A public issue is no longer for growth capital, it is a distribution mechanism
I read with much amusement the recent media splash on InterGlobe Aviation, the company that owns IndiGo Airlines. Its clocking a record profit in FY15 was big news – the Indian aviation sector has been in the dumps for some years now, suffering from strategic mistakes and a high fuel price. IndiGo has been an exception, due to its extremely efficient operation.
Apart from its smart business strategies, the low price of fuel helped in rake that ₹1,304 crore historical profit. This all-time high profit was thrice that of FY14 and comes at a time InterGlobe is to hit the public market. Assuming what has been reported is sustainable, the airline probably does not need to approach the capital market. This is because, of the ₹2,500 crore that it intends to raise through the issue, ₹1,165 crore was to go towards retiring certain outstanding lease liabilities for aircraft. The reminder is promoter and management sale proceeds.
The return ratios of IndiGo this year beats the best in the world like Southwest Airlines, which is super efficient and operates in a far bigger market with lower infrastructure costs. With fuel costs at a multi-year low, the IndiGo management surely knows that the return ratios cannot get any better and there is no favourable time to take money off the table.
That brings us back to the question of what purpose will the IPO serve? And the question is not just about IndiGo. Truth be told, the whole idea of an IPO itself has changed from one where companies came to the stock market to raise growth capital to one where promoters either want to cash in on their own holdings, or provide an exit to outside investors. Therefore, the primary market is no longer a place where investors undertake equity risk for the upside in a growth story.
Another high profile IPO in queue, Coffee Day Enterprises, is one more case in point. The ₹1,100 crore-fund raising is partly to pay down debt and partly for expansion of the coffee chain. The private equity investors in the company will convert their debentures into equity shares ahead of the issue.
Coffee Day Enterprises is a holding company, of several businesses including real estate, logistics, financial services and hospitality in which coffee constitutes only 50%. It also holds a 16.74% stake in software company Mindtree, worth ₹1,920 crore. Founder VG Siddhartha owns an additional 3% stake personally. The management has clearly said it will not allocate capital to any other subsidiary apart from coffee over the next five years, but the point is, even the expansion of the cafe business can be funded if the management decides to liquidate its holdings in listed stocks. But the management in its wisdom has chosen to raise money from the public rather than utilising the levers available within the company to re-allocate capital. Yes, the private equity investors have to get their exit, but then that is precisely the point – the stock market is only an exit route for some investor or the other, and retail investors need to do their own homework.
Tailpiece: A few weeks back when we approached IndiGo for a cover story, the management refused to participate on grounds that the company had filed its prospectus and therefore, was observing a silent period. And a few days back, the company was all over the press tom-toming its record profit. Incidentally, the Sebi approval for its IPO also came in yesterday.