Kingfisher’s F1 move fools the market

After years of helplessly watching debt pile up at Kingfisher Airlines, investors in Mumbai might be forgiven for jumping to a conclusion when its billionaire owner issued $100m worth of shares in his Formula 1 team to an Indian conglomerate on Wednesday.

Given the 12 per cent surge in the airline’s stock on Thursday, they seemed to think the money would go towards bailing out the loss-making airline.

But they may be disappointed. Indian liquor baron Vijay Mallya has told a local business paper that the money is going to the F1 team alone.

Kingfisher did not respond to multiple requests for comment, but Mallya told Mint newspaper that: “No shareholders sold stakes and the entire $100m will go to the team.”

The market had good reasons to have gotten excited.

The F1 share issue comes just two weeks after Mallya announced he was shuttering Kingfisher Red, the low-cost subsidiary of his Kingfisher Airlines, which in January was more than $1.2bn in debt, and a day after the company “asked its lessors to release $200m of safety deposits to help it repay debt”.

But in light of Mallya’s comment to Mint, Deven Choksey, managing director of KR Choksey, a Mumbai-based brokerage, said he expected the Kingfisher stock to come back down.

“The market will take note of [the fact that all of the money will go solely to the team] and correct downward,” he said. “We all thought this money was going to help Mallya reduce Kingfisher [Airlines’] debt because we all thought even if Mallya gets this money, he will pump it into Kingfisher to reduce the debt.”

One Mumbai-based analyst told beyondbrics that even if some of the proceeds from the share issues had gone to Kingfisher, he is not sure how much of a dent it would have made on the company’s overall debt burden.

“They need at least [$400m to $600m] to have a significant impact on the company,” the analyst said. “[$100m will cover] just a quarter or two of losses.”

The entire Indian airline industry has been going through tough times lately. As the FT’s Amy Kazmin reported last week:

India’s private airlines began the year optimistically, as soaring passenger numbers raised hopes that profits were finally on the horizon. But while Indians are flying in record numbers, the airlines are still bleeding red ink, wounded by surging fuel prices and fierce price wars with ailing state carrier Air-India.

Kingfisher, India’s second-largest carrier by market share, has been the worst hit, incurring $52m in losses in the quarter ending in June 2011. Shares in the group have fallen 65 per cent for the year to date, compared to the Sensex’s 17.6 per cent decline.

Mallya, one of India’s most flamboyant tycoons, is known as “The King of Good Times”. He launched Kingfisher Airlines, billed as a competitor to the world’s premium carriers, in 2005. But the debts it took on to fuel expansion before the financial crisis became a heavy burden as passenger numbers plummeted.

Based on today’s news, investors might be forgiven for thinking that that load may not lighten anytime soon.

Related reading:
Kingfisher plea for foreign investors, FT
Air India: the pilots strike back, beyondbrics
India to act over predatory airline pricing, FT