Aviation - Foreign carriers allowed to invest upto 49% - Edelweiss

The Union Cabinet has approved the proposal to allow foreign airlines to buy up to 49% in local airline companies. Removing the existing restriction on investment by foreign airlines would assist in bringing in strategic investors into the aviation sector which was limited to nonairline investors.

Most of the Indian airline companies are in dire need of capital to reduce their huge accumulated losses and mounting debt levels, caused largely by competition induced price wars and rising fuel and capital costs. As of FY12, Jet Airlines has accumulated around INR133bn debt in its books. Jet's reserves and surplus has eroded to INR446mn in FY12 from INR16.4bn in FY10. Kingfisher Airlines on the other hand is on the verge of bankruptcy.

Our view

We consider this as a highly positive move taken by the government as it raises hopes of further reforms in the aviation sector. Most prominent would be rationalization of the duty structure in aviation turbine fuel (ATF). High ATF price has been one of the major contributors to losses for most of the airline companies.

This event also has potential to rerate the valuation multiple of airline companies. Currently, we have 'HOLD' rating on Jet Airways.

Source : Equity Bulls

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