Air India?

So far the government has been supporting this ailing national carrier with tax payers' money. But if the recommendations of the pay parity report, also known as Dharmadhikari report, are implemented Air India could soon be listed on the stock exchanges. The report recommends listing of the state-owned firm so as to facilitate employee stock options. That too, as part of voluntary retirement scheme (VRS) for probably 7,000 of its 'voluntary retirees'.

In theory, this novel idea may seem to be a quick fix to Air India's ongoing financial constraints. But can the government allure investors to buy shares of Air India? For one, the sentiments in the IPO market are not too encouraging. Secondly, investors have already burned their fingers on other aviation stocks. And given Air India's abysmal financial health, inefficient operations and excessive government interference, the chances of a successful IPO are very bleak.

Do you think Air India should be listed simply to facilitate ESOPs for its employees? Share your views or you can also comment on our Facebook page / Google+ page.

 Chart of the day
After much wait, the Competition Commission of India (CCI) has finally slapped a penalty of nearly Rs 63.1 bn on 11 cement companies that have been found guilty of cartelisation and price manipulation. The companies have been ordered to pay a penalty to the tune of 50% of their average profit during the financial year 2009-10 (FY10) and 2010-11 (FY11). As today's chart of the day shows, the worst hit companies include Jaiprakash Associates, UltraTech Cement, Ambuja Cements and ACC. Each of these companies has to pay over 10 bn as penalty. In addition, the competition watchdog also fined industry body Cement Manufacturers' Association (CMA) at 10% of its average turnover in 3 years (about Rs 7.3 m). Cement players are expected to challenge the order in the competition appellate tribunal.

Data source: DNA Money

Property markets across India have tumbled in recent times. In the last quarter itself, Mumbai and National Capital Region (NCR) saw a drop in volumes by 58% and 57% respectively. However, one city has been an exception in the current turmoil. It's Bangalore. The city registered a volume drop of just 18% in the last quarter. Moreover, it also absorbed 49 million sq ft of residential space in the last year. This is highest by any city in India. Apart from this, it also registered highest absorption rate when it came to commercial real estate market.

So, what has been the reason for this outperformance? Presence across all price points is one of the reasons. For instance, in Bangalore one can buy a property ranging from Rs 20 lakhs to Rs 1 crore with ease. Stability in prices is another reason. It may be noted that during the bull run, prices in Mumbai and NCR went through the roof. But in Bangalore, the rise was gradual. Calibrated price increases resulted in high affordability. Also, it may be noted that Bangalore is an IT hub. Thus, the demand for commercial space is likely to remain buoyant there as compared to other cities. However, the situation might change soon as many pending project approvals in Mumbai have been recently given a green signal by the local municipal authority.

As value investors, we've always had our fair share of doubts about the modern portfolio theory. Or for that matter, the entire practice of indexing, which all global institutions so widely follow. A recent episode surrounding Greece further confirms our suspicion. Apparently, an exit from the Euro zone would likely downgrade Greece to the status of a developing nation. Now, this logically means that investors could become wary of investing in the country. But that's hardly the case. As per the strange rules of indexing, Greece could actually witness a sharp jump in inflows as it would now form a bigger proportion of the emerging market index as opposed to a small proportion of the developed market index before the downgrade. This is certainly perplexing. Shouldn't investment decisions be based on intrinsic values and the difference between the intrinsic value and the current stock price? We certainly think so. The downgrades or the upgrade should hardly matter as long as the intrinsic value is intact. But we are hardly complaining. As we can always take advantages of the pricing anomalies that arise due to the strange behaviour of the so called big institutions.

Levy penalties to quash monopolistic trends in one sector. At the same time, allow a protective shield to guard companies from competition in another. The government's latest sectoral regulations seem ill conceived. The only difference being that the entities bearing penalties largely belong to private sector. Now, no prizes for guessing that the government has a special interest in the entity being protected! As most readers may have guessed, we are referring to the cement and power equipment manufacturing companies respectively. The CCI has imposed heavy penalties on cement manufacturers for forming cartels and fixing prices. But the inability of power generation equipment manufacturers to compete with Chinese imports is not seen as their ineptness. PSU behemoth Bharat Heavy Electricals Ltd. (BHEL) in particular.

India will shortly impose a 5% import duty on power generation equipment. Local manufacturers have demanded this for the past two years. The supply of cheaper equipment has eaten into their order book. Ones coming from China, Korea and Japan cater to almost 30% of power equipment market in India. Chinese exporters benefit from low interest rates and an undervalued currency. Thus, it is not surprising that the likes of BHEL fear capacities lying vacant. As it is, BHEL's order flows have remained low over the last three years. In the absence of this import duty, BHEL's incremental capacity will lie unutilised. The discriminated approach to policy making, however, seems a stifle disturbing to us.

