If Vijay Mallya pulls this off it will be a moment of magic and/or poor judgement.

Etihad Airways, the Gulf carrier, is on the cusp of buying a stake in the debt-encumbered Kingfisher Airlines – the airline that has been grounded since October.

On Thursday, Kingfisher set a 3 per cent cap on foreign institutional investment. Alongside the 49 per cent limit on foreign ownership by Indian law, this creates room for a foreign investor to take the other 46 per cent. Foreign institutional investors currently hold 2.46 per cent of the company and Kingfisher said in a statement that the cap was put in place:

…With a view to keeping the company’s capital structure in readiness for transactions that may be identified in the future for the benefit of all stakeholders of the company.

Rumours of a deal with Etihad have been circulating and analysts expect it to be completed within the month, before Kingfisher loses its licence. The local media has been forecasting a price of Rs30bn ($550m) crore for a 48 per cent stake in the India airline, which has $1.5bn net debt and reported a net loss of $138.5m in the three months to September.

The markets are similarly expectant. In the last three sessions, shares in Kingfisher Airlines have immediately shot up some 5 per cent – the day limit. The stock has rallied 14.3 per cent in the week to Rs17.15.

Sharan Lillaney, an analyst at Angel Broking, told beyondbrics: “I would give Kingfisher a zero valuation as there is more debt than value and there isn’t any ability to make profits. The aviation industry, around the world, has little capacity to make high profits anyway.”

In the other camp, Deven Choksey, managing director at KR Choksey, said Kingfisher is a good investment for a foreign player who wants a good share of the market. “All said and done, Kingfisher does have a strong brand.” He added: “Etihad must have been given some government reassurance that they will be bringing down the cost structure in the Indian airline industry. As it stands, ATF (Aviation Turbine Fuel) is a major cost as the airlines have to source locally. If the government has signalled it will reduce the tax rates, it would bring India in line with foreign investments.”

Related reading:
Etihad eyes stakes in two Indian airlines, FT
Kingfisher: losses widen as company sits in ‘holding pattern’, beyondbrics
India suspends Kingfisher licence, FT

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