Is Indigo's Negative Networth the Main Concern?
(Oct 20, 2015)
|A A A
In this issue:
» Rajan criticizes IMF
» Valuations of startup firms up by 167%
» ...and more!
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...
Aviation industry: one tough sector
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.
--- Advertisement ---
Why Little-Known Companies Could Make You Big Returns...
Some little-known and barely heard of companies could be the star performers in your portfolio.
It's because these companies have a huge potential for profit. A potential unrecognized by most investors as of now.
And you need more than a magnifying glass to go through the details of such companies to pick the winners.
Believe it or not, Equitymaster has been researching and recommending such companies for more than 7 years now.
And our subscribers have made returns like 124% in 7 months, 217% in 3 years and 11 months, 250% in 2 years and more from such little-known small companies we've recommended.
So we now invite YOU also to be part of this amazing opportunity.
Just click here for full details...
Time and again, we have praised the Reserve Bank of India and Raghuram Rajan in particular. For good reasons too. The RBI is a model central bank in many ways. It has a long track record of standing up to political pressure.
Governor Rajan has earned praise the world over for his inflation fighting credentials. We take comfort in the fact that he calls out risks in his public statements along with the opportunities. Thus, it came as no surprise to us that he chided his former employer, the IMF.
The International Monetary Fund is not supposed to be a cheerleader for global central banks. Sadly, it has not been critical of the easy money policies of developed world. As per Rajan, the least that the IMF can do is to question the success of these policies.
We are thankful that India has such folks heading key institutions. As a former chief economist at the IMF, Rajan is perfectly entitled to question its stance. There is almost no one to question the long-term damage that such easy money policies may cause.
Those who are skeptical of Rajan's comments need to only remember the last time he called out the risks facing the global economy. In 2005, he had warned of the same dangers and was proved right in 2008. He may well be right again.
Valuations in India's e-commerce space have clearly reached bubble territory. We have heard of all kinds of start-ups raising big money from venture capitalists (VCs). But the e-commerce firms are head and shoulders above them all.
As per an article in the Business Standard, the valuations of these firms have increased by 167% over the last five years! To put things in perspective, this is the same as a listed stock's P/E ratio rising from 10 to 26.7. And e-commerce firms aren't even making profits yet.
Venture capitalists are no fools. They have invested in these firms with the expectations that growth will lead to profitability. The VCs would obviously look to exit at that stage. However, things haven't turned out that way yet. These firms are nowhere near the breakeven points. And if their recent advertising blitz that we have seen is anything to go by, profits may be a distant dream.
In the meanwhile, Indian stock markets continued to trade near the dotted line after opening the day on a flat note. At the time of writing, the BSE-Sensex was trading up by around 55 points (+0.2%). Gains were led by power and auto stocks. Mid and smallcap stocks were trading firm as well, with their respective indices trading higher by about 0.6% and 0.7% respectively at the time of writing.
"Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks." - Warren Buffett
|| Today's investing mantra
Today's Premium Edition|
Why BPCL & HPCL Have Trumped ONGC...
Weak crude prices have led to a rally in stocks from the downstream oil segment.
| Get Access
|This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).
|DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.
DETAILS OF ASSOCIATES:
Details of Associates are available here.
DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
- 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
- Equitymaster has financial interest in ONGC.
- Equitymaster’s investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made solely for building track record of its services.
- Equitymaster's Associates and Research Analyst or his/her relative doesn't have any financial interest in the subject company.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
- Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
Definitions of Terms Used:
- The Research Analyst has not served as an officer, director or employee of the subject company.
- Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
- Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
- Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
- Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
- Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringementDisclosure & Disclaimer:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use
, available here. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407