The government has invited bids for offloading 98 percent stake in
Air India’s (AI) ground handling arm, Air India Air Transport Service Ltd (AIATSL). This announcement shows the government is going through the motions to keep its narrative - of not having abandoned the disinvestment of loss-making Air India (and group companies) – alive.
But there is little likelihood of the disinvestment of AIATSL actually going through since Lok Sabha polls are widely expected to be announced soon and once the dates are out, such grand sell-off plans will almost certainly have to be put on hold till the new government takes office.
Having said that, it is heartening to see that the babus in Rajiv Gandhi Bhawan have finally learnt some lessons from the sale process of Air India (the airline), which bombed last May primarily due to the government insisting on retaining a 24 percent stake and scaring off potential investors by leaving a large quantum of the debt on the airline’s books.
The Preliminary Information Memorandum (PIM) released last evening (Tuesday) shows that the government is all right with exiting the ground handling business completely since 98 percent stake is on offer to a bidder and employees can bid for the remaining 2 percent. A clean break is a good way of showing the seriousness of intent in this instance.
A senior civil aviation ministry official had acknowledged some days back that the government had erred in insisting on remaining a minority shareholder in the case of Air India disinvestment. This official had also said that the second mistake the government made in AI’s case was leaving so much debt on the airline’s books for any incoming investor, since the latter would have most certainly not been able to service such liabilities through merely operating the airline efficiently.
Now, after months of the disinvestment process getting derailed, the government has formed a Special Purpose Vehicle (SPV) and announced it will transfer almost Rs 30,000 crore of the debt on AI”s books to this SPV, leaving it much lighter with just around Rs 25,000 crore of debt.
The official quoted above said even when the debt load on AI has been halved, any prospective bidder may not find the airline attractive since the debt remaining on the books is still too high.
So with all this background, the government has taken some sensible steps while offering AIATSL for disinvestment. For one, it is a profit making business. The net profit more than doubled year on year in 2017-18 to Rs 71 crore and AIATSL has been consistently profit making since the commencement of autonomous functioning from 2014-15.
Its average earnings before interest, tax, depreciation and amortisation (EBITDA) margin has been around 19 percent and average PAT (profit after tax) margin has been around 11 percent for the last three financial years.
Two, AIATSL is a strong player in India’s fast-growing ground handling market since it works at 76 airports and controls just a little less than half the market (market share 47.7 percent in 2017-18).
Three, nine in 10 employees of the company are contract workers so any incoming investor may not feel as encumbered with employee issues as was the case in the Air India disinvestment. But the downside is this: 68 paise of every rupee earned by AIATSL in 2017-18 was spent on employee expenses.
Four, the PIM says AIATSL does not have any “significant” contingent liabilities as of March 31, 2018, and any changes would be provided in the request for proposal (RFP).
Basically, the company on offer has limited employee issues, has been turning in a small profit each year and has no significant liabilities. This should make the sale attractive to prospective bidders and these conditions show how the government has finally understood what potential investors may be looking for in big ticket disinvestments.
As per the PIM, any prospective bidder must have a networth of at least Rs 200 crore. In case the bidder is a ground handling agency with foreign ownership of 50 percent or more of its paid-up capital, this bidder will have to form a new company in partnership with a domestic entity where the latter will hold at least 51 percent stake.
This provision will enable the bidder to comply with the extant foreign direct investment (FDI) guidelines in the ground handling business. The last date for submission of an expression of interest for AIATSL is March 26 and qualified bidders will be notified by April nine, as per the PIM.
Only, Lok Sabhja polls would likely jeopardise these good intentions of the government on kickstarting the tough disinvestment process of Air India’s sbusidiaries.
Sindhu Bhattacharya is a journalist based in Delhi who writes on a range of topics in business and economy.