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Global equity companies have no plans to put their money in the Indian aviation industry even though the carriers are seeking $2.5 billion in cash for expansion.
"We certainly would be looking to invest in airlines in India but we would like to wait and watch. The first round of consolidation for the industry is over and now we have three dominant players, which is great. We will wait to see how the benefits of merger, route rationalisation and international operations shape up the airlines in India and when they would start showing stronger operational numbers, which is not happening right now," said TPG Managing Director Puneet Bhatia.
The Group has made investments into Asia-Pacific aviation of late, but Bhatia refused to give the details. He said the group would be looking to invest into large established players.
However, it will be difficult for low-cost carriers to get the funding as only few airlines might end up getting all the investments, according to the head of a leading Mumbai-based equity research firm.
"The tail end airlines with marginal market shares (between 2 and 4 per cent) evoke no interest and they might struggle to get any capital investment as aviation is not funded across the board and only top players take the pound of flesh," Bhatia said.
He also added that it will be difficult for the low cost carriers to get the funding they are looking for.
Big investment groups such as Goldman Sachs and Blackstone have stayed away from investing in the sector.
Private equity firm Kotak Investors Advisors, which invested in Paramount Airways a considerable amount (Kotak did not give investment details) to get a board seat said it is not in a mood to invest any further in the sector.
"We invested in south-based airline Paramount Airways because it was a niche segment and a niche player. As of now we are not considering investing into any other airline. As and when the expansion plans of Paramount materialise, we will evaluate putting in more equity," said Nitin Deshmukh, Head, private equity, Kotak Investment Advisors.
The losses of the Indian aviation sector and high valuation expectations by the promoters are the reasons why investors are not interested in the Indian market.
According to Praveen Vetrivel, aviation analyst with International Bureau of Aviation, UK, "When the valuation of an airline is done, tangible and intangible assets are taken into account."
What is putting investors off the Indian market is the credit crunch faced by the Indian airlines and thereby making returns on the investments risky. The expectations of valuation by the Indian players are a little too high than what the market is willing to pay as in the eyes of foreign equity players, asset-based investments for the airlines is what they are looking at rather than equity-based investments.
"In fact, the latter is really not encouraged. For Indian market to look lucrative the losses are required to be cut and further consolidation is required."
The problem is that airlines cannot depend upon the Indian banks for financing as the leading banks in India do not consider aircraft as a special asset.
"High degree of interest will have to be translated into financial and operative leases," said Anand Ramchandran, Vice-President, finance, Simplify Deccan. "There is no depth in the Indian market to finance the kind of money that is required by the airlines," he added.
