AirAsia India IPO potentially worth US$408 million

AirAsia (AIRA:MK) Fair Value: M$4.20
Rating: Outperform

10 January 2018, Asia Pacific – AirAsia Group CEO Tony Fernandes commented this morning that AirAsia India is exploring a potential Initial Public Offering (IPO). Based on our preliminary estimates, AirAsia India could potentially be worth US$408m upon listing. This will boost the value of AirAsia Berhad (AIRA:MK), which owns a 49% stake in AirAsia India, by US$200m or M$0.24 per share, equivalent to 6.4% of AirAsia Berhad’s current market capitalisation.

AIRASIA INDIA’S DOMESTIC MARKET SHARE IS STILL SMALL AT 4% CURRENTLY

AirAsia India has a 4% market share on domestic routes in India currently. The airline doubled its number of passengers carried to 1.2 million in 3Q17 and grew revenue by 126% y/y to INR3.95B. AirAsia India has a fleet of 14 Airbus A320 aircraft, flies to 16 destinations in India and its passenger load factor was 85% in 3Q17.

Chart: Airline market share on domestic routes in India (Dec 2017)

Chart: Airline market share on domestic routes in India (Dec 2017)

LOWEST COST STRUCTURE POSITIONS AIRASIA INDIA WELL FOR GROWTH

With a cost structure that is even lower than the dominant domestic low cost carrier IndiGo (INDIGO:IN), AirAsia India is well-positioned to grow its market share and profitability longer term.

AirAsia India’s cost per ASK and cost per ASK excluding fuel are 2% and 3% lower than IndiGo’s. IndiGo has become the largest domestic carrier in India with a 41% market share and is a tough competitor to beat. Considering IndiGo’s highly efficient cost structure and its fleet size of 152 aircraft is more than 10 times larger than AirAsia India’s, AirAsia India will have a greater chance of turning profitable once its fleet size expands to more than 20 aircraft, enabling the airline to push its unit costs lower.

Chart: Airline unit cost comparison (July-Sept 2017)

Chart: Airline unit cost comparison (July-Sept 2017)

 

49% STAKE IN AIRASIA INDIA COULD POTENTIALLY BE WORTH US$200 MILLION TO AIRASIA BERHAD

Valuing AirAsia India is difficult given that it has been loss-making. The airline reported a net loss of INR164m in 3Q17 and is also in negative equity of INR996m at the end of September 2017. Airasia India has, however, turned EBITDAR positive with an EBITDAR margin of 12% in 3Q17, a marked improvement from negative 14% a year ago.

If AirAsia India manages to deliver net profits on a consistent basis, AirAsia India could potentially be valued at US$408m upon listing based on our preliminary estimates.

This will boost the value of AirAsia Berhad (AIRA:MK), which owns a 49% stake in AirAsia India by US$200m or M$0.24 per share, equivalent to 6.4% of AirAsia Berhad’s current market capitalisation.

 

KEY CHALLENGES FOR AIRASIA INDIA IPO

  • AirAsia India is in negative equity (amounting to INR996m at the end of September 2017) and will require additional capital injection first before heading for AirAsia India IPO.

 

  • Without a longer track record of consistent profitability, it would be challenging to garner sufficient investor interest in AirAsia India IPO. Recall that the IPO plans of AirAsia Philippines and AirAsia Indonesia had been repeatedly delayed.

 

  • Although the Indian airline sector is expanding rapidly and has strong growth prospects given its low air travel penetration rate and rising per capita income, competition will be stiff. The other domestic airlines have aggressive fleet expansion plans, particularly IndiGo (INDIGO:IN) which has a competitive cost structure and another 445 aircraft on order.

 

  • Future international route expansion could be low-yielding. Singapore Airlines’ (SIA:SP) 49%-owned Vistara, which operates 17 aircraft, also plans to expand rapidly on international routes as the Indian aviation market liberalizes. AirAsia India will also face strong competition from the Gulf carriers when it launches international routes.

 

  • Airport infrastructure constraints could impede AirAsia India’s growth.

 

Note: Stocks with upside of more than 10% based on our fair value are assigned an Outperform rating. Stocks with downside of more than 10% based on our fair value are assigned an Underperform rating. Stocks with upside or downside of less than 10% based on our fair value are assigned an In-line rating. These are Crucial Perspective’s proprietary rating classifications and by no means serve as investment recommendations.

 

Related Reports:

AirAsia (AIRA:MK) Initiation Research Report 2017 – Cost Leadership, Extensive Network & Strong Branding

Key Takeaways from AirAsia (AIRA:MK) Investor Day 2017

AirAsia (China) adds partners but lack of Henan govt stake raises risk of other entrants

 

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