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IndiGo nosedives 18% on promoters' feud over corporate governance issues

Swati Verma/New Delhi 10 Jul 19 | 09:31 AM

Shares of IndiGo, India’s largest airline, nosedived as much as 17.54 per cent to hit a low of Rs 1,291 apiece on the BSE in the intra-day trade on Wednesday after promoters Rahul Bhatia and Rakesh Gangwal made serious allegations against each other, forcing the Securities and Exchange Board of India (Sebi) to intervene.

The stock, however, pared some of its losses later in the day to settle at around 11 per cent lower at Rs 1,398 apiece on the BSE. 

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Gangwal, who holds 36.68 per cent, has sought permission to hold an extraordinary general (EGM) meeting, alleging that the company has participated in objectionable related-party transactions (RPTs) and has not complied with corporate governance standards.

Bhatia, on the other hand, has denied the charge, saying that the Companies Act gave the powers to the board of the company to decide its functioning. CLICK TO READ FULL ARTICLE

"This governance issue can make stock correct in a big way if resolution is not found soon. When promoters started the airline they had an agreement to run business together and that agreement also expires in next few months. A new agreement has to be signed by both which also adds to more confusion," says AK Prabhakar, head of research, at IDBI Capital. 

IndiGo has the market share of 50 per cent of domestic airline operating with 217 flights, with a consistent load factor of above 86 per cent. It has cash in balance sheet at Rs 15,308 croe and debt of around Rs 2,492 crore while net cash stands at Rs.12,816 crore. IndiGo is one of the best airline globally making consistent profit expect for FY19, Prabhakar added. 

In a 23-page letter to Ajay Tyagi, chairman, Sebi, with a copy to Prime Minister Narendra Modi, Gangwal wrote besides questionable RPTs, fundamental governance norms and laws were not being adhered to and this would lead to “unfortunate outcomes" unless correctives were applied. Corporate governance regulations prescribed by Sebi as well as those of the company's code of conduct for directors and the senior management have been violated, according to him.

According to Bhatia, Gangwal wants to change two clauses in the agreement giving the powers to him (Bhatia) to take decisions including appointing the chief executive officer and president of the company, the report added. 

Despite the tussle, analysts at ICICI Securities remain positive on the road ahead for the company and have maintained a 'buy' rating on the stock with a target price of Rs 1,914.

"We now factor-in 30 per cent / 25 per cent increase in available seat kilometers (ASK) with fare growth of 10 per cent / 0 per cent in FY20/21E.The average fare would then be around Rs 4,284 for FY20, a level which is sustainable, especially considering improving route mix and better domestic supply situation. We expect 5 per cent improvement in CASK over FY19-20E," said Ansuman Deb, an analyst tracking the company at ICICI Securities in a report.

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