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6 questions to ask before buying Jet's IPO
Amit K |
February 15, 2005
<: o:title="t">veryone is talking about it.
In the midst of higher oil prices and intense competition eating into net profits, Jet Airways is the first airline company to hit the market with an initial public offering on February 18.
Here are six questions to ask before you bite the bullet:
1. Who owns Jet Airways?
Tail Winds, registered in the Isle of Man, Mauritius, owns 99.99% in Jet Airways. The rest is owned by a number of shell companies.
Shell companies are those that generally do not have active business operations. They basically exist as legal entities and are used as instruments by which another company can carry out its dealings.
All these shell companies are owned by Naresh Goyal, chairman of Jet Airways.
Let's see what the Red Herring draft prospectus has to say. This is the preliminary prospectus filed by the company with the Securities and Exchange Board of India and is subject change before the issue.
It states that Tail Winds is an Overseas Corporate Body (an overseas company directly or indirectly controlled by NRIs) which was de-registered by the Reserve Bank of India.
Now, to comply with SEBI guidelines, Tail Winds will have to divest its holding to resident and non-resident Indian investors.
The draft prospectus refers to these arrangements/agreements as possible causes for 'potential conflict between Mr. Goyal and his promoter group and the interests of the airline'.
2. Who owns the Jet Airways brand?
Jet Enterprises, another shell company, which is 'substantially' owned by Naresh Goyal, owns the Jet Airways brand.
What is startling is that Jet Airways is bound by a contract to pay 0.1% to 0.2% of its gross revenue as royalty or license fee for using the brand.
That translates into an annual outgo of Rs 3.5 crore (Rs 35 million) approximately, considering Jet Airways' total revenue of Rs 3,565.73 crore as on March 31, 2004!
To add fuel to fire, the draft prospectus confesses that the trademark, Jet Airways, is under litigation in the United Kingdom and America.
The Articles of association of Jet Airways explicitly state the airline will have to forgo the Jet Airways trademark if it loses this litigation!
Obviously, this was cause for concern amongst potential investors. So the company said that an agreement has been reached between the two companies and the brand name and logo would be transferred to Jet Airways within six months.
3. Has Jet being making a profit?
The year 2001-02 was bad news for Jet. The airline incurred a loss of Rs 31 crore (Rs 310 million). The following year, 2002-03, it rose to Rs 119 crore.
For the period ending March 31, 2004, Jet Airways made a net profit of Rs 163.10 crore and for the six months ending September 30, 2004, the profit recorded was Rs 129.35 crore.
But here is something you must note.
The entire holding structure is designed in such a manner that the parent company and a number of other shell companies (remind you of somebody by the name of Ambanis and their complex web of shell companies?), will earn their profits from Jet Airways' operations.
The story of shell companies eating into Jet Airways' profits does not end here.
The draft prospectus says, "the general sales of Jet Airways is outsourced to Jetair Pvt Ltd, another company controlled by Mr Goyal. Jetair earns a 3% commission on all passenger sales undertaken for Jet Airways." Fair enough.
What takes the icing on the cake, however, is an arrangement wherein Jetair recovers its infrastructure and employee costs from Jet Airways through a 'charge back' agreement.
Now why should Jet Airways pay the employee and infrastructure costs of Jetair? Why should Jet Airways oblige Jetair with these costs? The management owes an explanation to potential investors.
Further, there are many such promoter-owned companies operating from Dubai, Canada and South Africa, who would earn their commissions from cash generated by Jet Airways' operations!
4. What is Jet Airways' current market share?
The under-penetrated aviation sector in India has been growing at a compounded annual growth rate of 8.6% every year from 2002.
In terms of passengers carried till the period September 30, 2004, Jet enjoyed a share of 46%. Their market share, in terms of revenue, earned has increased from 6.4% to 42.3% in the decade beginning 1994.
With a fleet of 42 aircraft, mostly Boeing 737s, flying across 45 destinations and 7,000 employees across the country, Jet Airways is preparing to zoom into uncharted territories like the ASEAN countries.
The recent government decision to allow foreign institutional investors to increase their investment to 49% (up from 40%), will further help airline companies raise money to expand their operations.
Since Jet Airways has a strong brand presence in the Indian market, it could tap into this route.
5. Will Jet face a lot of competition?
Recently, the Union Cabinet allowed airlines which have completed five years of operations and a fleet strength of 20 aircraft, to ply all international destinations. The lucrative Gulf region is off limits for another three years.
The new routes Jet plans to operate in will have tough competitors like Singapore International Airways, Malaysia Airways and Emirates Airways who will not think twice before entering into a cut-throat fare war competition.
On February 9, SIA announced a 14-day limited period scheme for ASEAN destinations like Singapore and Kuala Lumpur for as low as Rs 13,100, to Bangkok for Rs 16,500, and to Hong Kong for Rs 17,500, exclusive of taxes!
On home turf, there will be almost half a dozen airline operators fighting for a share of the pie.
These include Sahara, Indian Airlines, Royal Airways, Kingfisher (promoted by UB boss, liquor baron Vijay Mallya), Go Airways (to be promoted by Bombay Dyeing head honcho Nusli Wadia), Air Deccan (both low-cost, low-frills aircraft services), and Virgin Atlantic (promoted by maverick Richard Branson) as and when it gets the government's nod.6. Are the shares too highly priced?
The face value of the shares will be Rs 10 but will quote at a premium Rs 950 to Rs 1125 per share.
The Earning Per Share (net profit / number of shares) for the period ending March 31, 2004 was Rs 19.44.
If this EPS is used to calculate the PE ratio (market price / EPS) for Jet's IPO band of Rs 950- Rs 1,125, the PE ratio works out between 54.5 and 64.5 for the two extremes.
Generally, a lower PE ratio stock is much sought after indicating that there is room for growth. It is entirely left to the investors' wisdom if you want to buy into an IPO with such a high PE ratio.
To get a clear understanding on EPS and PE, read How to spot a good stock.
Comparison with industry PE and EPS will be futile as there is only one listed airline, Royal Airways Ltd, that shows a negative EPS and PE.
In a nutshell
As an investor look carefully at these six issues before jumping on the Jet IPO bandwagon.
If you want to get into the IPO and exit quickly, go for it.
Investors can hope to make 15% to 20% on listing. Or, if you do believe in Jet's strong fundamentals, solid business plan, ability to take on competition, consider it for the long term.
• Is Jet IPO a good bet?