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Kingfisher Airlines Limited
Initiation
Overweight
KING.BO, KAIR IN
On a recovery path
• Initiate with Overweight, PT of Rs83: Our PT implies 24% upside
from the current share price. KAIR is the second-largest full service
airline in India with passenger market share of 19%. We expect a sharp
turnaround in earnings driven by an improved operating environment,
restructuring of operations, and conversion of debt into equity.
• Redeployment and operational restructuring to drive earnings
turnaround: KAIR has recently reached an agreement with AIA for
the recovery of its grounded fleet by 2Q FY12. Four of the 14
grounded planes have been deployed, and KAIR expects to deploy
another three by 4Q FY11. The restructuring of operating costs should
help reduce operating (ex-oil) CASK by 8.5% in FY11E and 8.2% in
FY12E.
• Debt restructuring to ease cash flows: Conversion of debt to equity
should drive Rs4.5B interest savings per annum and reduce gearing
from 17.1x in FY10 to 1.8x in FY12E. Easing of cash flows will have
operational benefits, as KAIR will be able to negotiate better terms for
fuel and airport charges. KAIR is also looking to raise US$300MM of
additional equity (not factored into our estimates), which could help
further reduce interest costs. We expect KAIR to achieve EBITDA
breakeven in FY11 and PAT breakeven by FY12.
• Price target, valuation, key risks: Our Sep-11 price target of Rs83 is
based on 8x FY12E EV/EBITDAR, at a premium of 14% to the Asian
airline peer group and a 10% discount to Chinese airlines. We believe
the premium to Asian airlines is justified given KAIR’s stronger
growth prospects, debt restructuring, and better long-term growth
potential offered by the Indian market. Key risks include an increase in
fuel prices, slowdown in passenger traffic growth and delay or inability
to restructure debt, further delays in redeployment of grounded aircraft,
depreciation of rupee and adverse changes in regulations
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