Spicejet restructures it’s Balance Sheet by transferring part of business to a subsidiary

SpiceJet confirmed to have received shareholders’ approval to transfer its cargo and logistics services business to its subsidiary, SpiceXpress and Logistics Private Ltd. (SLP), on a slump-sale basis, for Rs 2,555.77 crore.

Key points to note –

• Transfer of business is to a wholly owned subsidiary without any cash consideration. SLP will issues shares to Spicejet for the consideration amount.
• The transaction will result in Rs 2,555.77 crore of one time gain for Spicejet and will also help in reducing it’s negative networth (stood at Rs 3,300 crore as on June 30, 2021).
• Simultaneously, Spicejet has also received shareholders approval for raising funds through Qualified Institutions Placement (QIP). It plans to raise Rs 2,500 crore.

Transaction seems to be mainly targeted towards restructuring the negative Balance Sheet. Besides, it allows both Spicejet and SPL to raise funds separately. Some investors may be keen towards airlines and some towards the cargo and logistics segment.

It’s also important to note here that Spicejet was sitting on a debt of > Rs 9,000 crore as at March 31, 2021. Operational performance has dropped significantly since 2019. From a net profit of Rs 557 crore, Company reported a loss of Rs 1,030 crore in FY 2021 and a loss of Rs 731 crore in the last quarter ended June 30, 2021. Key factors responsible for deterioration in performance include – Covid, increasing fuel costs and competitive pressures.

Given the underlying numbers, external fund raise can only help company to some extent. The underlying operations and financial performance really need to start delivering asap.

Personally, I believe airlines will see strong demand as Covid fear starts waning. That would provide companies like Spicejet with lot of pricing power.

However, they would only be able to take advantage of that if the government allows them a free hand and that is unlikely !