Kingfisher Airlines Report

Kingfisher Airline has consistently been a loss making company until this year. With improved revenues, aided by the growing demand and focused cost cutting measures, the company was able to generate profits in 2011. With debt restructuring and new avenues to raise short term capital, the company is well poised to continue improve its profits in the near term.

By incorporating the balance sheet changes and forecasting future revenues, KFA stock is valued at a fair price of Rs. 88.5. The market has mispriced the share at Rs. 45 and the equity research and valuation models recommend a BUY action with a target of Rs. 82 until March 2012.

Investment Rationale

The growing Indian economy and the resulting demand are the main drivers for the industry. Infrastructure, which was a major roadblock in Indian aviation, has now caught up with the requirements. The spike in oil prices is expected to stabilize, which is a major plus for the industry.

The company has reduced its cost of capital with debt restructuring. Despite its premium brand, the company has managed to reduce its costs and is now the market leader in operating efficiency measures like load factor, RASK, CASK and EBIDTAR margins.

The company has been invited to join the ‘OneWorld Alliance' , which will strengthen its growing international operations, deliver new opportunities for ‘codeshare agreements' and strengthen its loyalty program. The branding and marketing activities of its holding company ‘UB Group' is a major positive.

Valuation

The balance sheet is adjusted for debt recast and the revenues are projected until 2015. Demand at 16.52%, Oil prices at 13% and a generous WACC of 15.48% are among the major forecasted parameters. The DCF models (FCFF and RI) are used to establish the fair price. Comparative valuation along with projected earnings is used to establish the one year