NRI Goyal, owner Jet Airways Flying high, but with strings attached
As a passenger you may love Jet’s service, but what about as an investor?

MUMBAI, FEBRUARY 15, 2005
The Indian Express

On the face of it, there’s no downside. Jet Airways’ Rs 1,942 crore IPO flies high on service standards that other airlines emulate. The average air travel in India is just 0.014 flights per person as compared to 2.02 flights per person in the US. The secondary market is booming like never before. Investors, both at home and abroad, are hungry for Indian paper.

But even a market hungry for ‘good paper’ would wonder just what it is getting for Rs 950-1,125 a share. There are also questions about promoter control, as well as Jet’s relationship with various private companies — who either provide services to Jet or own the brand name.

Do financials justify the issue price?

For the fiscal-ended March 2003, the company made a net loss of Rs 244 crore. But it turned around in 2004 and made a profit of Rs 163 crore. Its earnings per share (EPS) for fiscal 2004 was Rs 19.44. Taking the upper band of the offer price of Rs 1,125, the price-earning (P-E) ratio of Jet Airways works out to 57.87.

Compare this with Air China. China’s largest airline sold 2.805 billion shares and raised US $1.07 billion after pricing its IPO at HK$ 2.98 per share (around Rs 16.56). The offer price values Air China at about 10.9 times 2005 forward earnings, a discount to rivals China Eastern Airlines (11.8 times) and China Southern Airlines (14.9 times). While some market watchers say the Jet issue is highly priced, others think it will give high returns. Says Ved Prakash Chaturvedi, MD, Tata Mutual Fund: “As a sector, aviation is important. This is despite the fact that globally the sector is not doing well, but in economies like India, there are more opportunities.”

Others say the opposite: “Retail investor should avoid this IPO. The price is too high and I don’t think the IPO will make so much money,” says Arun Kejriwal, head, Kejriwal Research & Information Services. In defence of the pricing, UBS Securities Managing Director Manisha Girotra said it was based on a fair valuation done by comparing with listed overseas airlines like Ryan Air and Singapore Airlines.

Does promoter inspire confidence?

IPO ISSUE

• Tail Wind’s 80 per cent stake in Jet after the IPO
• Goyal’s control of company, including power to appoint CEO
• Goyal’s companies having relations with the airline
• Brand to be sold to Jet air, but consideration remains a mystery


Looking at the IPO offer document, several ownership and corporate governance issues arise.

he Risk Factors list that after the IPO, Tail Winds (Jet Airways’ owner, which is registered in the Isle of Mann) will control 80 per cent of the airline’s equity holding, with NRI Naresh Goyal continuing to have full control of the company till his stake remains above 35 per cent.

Goyal is also going to be the permanent chairman of the Board, till he chooses to be. He can also appoint one-third of the board of directors, the MD and CEO.

Another area of concern is the various private companies (owned by Goyal) that have business relations with the airline. For instance, the airline pays Jetair Private Ltd, the general sales agent, an overriding commission of 3 per cent on all passenger sales and 2.5 per cent of all cargo sales. This commission is in addition regular commissions payable to sales and travel agents.

On the issue of the Jet Airways brand, it will now be sold to Jet Airways — but the consideration is as yet unknown, as the deal will be finalised within six months. Another issue for future stockholders is succession, particularly as the company depends so much on one person. At the IPO press conference, Ravi Menon, Director and Co-head Investment banking of HSBC said: “The board members have 30 and 40 years of experience. The board is capable of running the airline in a professional manner”.

It is almost certain that the issue will be oversubscribed — strong secondary market and good merchant bankers ensure this. But what should you do? If you like risks, it may be worth grabbing this IPO.

If you are a risk-averse equity investor, you could wait for the company to list, evaluate its performance and check out if the ‘Jet Airways’ brand valuation is in the company’s interest, and then put a toe in to test the waters.

Any comments on this article or you have any news: Click here