This chart shows claim settlement ratio of life insurance companies... Read On
It would be difficult to miss the story surrounding Indigo and its negative networth making rounds in business dailies today. For those who have no clue what we are talking about, it seems that the company's promoters have been receiving flak for paying out a dividend that has turned the company's networth negative for the quarter ended June 2015. Three months prior, the company's networth was positive. As such, it paid out more than what it earned in the quarter. And that just before the IPO hits the market!
From what we have gathered, the promoters are of the view that the company will keep its business model lean and thus will not need much cash. Indigo's low operating costs (through its standardisation and leasing model), young fleet (allowing it to have fuel cost efficiencies), and minimal ancillary costs differentiate it from its peers.
In fact, Indigo is one of the lowest cost airlines in the world. Through different measures (such as entering into contracts with original equipment manufacturers), it has been able to keep its costs low and show profits. In short, its capital requirements remain low.
But then...that raises the question: Why raise capital in the first place?
Well...turns out that about 60% of the issue size is an offer for sale. That is, the promoters are putting their shares on the block. Only the balance of 40% will be utilised internally.
So Indigo has some clear strong points in its favour but also raises some red flags.
But...should investors concern themselves with these aspects? Perhaps it would be better to look at the bigger picture in this case...
Yes, the opportunity in the aviation industry remains massive. But the sector's worldwide historical performance has been weak. Strong headwinds - regulatory hurdles coupled with volatile fuel prices as well as high competition and its effect on pricing power - have kept industry players from truly flourishing over time.
With these factors holding true in India as well, investors would do well to consider the big picture rather than worry about these relatively trivial controversies before investing in this sector.
The following chart puts this in perspective...
As you can see, the return ratios of the two large aviation players have been anything but decent ('L' indicates latest year, 'L-1' indicates one year before latest, and so on).
Please note that we are not saying that Indigo's performance will necessarily resemble that of its peers. After all, it has proved to standout from the crowd.
But the fact is that certain industries have relatively dull economics compared to others. And investors would do well to keep this in mind, particularly in the case of aviation.
What should investors be more worried about - the controversy surrounding Indigo's promoters or the poor dynamics of the aviation industry? Let us know your comments or share your views in the Equitymaster Club.
Data source: ACE Equity
This Chart Of The Day was published in The 5 Minute WrapUp - Is Indigo's Negative Networth the Main Concern?
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