India's top airline starts IPO bidding in Modi sentiment test

[NEW DELHI] Bidding opened on Tuesday for shares in the parent company of India's leading airline, IndiGo, the nation's biggest initial public offering in almost three years.

InterGlobe Aviation Ltd and its existing investors are seeking to raise as much as 30.01 billion rupees (US$462 million), according to terms for the deal obtained by Bloomberg on Tuesday, which would make it India's largest IPO since Bharti Infratel Ltd's December 2012 offering. With Prime Minister Narendra Modi pitching India as a safe and lucrative destination for foreign money, the sale will help gauge investor sentiment toward the world's fastest growing major economy.

It's the first IPO by a local airline since the 2006 listing of Deccan Aviation Ltd, which later was taken over by now-defunct Kingfisher Airlines Ltd. Jet Airways India Ltd, then India's largest private airline, raised 19 billion rupees in its 2005 IPO.

"Indigo's market leadership position, cost competitiveness and low-cost carrier business model, along with India's aviation potential, make IndiGo one of the consistent performers" in the country's airline industry, Anand Rathi Share & Stock Brokers Ltd wrote in an Oct 26 research note. The Mumbai-based brokerage recommended its clients subscribe for shares in the IPO.

IndiGo, the only Indian airline to have made a profit in each of the past seven years, is trying to tap a market where carriers have lost a combined US$10 billion over the past six years, according to the Sydney-based CAPA Centre for Aviation. At the top top end of its proposed range of 700 rupees to 765 rupees a share, the IPO would value the airline at about 275.66 billion rupees. That would make IndiGo the third-largest budget carrier in the Asia-Pacific region, according to data compiled by Bloomberg.

As part of the IPO, IndiGo said Monday it would allocate 10.9 million shares at 765 rupees apiece to anchor investors, including the Kuwait Investment Authority, Harvard Management Co and Abu Dhabi Investment Council, for a total of 8.32 billion rupees.

Citigroup Inc, JPMorgan Chase & Co and Morgan Stanley are leading the offering. Barclays Plc, Kotak Mahindra Bank Ltd and UBS Group AG also are working on the IPO.

The issue had seen a subscription of 0.27 per cent as of 11.00 am local time on the National Stock Exchange website. The institutional investor category had seen a bid of 1.14 times.

Founded by former US Airways Chief Executive Officer Rakesh Gangwal and former travel agent Rahul Bhatia less than a decade ago, IndiGo has cemented its top place in India's aviation market with 37 per cent market share in the first nine months of this year. The valuation it's seeking is six times the market value of its nearest competitor, Jet Airways, and 10 times that of SpiceJet Ltd, the only other publicly listed local carrier.

The IPO "is a good thing for the industry. It puts the spotlight on the potential of this market if you do things right," Sanjiv Kapoor, SpiceJet's chief operating officer, said in an interview Monday in Dubai. "It will begin to re-rate the market, it's a positive thing for all." Provincial taxes make jet fuel in India the costliest in Asia, and below-cost fares further stress carriers' bottom lines. India is the cheapest country in which to fly, according to a study by GoEuro.com, with passengers paying about US$10.36 for every 100 kilometers , compared to US$138.90 in Finland.

Despite those challenges, global airlines like Singapore Airlines Ltd and AirAsia Bhd have started local units in recent years, seeking to tap a market where an expanding middle class offers ample growth opportunities. Indian airlines will need 1,740 new planes over the next 20 years, at a value of $240 billion, according to Boeing Co.

Not everyone agrees with IndiGo's valuation. In a research note, Mumbai-based Ambit Capital Pvt. called the IPO "expensive," saying a U.S. rate hike could raise leasing costs for the airline and a China slowdown could hurt aircraft demand, impacting IndiGo's sale-and-lease-back model.

BLOOMBERG