This story is from June 2, 2007

Mallya bets on Deccan's market share

T Surendar / TNN / Jun 2, 2007, 00:00 IST

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In Deccan, Mallya has bought a company that has started making bigger and bigger losses over the last nine months.

MUMBAI: Buying a profitable company to grow bigger is understandable. But, in Deccan, Mallya has bought a company that has started making bigger and bigger losses over the last nine months. The argument is Mallya wants to be the leader of domestic airlines business at any cost. What could be his motivation?
One logic is that Mallya is getting Deccan cheap.Airline analysts compare the latest deal with Jet-Sahara deal that was clinched in mid-April. Jet's Naresh Goyal paid Rs 1,450 crore for Sahara which had a marketshare of 8% at the time of sale.
Mallya's Rs 550 crore for a 26% stake values Deccan at Rs 2,200, for a company that commands 21% share of the market. And Mallya's men argue that an equity infusion at this juncture into the beleaguered Deccan can help in turning around its operations.
But an industry expert says that it will be tough going for Mallya to make Deccan's operations profitable. According to him, Deccan is a loss making airline despite having the highest load factor in the industry.

The load factor is a function of the highly discounted fares that Deccan offers. The expert argues that if Deccan raises its fare, its load factor is bound to dip and hurt its profitability further. Says the expert: "Mallya will be stuck between a rock and hard place trying to turn around Deccan."
So what's Mallya's game? An analyst with a foreign brokerage house says that since the airline industry is still in its nascent stage, a higher market share could translate into better valuations for airline companies. In this case, Mallya is buying the Deccan stake through UB Holdings, which also incidentally holds the group's stake in Kingfisher. Says the analyst: "At some stage Mallya will be looking to merge his investment in the two airline ventures, which should give the company a controlling stake in the business. This will give Mallya a big advantage in downloading large stakes to investors."

According to investment bankers, there are early talks of UB Holding divesting 25% in Kingfisher to investors to ascertain the value of the business. Says the banker: "This may well be the first step towards integrating the airline businesses. Only when Mallya arrives at a value for Kingfisher, swap ratio with Deccan shares can be determined."
Analysts expect that the entire exercise will make Mallya's airline business the most valuable one in India.

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