Price of Van­ity

King­fisher has crash­landed. The UB Group could be next. But the high-fly­ing Vi­jay Mallya Re­fuses to ac­cept that his busi­ness model is to blame for the present cri­sis.

India Today - - INSIDE - By Sandeep Bamzai and Dhi­raj Nayyar

Vi­jay Mallya re­fuses to ac­cept it’s his busi­ness model that is to blame for the present cri­sis.

Once upon a time Vi­jay Mallya be­lieved his dream busi­ness, an air­line, would cat­a­pult him from ty­coon to tril­lion­aire. Six years af­ter he launched King­fisher Air­lines in 2005, its trou­bles have be­come a gan­grene that could in­fect the en­tire UB Group. Mallya’s cash-rich liquor busi­ness has been drained be­fore for glam­orous ac­qui­si­tions and life­style needs. But that was a man­age­able bur­den. An air­line is too heavy a load.

Mallya is elo­quent in his litany of rea­sons for the cri­sis. He blames ev­ery­one and every­thing—bar him­self. But an­a­lysts know and cred­i­tors are learn­ing that the real prob­lem is Mallya’s ill-con­ceived busi­ness plans. His foray into the air­line busi­ness has cost the share­hold­ers of UB’S hold­ing com­pany, shares of which are cur­rently trad­ing at Rs 82, al­most four times lower than their 52week high of Rs 315. This is the price paid for van­ity man­age­ment. Ac­cord­ing to a former air­line head, his ob­ses­sion to van­quish Jet Air­ways at any cost is re­spon­si­ble for his de­ba­cle. He says, “Mallya’s prob­lems are self cre­ated. You can­not keep chang­ing the busi­ness model, there are cost im­pli­ca­tions in­volved. A one-point agenda can­not be the ba­sis of your busi­ness propo­si­tion.”

Mallya needs some­one to res­cue him ur­gently. By how much? For how long? His pride has stopped him from ask­ing the Govern­ment for a bailout. Banks are re­luc­tant, hav­ing al­ready of­fered him a gen­er­ous pack­age in March

2011, when they con­verted a sub­stan­tial por­tion of debt into eq­uity at a premium that raised more than one ques­tion. But there are po­ten­tial saviours. The Tatas have re­port­edly made an of­fer, valu­ing the com­pany at Rs 30 a share. That is a 50 per cent premium on King­fisher’s share price in the sec­ond week of Novem­ber but is well be­low the Rs 81 mark that King­fisher recorded in Novem­ber 2010. Mallya has spo­ken to Re­liance boss Mukesh Am­bani to ex­plore his in­ter­est. So far, Am­bani has for­mally de­nied any in­cli­na­tion to buy into the strug­gling air­line. IN­DIA TO­DAY has learnt that the white knight may well be an In­dian busi­ness group flush with cash which also owns a pri­vate eq­uity fund of sub­stan­tial size. Mallya has some­one lined up. He told IN­DIA

TO­DAY af­ter his press con­fer­ence in Mum­bai on Novem­ber 15 that “if I was asked a di­rect ques­tion—have you re­ceived a di­rect of­fer from an In­dian in­vestor—the hon­est an­swer is yes.”


is spec­u­la­tion that Sa­hara pro­moter Subrata Roy, who bought into Mallya’s For­mula One team ear­lier this year, may be in­ter­ested in mak­ing a come­back to avi­a­tion af­ter sell­ing out to Jet Air­ways in Jan­uary 2006. But Roy has burnt all ten fin­gers in the air­line busi­ness be­fore. What seems clear is that Mallya will sell a ma­jor­ity stake in the air­line, sub­ject to the reg­u­la­tory frame­work, but re­tain a mi­nor­ity pres­ence. UB Group Chief Fi­nan­cial Of­fi­cer Ravi Ne­dun­gadi dropped a hint: “Ma­jor­ity stake is not key.” Still, Mallya would like to re­tain con­trol over King­fisher, even if he can­not keep con­trol over its shares.

The uncer­tainty has taken a toll on em­ploy­ees of the air­line, many of whom have lost their sense of job se­cu­rity. At King­fisher’s Ban­ga­lore of­fice, the word is out that aus­ter­ity mea­sures are go­ing to be put in place. “We are func­tion­ing with­out know­ing who will lose his job or when. Our su­pe­ri­ors have told us that they think the air­line will con­tinue to oper­ate, but there will be fi­nan­cial tight­en­ing and re­duc­tion in em­ployee numbers,’’ a King­fisher em­ployee says on con­di­tion of anonymity.

The sit­u­a­tion has not reached panic lev­els yet, but al­most all em­ploy­ees are on

the look­out for jobs in other air­lines or in the hos­pi­tal­ity in­dus­try. Salaries for the month of Oc­to­ber have been held up, while some haven’t got even their Septem­ber salaries. There are in­di­ca­tions that priv­i­leges like fam­ily travel on King­fisher at nom­i­nal cost or pickup and drop fa­cil­i­ties for pi­lots and crew are likely to be cut. “We are watch­ing the sit­u­a­tion, hop­ing some­thing will work out,” an em­ployee says.

Se­nior of­fi­cials and friends of Mallya are try­ing to sound up­beat. His busi­ness part­ner Ir­fan Razack, who con­structed UB City, where the UB Group has its head­quar­ters, main­tains the King of Good Times will pull it off. “He is an in­tel­li­gent man who works to a game­plan. He built an in­ter­na­tional-level air­line from noth­ing. Mallya has put a lot of pas­sion into this air­line, I don’t think he will give up eas­ily,’’ he says.


