Swajas Air Charters IPO Review by MLR Securities (Avoid)

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Review By MLR Securities Private Ltd on September 28, 2011

Issue Period: 26th Sep - 28th Sep
Price Band: INR 90-100
Issue Size: INR 37 Cr
Mcap: INR 135-150 Cr
Grading: ICRA IPO Grade 2
BRLM: Aryaman Financial Services ltd
Promoter: R Jayakumar & Christopher Ian Want
Listing: BSE & NSE

Swajas Air Charters is a non�]scheduled airline operator offering services such as general air charter, off�]shore transportation, medical evacuation and maintenance, repair and overhauling (MRO). The company predominantly operates in South India and intends to expand its operations subsequent to the proposed IPO.

The company currently operates one aircraft �] Cessna Citation XL and two helicopters Bell 412 EP which is a business class helicopter and another Bell 412 EP utilized for offshore transportation. SACL clientele includes Hardy Exploration & Production (India) Inc., Government of Orissa, Videocon Industries Limited, Larsen & Toubro Limited, Nimbus
Communications Limited, Suzlon Energy Limited, Apollo Hospitals Group, BALCO (Bharat Aluminium Company Limited), etc.

R Jayakumar and Christopher Ian Want are the promoters of the company. R Jayakumar is the managing director of the company and has over 20 years of experience in aviation industry covering scheduled and general aviation. Christopher Ian Want an American national is a non executive director of the company. He is well versed with various aircraft
operations and has over 18 years of experience in the airline and air charter industry as well as more than 7500 hours of flying experience.

Objects of the Issue

• To part finance the fleet expansion
    Bell 407 - Helicopter - Rs 12.37 Cr
    PC Pilatus Aircraft - Rs 9.42 Cr
• Setting up of MRO facility - Rs 9 Cr
• Purchase of office building/space - Rs 3.5 Cr
• To meet working capital requirements - Rs 3.8 Cr

• Company's topline grew at a CAGR of 63% in the last three years to Rs 33 Cr in FY11 while bottomline grew at a CAGR of 50% to Rs 1.3 Cr during the same period. SACL's margins are quite volatile owing to volatility in the ATF prices, in FY11 it posted an EBITDA margin of 8% and a PAT margin of 4%. SACL is quite comfortably leveraged with debt equity level of 0.3:1. Company's RoE fell from 29% in FY10 to 14% in FY11 on the back of equity infusion.
• SACL's market cap is Rs 150 Cr on upper price band of Rs 100. Its Mcap to sales ratio is coming to 4.6 which is quite aggressive. Company is asking for a valuation of 76�]84 times its FY11 EPS of Rs 1.2 and the P/BV is 16�]18 times its FY11 book value of Rs 8.32. Its closest peer Global Vectra's is trading at a market cap to sales ratio of 0.2 and a P/BV of 1.7. We believe valuations does not justify its weak fundamentals. We recommend investors to avoid this issue.

Concerns

• Client Concentration - SACL is significantly dependent on few major customers. Its top ten customers contributed approximately 82% and 66% of revenues in FY10 and FY11. Due to the niche nature of the industry, wherein company does not provide to public at large (like in the case of scheduled airlines) and caters to only elite class of customers, it is more dependent on regular business from such customers. Loss of any such customers will adversely impact its revenues.
• Volatility in ATF prices - ATF accounts for 35-40% of its operating cost. Any ad-hoc increases in ATF prices or undue volatility in the same would adversely affect profitability margins and operational efficiency.
• Forex Exposure - Dry lease contracts of helicopters and aircrafts from foreign lessors namely, Consolidated Aviation Management Corporation Limited, Ireland and Aircon Beibara Fze, UAE and therefore the lease payments are effected in foreign currency. Also, the company imports a significant portion of the spares, special tools and equipment for the maintenance of helicopters/aircraft and would also be required to import various equipment and tools for proposed MRO/Hangar services. The company does not have any outstanding derivative contracts to hedge the risk of fluctuations in foreign exchange rates.