“Buy not on optimism, but on arithmetic,” said one of the famous value investors Benjamin Graham, who was also known as a mentor of all-time successful value investor Warren Buffet. However, investors on Dalal Street seldom have time for these golden words of wisdom. The stock of now grounded Jet Airways has shown resilience relatively. It ended at Rs 164 on the BSE on Friday. That makes its market capitalisation at Rs 1,861 crore. What is keeping the Jet stock at such a high level is the optimism of a better future. This optimism stems from the fact that there will be an open offer if any bidder buys the minimum 31.2 per cent stake put on block by the lenders led by State Bank of India. The total offer is for buying 75 per cent stake in the cash-strapped airline. But, the harsh reality is in the ‘arithmetic’ that is against the investment logic today. Take a look:
Equity value is zero
The equity value of Jet is zero today. The airline has reported a loss of Rs 3208 crore in the nine months (April-December) of 2018-19. The losses would have compounded further. The company has a negative net worth of Rs 10,370 crore . The current liabilities already exceed the current assets by Rs 9,610 crore. Given the precarious situation, the balance sheet clearly leaves nothing for the existing equity shareholders.
Unsustainable debt and equity dilution
The current debt of over Rs 8,500 crore is completely unsustainable. Even if the airline manages to revive operations partially, the entire debt that was unsustainable when the airline was running with 124 aircrafts, will not get serviced fully in the near future. Clearly, part of the debt will have to be converted into equity, which will leave nothing for existing shareholders. Higher the equity, longer will be the payback period for equity holders. In many bankruptcy cases where a new investor comes in, the entire existing capital gets cancelled or restricted to around 10 per cent of the new revised capital. In such a case, existing investors will not make any money for many years.
No Strategic bidders making a beeline for acquiring Jet
Strategic investors appear to have no interest in acquiring the airline. The private equity players never put a good value on a distressed business. They try to bring down the price to as low a level as they can. That leaves only Etihad that was earlier willing to sell back its share at Rs 150 to SBI when the market price of Jet stock was over Rs 250 per share. Given the status of the airline, Etihad offer will have other challenges. For example, market regulator Sebi had denied the open offer earlier.
A likely liquidation scenario
Investors may lose in a likely liquidation scenario. The airline business does not have tangible assets such as steel or cement plants. It works on an operating model where you pay big expenses like lease rentals, salaries, rents etc from the income generated from the business. In a bankruptcy situation, assets like people go away, the slots get reallocated and the customers shift to other airlines.
Clearly, the arithmetic is not on the side of investors and speculators. As the reality dawns, the stock price will soon find a bottom. Still, some would say that the stock market runs on greed and hope. That said, there would always be confident buyers if stock continues its slide.