Tatas got AirAsia stake at a 20% discount while IndiGo and SpiceJet’s value has doubled since pandemic broke out

Tatas got AirAsia stake at a 20% discount while IndiGo and SpiceJet’s value has doubled since pandemic broke out
(Representative image)BCCL
The AirAsia Group Berhad on December 29 sold 32.67% of its stake in the Indian subsidiary to their joint venture partner Tata Sons for $37.66 million (₹276 crore). Analysts believe that the Tata Group got a 20% discount on the airline’s value.

One may argue that the prospects for airlines may have been hit by the pandemic, but on the other hand, the market value of Air Asia India’s peers like IndiGo and SpiceJet has doubled since the pandemic broke out in March.

Tatas got AirAsia stake at a 20% discount while IndiGo and SpiceJet’s value has doubled since pandemic broke out

Why did AirAsia sell its stake at such a discounted price?

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Multiple factors may have played into the discount on Air Asia. “Either AirAsia has a significant amount of liabilities, which you know is yet not known since this year COVID has been a big impact on the airline sector. Second, the prospect of recovery which the Tatas see within AirAsia India might not be that great,” Ansuman Deb, a research Analyst at ICICI Securities told Business Insider.

The Malaysian parent was also desperate for some cash. While selling its stake AirAsia Group President (Airlines), Bo Lingam also highlighted that “this transaction is in line with our initiatives towards reducing cash utilisation for the Group and will allow us to use cash to grow market share in our core markets in Asean, particularly in Malaysia, Thailand, Indonesia and the Philippines as well as for our future expansion into Cambodia, Myanmar and Vietnam.”

Tatas got AirAsia stake at a 20% discount while IndiGo and SpiceJet’s value has doubled since pandemic broke out
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More importantly, Air Asia wasn’t doing very well even before the pandemic. It has been making losses, and its balance sheet has never been strong. “In terms of operations also the airline barely has 6% market share — then the legal implications also vary — When it comes to flying internationally, they are not allowed to do so at this point of time, so there are a variety of reasons that led to this,” said another analyst who didn’t want to be named citing compliance reasons.
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Air Asia India in 2018 was accused of bribery and violation of the country’s aviation laws, which the company refuted. There are other legal tangles that AirAsia India has been caught in, like, ownership undertakings to fly abroad to DGCA’s investigation on safety violations.

Now, that begs the question why did Tatas buy more stake in a troubled airline?

Tatas preparing AirAsia India to bid for Air India

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Tatas got AirAsia stake at a 20% discount while IndiGo and SpiceJet’s value has doubled since pandemic broke out
BCCL

The Tata Group wants to buy out India’s national carrier, Air India, and they planned to bid for it via Air Asia India. There are many within the ruling establishment in New Delhi and their political affiliates, who want Air India to be sold to an Indian company, and not to a foreign one.

The government earlier this week had removed the January 5 deadline, for notifying qualified bidders for Air India. The transaction adviser will now reach out to the qualified parties that submitted their expression of interest (EOI) for the airline. According to the ICICI Securities report, “If Tatas successfully acquire Air India and consolidate Vistara and AirAsia India under its brand, the industry will convert from a 6 to 4 player industry comprising Tata group. IndiGo, SpiceJet and GoAir.”

So are IndiGo and SpiceJet overpriced?

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Similarly, the hope of recovery post the advent of a vaccine ⁠— along with the return of revenge travel⁠ and the struggles of GoAir— and the expectation of fewer competitors, eventually, have led the stocks of IndiGo and SpiceJet to double since the crash in March 2020.

“The market has taken all the positives at this point. Now we will have to wait and see if they deliver it up. So IndiGo might be best at something of this sort or probably reaching an overvalued territory,” warned the analyst seeking anonymity.

In comparison, Spicejet shifted its focus to carrying more cargo during the pandemic, when the number of passengers dried up. “I think it is fairly valued, and there’s some upside left (in the stock),” he added.

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