News

AirAsia has received the formal approval from Indian Foreign Investment Promotion Board (FIPB) for its 49% JV investment with Tata Sons Limited (30%) and Mr. Arun Bhatia (21%) into India AirAsia.

With this approval, India AirAsia is formally set up with Shareholders Agreement and Brand Licensing Agreement (with AirAsia) to be signed within April. However, the JV still needs to apply for the aviation license (to fly aircrafts) with the Indian Directorate General of Civil Aviation.

The JV is aiming to commence operation as early as Deepavali (end 2012), to take advantage of the India largest festivals.

Financial impact

Financial impact is expected to be minimal, as AirAsia is likely to recognize losses from the new JV up to its capital investments of RM22.5m. The initial startup investment for India AirAsia is expected to be US$14.5m (RM45m).

Pros / Cons

We continue to be positive with AirAsia penetrating into India market given its huge population of 1.2bn and fast developing economy (one of the BRICs). The new hub will expand AirAsia Group’s connectivity further into the west such as Pakistan and Middle East countries.

India market is well known for its competitiveness due to the many number of domestic airlines, complex regulations, high cost structures and low domestic income level. Indian airlines have been making losses over the past years with some airlines even in the brink of bankruptcy.

We believe the new India AirAsia will face tough competitions and incur losses in the early years of operation (similar to all the previous JVs i.e. Thailand, Indonesia, Japan and Philippines).

However, India AirAsia is likely to survive the competition, banking on strong brand name, disciplined cost structures, vast networks connectivity and experienced management.

Risks

World crisis (ie. war, terrorism and epidemic outbreak), delay in KLIA2 completion, high jet fuel price and development of high speed train between Singapore and Pulau Pinang.

Forecasts

Unchanged.

Rating

HOLD

• Positives –
  • Beneficiary of strong air traffic into Malaysia, in line with government initiatives to boost tourism sectors.
  • Largest and lowest cost LCC in Asia with strong brand name.
  • Strong ancillary income.
• Negatives –
  • High jet fuel cost.
  • Entry of Malindo Airways enforcing price competition.
  • Proposed construction of high speed railway for KL-SG.

Valuation

• Maintained Hold on AirAsia with unchanged TP of RM2.84.

Source: Hong Leong Investment Bank Research - 8 Apr 2013