Ne­dun­gadi, “We are op­ti­mistic. We recog­nise that the sit­u­a­tion is tough and are alive to the chal­lenges. But I don’t think we are fazed by it.” He adds, “We are in high spir­its. We have gone through a tough quar­ter and two other air­lines have com­bined losses of Rs 950 crore for this quar­ter alone. King­fisher is rel­a­tively bet­ter off.’’

In re­al­ity it isn’t. While Jet Air­ways lost Rs 713 crore in the pe­riod be­tween July and Septem­ber 2011, com­pared to King­fisher’s loses of Rs 469 crore, it has been in bet­ter fi­nan­cial shape for longer. In the fi­nan­cial year 2010-11, when King­fisher made losses of Rs 1,027 crore, Jet had recorded a loss of only Rs 86 crore. King­fisher has not made an an­nual profit in a sin­gle year since 2005. Jet Air­ways has had sev­eral years of profit. The low-cost car­ri­ers Indigo and Spice­jet have also shown prof­its, even if the last six months have been a strug­gle ( see box). There seems to be some­thing fun­da­men­tally wrong in King­fisher’s busi­ness model which has never al­lowed it to make a profit, op­er­at­ing in the same mar­ket and un­der the same con­di­tions as other air­lines. The prob­lem of high taxes on avi­a­tion fuel, high user charges at air­ports and com­pul­sory fly­ing on

un­prof­itable routes af­fect all air­lines equally. Also Mallya knew that all these con­straints ex­isted when he started the air­line. So he should have tai­lored the busi­ness to the con­di­tions.


ob­servers are pes­simistic about Mallya and King­fisher’s prospects. Says former joint sec­re­tary, civil avi­a­tion, Sanat Kaul, “I think he is in too deep. He is now try­ing to se­cure for­eign eq­uity per­mis­sions through a change in FDI rules. The banks al­ready own 23 per cent, he is in a cul de sac.” Ver­i­tas In­vest­ment Re­search in a scathing re­cent re­port ti­tled A Pie in the Sky stated, “UB Hold­ings, par­ent of King­fisher Air­lines, is tee­ter­ing on the verge of bank­ruptcy and in­ci­den­tally so is King­fisher Air­lines.”

If the busi­ness model is wrong, there is a ques­tion mark over the ef­fec­tive­ness of pour­ing money into the air­line. A con­sor­tium of 13 banks led by SBI and ICICI has learnt this the hard way. In March 2011, the con­sor­tium agreed to con­vert Rs 1,300 crore of King­fisher’s debt into eq­uity at a price of Rs 64 per share. The price was cal- cu­lated in com­pli­ance with a SEBI rule which re­quires all con­ver­sion of debt into eq­uity to take place at a six-month weighted av­er­age of the share price. Mallya got lucky. The six month price of Rs 64 was a 61 per cent premium over the pre­vail­ing share price of Rs 40 at the time the debt was con­verted into eq­uity. The banks could have still said no to the deal but they went ahead with the con­ver­sion of debt into eq­uity. The share price has sunk fur­ther to around Rs 20 eight months later, ex­ac­er­bat­ing the losses suf­fered by the banks. The six top banks in the con­sor­tium forked out Rs 596 crore for shares worth Rs 195 crore at cur­rent prices. The banks suf­fered a dou­ble whammy be­cause in ad­di­tion to eq­uity they have also fi­nanced King­fisher through loans. Their to­tal ex­po­sure is around Rs 7,000 crore. Re­cently down­graded by global rat­ing agency Moody’s for ris­ing non-per­form­ing as­sets, the banks are un­will­ing to put in any more money un­less Mallya in­fuses pro­moter eq­uity.

SBI Man­ag­ing Di­rec­tor He­mant Con­trac­tor told the World Eco­nomic Fo­rum in Mum­bai on Novem­ber 13 that the banks ex­pected Mallya to in­fuse at least Rs 800 crore.

King­fisher’s bal­ance sheet shows that Mallya has put in sub­stan­tial eq­uity into the ven­ture. Over the last six years, he has lever­aged per­sonal eq­uity of Rs 3,593 crore in the air­line with banks who have com­mit­ted Rs 7,057 crore in loans. In the last 12 months alone, Mallya has put in Rs 780 crore of his own or as­so­ci­ates, of which Rs 150 crore came in the last month.

The UB Group is suf­fer­ing. The per­for­mance of six of its listed com­pa­nies has been se­ri­ously im­paired by the fo­cus on King­fisher. Its mar­ket cap­i­tal­i­sa­tion has halved from Rs 45,134 crore to Rs 21,308 crore. The per­cep­tion in UB City is that Mallya will not sell his yachts and horses or the Royal Chal­lengers IPL team to shore up the air­line. That would mean giv­ing up his much-cher­ished im­age of flam­boy­ance. In­stead, he will likely exit the air­line busi­ness to fo­cus on the oth­ers. Says a source close to Mallya, “His liquor com­pany United Brew­eries is still a safe bet, with good mar­ket share and mus­cle. He may not be able to save King­fisher Air­lines, but other­wise he will be fine.’’ That, of course, if Mallya keeps his van­ity aside to do a deal on buyer’s terms.



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