Airline IPO

Indigo's IPO has been in the news for a couple of days. An article in Business Standard proclaimed yesterday that on the first day the issue had been subscribed 86%. If you read the article through, you might notice that the blocks allocated to institutional investors have been oversubscribed and the blocks allocated for individual investors have been left almost completely unsubscribed.

Interestingly, the airline has reported a negative net worth on 30 June, after it paid out a dividend of Rs 1080 Crores to the founder promoters in FY 2015. Add that to the dividend paid out in FY 14 of Rs 377 Crores and the 1010 Crores of interim dividend declared for this year, and we come to a value of about 2400 Crores. Of the total IPO value of 3200 Crores, 1200 crores is new capital and the remaining issue is accounted for by sale of equity by the founders according to this article. The company has stated that it intends to use part of the IPO proceeds to retire about 1200 Crores of its 3900 Crores of debt. So the entire amount of new capital invested by folks like you and me and will be used to pay off one-third of the old debt.


To top things off, the company has clearly stated as part of disclosures for their IPO that "there can be no assurance that we will be able to achieve a positive net worth in the periods going forward. If this financial position (negative net worth) continues, it may be difficult or more expensive to obtain future financing or meet our liquidity needs."

Wait. What? Let me get this straight. If I understand this correctly, the capital markets in my country find it acceptable that I can start a company, take on a mountain of debt to buy new aircraft, place an order for another 430 aircraft, pay myself a dividend exceeding the total profits earned in the last few years and large enough to take the net worth of this company to a point below zero, then offer to sell the company to other investors while telling them that I give them no assurance that the company's net worth can turn positive again and also add for good measure, that it might be difficult to maintain the liquidity needs of the company.

Now that takes titanium cojones.
It is easy to see why the individual investors might want to stay away from this IPO. I wonder what the institutional investors are up to.