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Go First IPO: Facts, Stats, Opportunities and Risks

Dec 7, 2021 4:43 AM 6 min read

On May 14th, GoAir (now rebranded to “Go First”) filed a draft red-herring prospectus (DRHP) with SEBI for an IPO, which would involve a fresh issue of shares worth ₹3,600cr ($490m).

This would make the low-cost carrier the third listed (currently operational) airline in India after IndiGo's Interglobe Aviation and SpiceJet (Jet Airways and Kingfisher stopped flying in the last decade).

Go First's IPO was initially planned for sometime in the "summer". However, due to a pending inquiry against Bombay Dyeing Manufacturing Company and its promoters, the Wadias (who own a majority stake in the airline), SEBI temporarily put the listing on hold. Now, with the regulator's green-light secured, the IPO is slated to open on December 8th.

Go First will hit the bourses at a time of great upheaval in the aviation industry as it faces its biggest crisis in decades on account of the COVID-19 pandemic (which certainly doesn't do any favours to its valuation in what is anyway a brutal sector).

Macro Matters

Founded in 2005, Go First is a subsidiary of the Wadia Group, which also owns Britannia Industries and Bombay Burmah Trading Corporation.

73.3% of the airline is owned by the promoters (Go Investments and the Wadia family) with the remaining 26.7% owned by other members of the promoter group. As of December 2020, it was the fourth-largest carrier in the country.

Go has been toying with the IPO idea since at least 2015. In 2019, plans were afoot for a possible ₹2000cr ($272m) listing. At the time, its numbers were relatively strong. Profit and operating revenue were somewhat stable, and its market share was steadily climbing. While investor sentiment and air travel growth were tepid (the economy was in a slowdown), low crude prices and the vacuum created by Jet's exit kept the naysayers at bay.

There is no doubt that the sector is extremely challenging with a fair bit of unpredictability on key costs, high competition, extremely price-sensitive consumers and lofty capex commitments. In 2018, 2019 and 2020, despite revenue growth, Go First’s EBITDAR declined steadily year-over-year with escalating losses. Yes, 2020 was massively COVID-struck, but it wasn't that Go was doing wonders before either.

The pandemic however affected aviation in a fundamental way. Airlines were forced to shut operations during the nationwide lockdown and then struggle through capacity caps (which still exist) even as consumer wariness about flying dragged demand down and subsequently exacerbated losses. IndiGo and SpiceJet too felt this as evidenced by the losses they reported. Following the Second Wave and with Omicron on the horizon, a timid recovery stands to be reversed and the future looks uncertain.


Fast Facts

  1. Go First initially considered a pre-IPO share issue of up to ₹1,500cr ($204m), in the event of which the fresh issue may have been reduced. But in September, the company received ₹2000cr from the Wadias enabling it to skirt a pre-IPO issue.
  2. The bulk of the net proceeds from the listing would be used to trim outstanding borrowings aggregating to ₹2,015.8cr ($274m), including outstanding lease rentals of the company’s aircraft.
  3. The airline had 56 aircraft in its fleet as of February 2021. Of these, 46 aircraft are A320Neo models and 10 are older A320Ceo models, which are on their way out, which could make it the only all-Neo carrier in India. It had earlier also placed two orders for 144 Airbus A320Neo aircraft each in the past.
  4. Link to DRHP


Money Matters

In 9MFY21, Go suffered a net loss of ₹470cr ($64m) whilst reporting a revenue of ₹13,194cr ($1.8bn). The story is not too different for 2018, 2019 or 2020 - while revenue has seen some growth, EBITDAR and profitability appear to be meaningfully pressured.

Most of the airline's revenue comes from ferrying passengers - its ancillary revenue collections are relatively muted. Its outstanding borrowings have always been a tough nut to crack, something worsened by the pandemic and the lack of Government relief for the industry. The airline had already received a credit line of up to ₹800cr (109m) from banks earlier this year.


Reading the IPO Room: Opportunities and Risks

The biggest talking point right now is COVID-19. All airlines were negatively impacted by the pandemic’s disruptions but the extent of damage has varied.

IndiGo, India’s largest carrier, had to implement salary cuts, rework vendor contracts and refrain from issuing dividends (here are IndiGo’s emergency measures). However, the COVID blow was cushioned thanks to Interglobe’s relatively high cash balance (it entered FY21 with a healthy total cash balance of ₹20,400cr ($2.7bn) of which ₹8,900cr ($1.2bn) came in via free cash flow).

The situation was similar with Vistara and AirAsia India, both owned by the Tata Group. The conglomerate’s warchest not only kept its two airlines afloat but has also made it the leading contender to buy Air India.

On the other hand, Go First entered the pandemic with quite a bit of debt, which has invariably risen over the past year. So much so that the airline continues to be in payment default under several of its aircraft lease agreements - something that could lead to legal action against the company. Issues regarding the company's aircraft rental payments are also a risk.

From a market perspective, Go First’s performance vis-a-vis its competitors has been a mixed bag. Its market share has stagnated around 10% for a long time and its total income for FY20 was just 19% of that of IndiGo. But these numbers could also be read as being in line with the fleet the Wadia-owned airline has. From this perspective, it has the highest ratio of domestic market share to domestic slot share of 118% (last year) compared to IndiGo’s 108%.

Considering the uncertainty, why an airline IPO now? Partly because it's necessary for the company - a public issue is a relatively cheap way for a cash-strapped, debt-laden firm to raise funds. Especially with the absence of fiscal aid for the sector.

As for the tenuous nature of investor sentiment, the future outlook for the sector may be more sanguine than some let on. Once the vaccination drive picks up and the pandemic subsides, demand for air travel is likely to return to pre-2020 levels. Abroad, the near-term outlook seems to be positive. Two US budget carriers - Frontier Airlines and Sun Country Airlines - went public in the last two months. The latter’s shares jumped 51% on debut.

Having said that, in India the near-term prospects for the aviation sector are more ambiguous. Many investors anticipate a post-pandemic travel rebound in line with the US. Accordingly, IndiGo and SpiceJet’s share prices have surged over the past year. In May, the former also managed to raise up to ₹3,000cr ($408m) by way of a qualified institutional placement.

But as of April 2021, passenger traffic was still 45% of what it was before March 2020. Rising crude oil prices mean a jump in the cost of aviation turbine fuel (ATF). A depreciating rupee, substantial debt, weak macro indicators, possible inflationary trends, and fears of more coronavirus waves and variants further cloud the horizon. There's also the impending entrant of a new ultra-low-cost carrier, Akasa.

Furthermore, amidst all these developments, Go First has announced that it will “fully embrace the ultra-low-cost carrier model”, promising cheaper fares for customers. How it will ensure margin expansion (or even margin preservation) by moving downstream is certainly a mystery.  Demand and cash crunch among consumers is an additional headwind. 


The Bottom Line

Investor reception to the listing will be read through the lens of the pandemic in addition to the company’s fundamentals.

The issue of demand will be the elephant in the room. Even if the pandemic dies down in the near-term and India sees pre-pandemic normalcy resurface, consumers may think twice before booking flights at least for some time. Businesses may prefer to hold video conferences rather than send employees on business trips. Travellers may opt for closer destinations that can be reached by road rather than fly to faraway places. The spectre of local lockdowns and travel restrictions remains a notable short-term threat.

Go First’s IPO was long-expected and will be closely watched. Unlike other listings such as Zomato and Flipkart, this would be the market debut of a company that was overwhelmingly hurt by the pandemic (unlike food delivery and ecommerce). As such, it could be a barometer for overall market sentiment and investor appetite (particularly so considering the possible post-Paytm IPO fatigue).


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