Domestic aviation market will become third largest by 2022
The government expects the quantum of domestic ticketing to reach 30 crore by 2022, a big jump from the current size of about 8 crore tickets sold annually.
By backing the recently announced civil aviation policy with a liberal funding mechanism, India’s domestic aviation market is expected to quadruple in size in next five years. This would make India the third largest aviation market in terms of (domestic) passenger traffic. The government expects the quantum of domestic ticketing to reach 30 crore by 2022, a big jump from the current size of about 8 crore tickets sold annually. The government is confident of achieving such a sizeable growth by making flying quite affordable for the masses. “Allowing 100% FDI in domestic airlines is a bold move, which goes further than most countries in the world,” says Binit Somaia, Sydney based aviation expert at Centre for Aviation (CAPA). The new policies, he adds, would provide the needed tailwind to one of the fastest growing major aviation markets in the world. To promote pan-India connectivity, the government has offered fiscal incentives to develop airports in smaller towns. The growth in aviation will create a large multiplier effect in terms of investments, tourism and employment generation, especially for unskilled and semi-skilled workers.
“The days of micro- management in aviation are gradually getting done with,” says Amber Dubey, partner and India head of aerospace and defense at global consultancy, KPMG. The government is now limiting itself to issues like consumer interests, aviation safety and security and leaving the rest to market forces.
By permitting 100% foreign-owned airline in India, the avoidable controversy on “ownership and control” is now over. Foreign airlines can now focus on customers and competition rather than wasting time on legal and regulatory issues, adds Dubey. The liberal regime would bring in deep-pocketed global players with more capital, aircraft fleets and best practices thus, bringing in more competition which will bring down prices and enhance air penetration in India.
Somaia, however, feels that there is still no clarity on whether foreign airlines, with more than 49% foreign ownership, are eligible to operate on international routes under India’s bilateral air services agreement. In the absence of this permission, foreign players might shy away from investing in domestic-only airlines. Dubey of KPMG is confident that foreign-owned airlines will be free to use the bilateral quota from the Indian side.
To speed-up the modernisation and expansion of existing airports, the government has also allowed 100% FDI in brownfield airport projects. Such a move was critically required as India will need USD 30-40 billion of capital to modernise its airport infrastructure over the next 10-15 years. However, since most of the brownfield airports are owned by the Airport Authority of India (AAI), aviation mavens call for its corporate restructuring so that those airports that could attract foreign investment are established as separate legal entities. “Such restructuring of the AAI will neither be quick nor easy but it is a necessary pre-condition without which there will be limited investor interest,” cautions Somaia.
The liberalised FDI restrictions might, however, result in increased foreign interest in GMR and GVK’s assets at metro gateways, both of whom are seeking investors. All the stock market gains triggered by the Indian government’s announcement of liberalisation in foreign direct investment rules in certain sectors were washed away by Britain voting to leave the European Union in a historic referendum termed Brexit. This historic divorce made the world financial markets like equities, currencies, crude oil, bonds, etc go into a tailspin witnessing a Black Friday bloodbath across the globe. An analyst rightly put the present gloom and doom situation as how investors across the globe had mispriced the risk (Brexit) and now quickly repriced the same. The Indian stock market indices opened Friday morning mirroring the other south Asian neighbours to a huge gap down by nearly 4%. The 30 share BSE Sensex plunged 604 points to 26,397 levels while the 50 share NSE Nifty dropped 181 points to close the week at 8,088 levels. The Tata Motors stock fell nearly 8% as a result of the UK referendum. The company derives majority of its revenue from its British luxury car unit Jaguar Land Rover (JLR) being the largest automotive manufacturer in Britain. The Tata Group has a huge exposure to the UK and fear that operations of their companies such as Tata Steel and Tata Motors could take a hit in Britain due to immigration and other restrictions plunged their blue chip stocks to lower levels. Meanwhile, some brokerage reports are also expecting that the UK is not the only negative story but it is about EU’s further disintegration in the near future. The only green tick and biggest beneficiary amid the bloodbath of global equity and currency market was gold. Gold prices shot up to Rs 30,885 per ten gram hitting a 26 month high, spurring investors to shift their allocation to a safe investment haven. In the short term, volatility will remain quite high and Indian stock markets are expected to trend lower due to the future and option expiry next week. Any bounce back is going to be a sell on rise market for foreign and domestic investors in the next few days. The Indian Defence capex is entering a new era of growth with over 50$ billion worth of projects cleared by the Defence Acquisition Council in the last two years. The defence sector has been a high priority area in the government’s Make in India programme with strong emphasis on indigenisation. Bharat Electronics is a blue chip government company with a 35% market share in the defence electronics space and the huge order book could make it one of the biggest beneficiaries. The company is totally debt free, has excellent research and development capabilities, good order book and low competition. The stock trades at a premium to its historical valuation and coupled with the fact that it is the largest listed defence player in the country, makes it an attractive buy. At the current market price of Rs 1,250, investors can see a price appreciation of over 25% in the next nine months for the Bharat Electronics stock. Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.