The Securities and Exchange Board of India (SEBI) over the past few years has been doing its bit to protect the interest of shareholders and investors. The latest issue that has come under its radar is the continuous underperformance of certain mutual fund schemes. Obviously, investors are free to exit funds which have not been doing well. But there are some fund houses where the performance of a significant percentage of schemes has not been upto the mark. And that too, on a continuous basis! These are the funds that the SEBI aims to address. The idea is to have a word with the fund managers and the CEOs to get a sense of what they intend to do to ramp up performance.

At present, there are around nine fund houses where half or more of their schemes have underperformed the scheme benchmarks consistently over the last three years. In the case of nine others, up to half the schemes have given lower returns than their benchmarks. Opinions wary whether the time period of three years is sufficient time to determine a fund house's performance. We for one believe so and also view the SEBI's move as a step in the right direction.

In the meanwhile, the Indian stock markets have been hovering in the negative zone throughout today's trade. At the time of writing, the BSE Sensex was down by 105 points (0.6%). All the sectoral indices were trading in the red except auto stocks. Barring Malaysia, all other Asian stock markets too were trading weak.

 Today's investing mantra
"Now I did a lot of work in the earlier years just getting familiar with businesses and the way I would do that is use what Phil Fisher would call, the "Scuttlebutt Approach." I would go out and talk to customers, suppliers, and maybe ex-employees in some cases. Everybody. Everytime I was interested in an industry, say it was coal, I would go around and see every coal company. I would ask every CEO, "If you could only buy stock in one coal company that was not your own, which one would it be and why? You piece those things together, you learn about the business after awhile." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Air India wants to go public for a shocking reason!". Click here!

    20 Responses to "Air India wants to go public for a shocking reason!"

    kj babu

    Jul 6, 2012

    absolutely ridiculous. Just for ESOP option going for listing the company will not help in any way. All of us should bear in mind that before the merger with Indian Airlines, Air India has shown better performance with profits. And now with the wrong and uninformed decisions taken without a foresight by the govt/ bureaucrats the fate of airlines is tragic. this is not the end the govt is eager to disinvest many of its holdings in the PSUs for want of funds. the Govt now-a-days makes a turn-a-round by making ways for private firms and foreign investors/ companies to reap benefits from the state owned companies. days are gone for which companies were set up for the good of the country and its citizens.



    Jun 23, 2012

    AIR INDIA should be closed down as it has become a white elephant........the people, whether politicians or the employees of AI are just misusing the Organization for their personal needs.
    If the country has to grow, then it needs to take such bold steps.
    Just shut down AI.....clean Indian Airlines and become professional in your operations. Those who cooperate....remains in the organization and those who don't can resign and go....

    Its time that this Govt. stops procrastinating and start having the guts to take bold decisions.



    Jun 23, 2012

    Being ESOP, that too to VRS employees is good idea that encourages all existing and future employees to work appropriately for its growth so that they directly reap rewards of its success. Otherwise, at one end they would have slogged, only for outsiders to benefits.
    Experts here can throw light on why this model should fail, unless the experts are market players / politicians who will loose the benefit of taking it over directly or indirectly at cheap rates all the assets that AI/IA owns!! With such high end caliber of management persons, do we accept that we are unable to run our own carrier and we need to sell off to foreigners with FDI window?????



    Jun 23, 2012

    Air India IPO will be name of another Scam. Who will buy the shares of a loss making airlines unless some industrialist has interest in acquiring the complete control. I would not think of buying the shares even if offered at the discount.



    Jun 23, 2012

    the silliest reason on the earth



    Jun 23, 2012

    How this govt gets these fantastic ideas, may be the top intelligent bureaucrates who have milked these PSU's still are not happy in liquidating the national carrier or rather give it to a industrialist so that the same can be run on a commercial footing.



    Jun 23, 2012

    Better late then never. LIC, PSU banks are there to bail out Air India, after all it is again Public money. The Parliament should enact a special law and make all MP's and AIR INDIA staff shareholders of Air India and repay all debts. They have been openly fooling the nation all these years under some or the other pretext.

    Like (1)

    g r chari

    Jun 22, 2012

    One easy way out for the govt. (subject to changes in the aviation policy) is to sell majority stake in Air India (say, 75%)to a foreign airline with a stipulation that the foreign investor will off-load about 24% equity through an "offer for sale" within a stipulated period of say, 3 to 5 years. This will be one of the best ways for the govt. to redeem itself and save scarce public money from being thrown into a black hole and still keep the interest of the Indian public in the domestic airline.

    Like (1)


    Jun 22, 2012

    Many Retail investors have burnt their fingers on subscription to the IPOs of MOIL,EIL and Follow on
    IPOs of SCI,REC,PFC etc even though their Balance Sheets
    are good and profitable but due to high pricing of the issues and Govt interferences in them.AIR INDIA is a ailing company and most unfavoured sector.Retail Investors
    cannot be fooled for ever.

    Like (1)


    Jun 22, 2012

    I agree with AI for the following:
    1) VRS for 7000 can be implemented which will reduce its operating cost.
    2) ESOP employees will work better for AI and may not participate in strength in strikes that can't be justified.

    Like (1)
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