Is Kingfisher Airlines Heading Towards Bankruptcy?

The financial agonies for Vijay Mallya led Kingfisher Airlines (KFA) don’t seem to have an end. After being forced to massively scale down its operations and ground more than half of its fleet in the month of Feb 2012 when the IT-Dept froze its bank accounts over non-payment of tax dues, the estranged airliner has now cancelled all of its international operations and has the aviation regulator (DGCA) as well as the govt. breathing down its throat questioning the company’s ability to come up with a credible plan and revive the failing fortunes.

While Vijay Mallya, chairman and promoter of the airline sounded confident and promised of a revival in operations after emerging from the meeting with the DGCA yesterday, we at DSIJ beg to differ. With just 16 airplanes left to operate with, KFA might indeed be heading towards the dreadful chapter of filing for bankruptcy.

While much of the analysis on KFA’s misfortunes was carried in an article titled ‘Facing Turbulence, Issue No 6 dated March 11, 2012 featured in our magazine, there is an interesting valuation done by our CRU team based on the ‘Altman Z-Score’ which reckons that it is time KFA shuts shop and calls it a day.

Before we continue with the analysis, we would like to give our readers a brief on the Z-Score formula which was published in 1968 by Edward I Altman. According to him, Z-Scores are used to predict corporate defaults and comprise an easy-to-calculate control measure for the financial distress status of companies. The Z-Score uses multiple corporate income and balance-sheet values to measure the financial health of a company. Using a sample of 66 companies - 33 failed and 33 successful - Altman developed a prediction mode which achieved an accuracy rate of 95 per cent. The table given below is a methodological explanation of Altman’s Z-Score formula.

As per the above table, a Z-score of 2.99 and above indicates that the company is financially strong. As the ratio declines and settles somewhere between 1.81 and 2.99 its means that the entity has entered into the grey zone and one must develop caution over its finances. Below the 1.81 ratio is an indication of sheer financial embarrassment.

When the Altman Z-scores formula was applied to KFA’s financials we derived a score of -0.64, which is far below the 1.8 levels. This is a clear indication of financial distress and we reckon that the days of KFA are numbered. Refer to table below for our calculation.

In conclusion, based on our latest analysis and keeping in mind our previously mentioned woes, we continue to maintain our bearish stance on KFA counter. Despite the impetus provided to the ailing aviation sector in the recent budget 2012-13, we believe that KFA in its current state of despair won’t benefit much from it. We recommend readers to continue avoiding the counter.

Disclaimer: The above mentioned analysis is purely an academic adaptation of a previously conducted study/research. While maintaining our bearish stance on the counter, we do not guarantee the possibility of a bankruptcy in the foreseeable future. The result of our valuation is our very own judgment and we don’t hold any bias views against the company or its promoters.