Flying high, but with strings attached

Do financials justify the issue price?

For the fiscal-ended March 2003, the company made a net loss of Rs 244 crore. But it turned around in 2004 and made a profit of Rs 163 crore. Its earnings per share EPS for fiscal 2004 was Rs 19.44. Taking the upper band of the offer price of Rs 1,125, the price-earning P-E ratio of Jet Airways works out to 57.87.

Compare this with Air China. China8217;s largest airline sold 2.805 billion shares and raised US 1.07 billion after pricing its IPO at HK 2.98 per share around Rs 16.56. The offer price values Air China at about 10.9 times 2005 forward earnings, a discount to rivals China Eastern Airlines 11.8 times and China Southern Airlines 14.9 times. While some market watchers say the Jet issue is highly priced, others think it will give high returns. Says Ved Prakash Chaturvedi, MD, Tata Mutual Fund: 8220;As a sector, aviation is important. This is despite the fact that globally the sector is not doing well, but in economies like India, there are more opportunities.8221;

Others say the opposite: 8220;Retail investor should avoid this IPO. The price is too high and I don8217;t think the IPO will make so much money,8221; says Arun Kejriwal, head, Kejriwal Research 038; Information Services. In defence of the pricing, UBS Securities Managing Director Manisha Girotra said it was based on a fair valuation done by comparing with listed overseas airlines like Ryan Air and Singapore Airlines.

Does promoter inspire confidence?

Looking at the IPO offer document, several ownership and corporate governance issues arise.

The Risk Factors list that after the IPO, Tail Winds Jet Airways8217; owner, which is registered in the Isle of Mann will control 80 per cent of the airline8217;s equity holding, with NRI Naresh Goyal continuing to have full control of the company till his stake remains above 35 per cent.

Goyal is also going to be the permanent chairman of the Board, till he chooses to be. He can also appoint one-third of the board of directors, the MD and CEO.

Another area of concern is the various private companies owned by Goyal that have business relations with the airline. For instance, the airline pays Jetair Private Ltd, the general sales agent, an overriding commission of 3 per cent on all passenger sales and 2.5 per cent of all cargo sales. This commission is in addition regular commissions payable to sales and travel agents.

On the issue of the Jet Airways brand, it will now be sold to Jet Airways 8212; but the consideration is as yet unknown, as the deal will be finalised within six months. Another issue for future stockholders is succession, particularly as the company depends so much on one person. At the IPO press conference, Ravi Menon, Director and Co-head Investment banking of HSBC said: 8220;The board members have 30 and 40 years of experience. The board is capable of running the airline in a professional manner8221;.

It is almost certain that the issue will be oversubscribed 8212; strong secondary market and good merchant bankers ensure this. But what should you do? If you like risks, it may be worth grabbing this IPO.

If you are a risk-averse equity investor, you could wait for the company to list, evaluate its performance and check out if the 8216;Jet Airways8217; brand valuation is in the company8217;s interest, and then put a toe in to test the waters.