GMLC: ROUND 3 (Priyanshu Agrawal)

THE ROAD AHEAD…

According to the FY 20-21, the company’s EBITDA was 40 billion against a revenue of 400 billion which means the
company’s operating expenses account for approx. 90% of its revenue which is very high. Discount rate has been assumed
to be minimum rate of return i.e. 2.6%.
SCENARIO 1 (Other Service Lines)

• Very low margins for capital investments, as the EPIDTA is low as per industry standards.
• For spreading to other service lines, an initial capital outlay of INR 1 billion is a major capital expenditure and
may raise the burden of cost of capital. Company might have to raise capital by debt or equity to make this
investment in case of lack of capital reserves, and in such case weighted average cost of capital will go up and
offset the benefits of service line expansion. Reserves also might be used for investment leading to lack of
reserves for other developments and thus, the company might not be able to give away dividends which will
upset the investors.
• Acquisition of new aircrafts is further costing INR 5 billion, which is a huge outlay investment, and unfit for
the company to invest in the present times. There will also be unguaranteed demand and competition from
established players in the industry, who are already operating in the service lines.
• Some of the positives of changing service lines for our airline company, however, shall be diversified revenue
system, increasing profit margins (as visible in the NPV below), competitive advantage, optimum
utilisation of existing infrastructure, brand recognition and long-term sustainability.
• Now, if leasing of aircrafts is opted by the company, the cost to the company shall only be INR 0.5 billion (+1
billion). This is a small expense as compared to the revenue being earned by the company in the same period.
Moreover, as per the projected revenue the company shall be able to recover its initial capital
investment after 5th year as shown by the positive NPV & IRR (below).
• Assuming the discount rate to be the minimum rate of return of 2.6% the company shall be able to cover its
initial capital outlay by the end of 5th year (tax & interest ignored) and the investment shows a positive
NPV from 5th year onwards making it a good investment. NPV is a financial metric used to evaluate the
profitability of an investment by calculating the present value of expected cash flows and deducting the initial
investment cost. A positive NPV means that the investment is expected to generate more cash inflows
than outflows over its lifetime.
• Calculation assumption for NPV: EBITDA as 10% of Revenue as per Fiscal year 2020-2021, Tax, Interest,
depreciation, and amortization ignored.
• A positive investment makes the company a good target acquisition in the global market, as well.
Dscount Rate 0.026
INR million
YEAR 2021 2022 2023 2024 2025 2026
PROJECTED REVENUE 850 2500 4000 5600 7175
EXPENSES 765 2250 3600 5040 6457.5
EBITDA -1500 85 250 400 560 717.5
NPV(3 YEARS) ₹ -788.80
IRR -25%

NPV(4 YEARS) ₹ -296.25

IRR -5%

NPV(5 YEARS) ₹ 318.84

IRR 8%

Table 1.1: Calculation of NPV in case of leasing aircrafts (other service lines)
SCENARIO 2 (Geographical Expansion)

• The company has lack of expertise in managing international operations.

• Moreover, adapting to the diverse regulatory frameworks of different countries will be a significant challenge
for the company. Such adaptations may also necessitate changes in management, potentially affecting
stakeholders' sentiments and, consequently, the share price.
 • Repatriation tax will further impact the company's Profit After Tax (PAT). Repatriation tax comes into play when
funds earned abroad are brought back to the home country, and this could apply to a corporation earning money
through a foreign subsidiary or an individual with overseas investments or earnings.
• Acquiring an international aircraft would require a substantial capital investment, ranging from INR 7 to 10
billion if the company chooses to purchase one. Even if the company opts for a lease, the high operational
expenses (OPEX) will reduce the EBITDA, consequently affecting the company's PAT.
• Although the international market shows a promising year-on-year revenue growth rate of 7%, with a projected
CAGR of 6.04%, both aircraft ownership and lease options result in a negative NPV. In the case of ownership,
the NPV remains negative for a period exceeding 6 years. Additionally, acquiring a single aircraft would cost an
average of INR 8.5 billion, leading to significant investments without proportional returns to sustain a fleet of
aircraft. Even with a lease, the NPV remains negative for more than 5 years.
• Considering the high capital investments, regulatory challenges, and negative NPV for an extended duration, this
option does not appear financially viable.
SCENARIO IF THEY PURCHASE THE AIRCRAFT SCENARIO IF THEY GO FOR LEASE
Discount Rate 0.026 Discount Rate 0.026
INR million INR million
YEAR 2022 2023 2024 2025 2026 2027 YEAR 2022 2023 2024 2025 2026 2027
REVENUE 980 1048.6 1132.5 1223.1 1308.7 1393.8 REVENUE 980 1048.6 1132.5 1223.1 1308.7 1393.8
MAINTENANCE EXPENSES -686 -734 -792.8 -856.2 -916.1 -975.7 MAINTENANCE EXPENSES -686 -734 -792.8 -856.2 -916.1 -975.7
AIRPORT DUTIES -68.6 -73.4 -79.3 -85.6 -91.6 -97.6 AIRPORT DUTIES -68.6 -73.4 -79.3 -85.6 -91.6 -97.6
STAFF -70 -70 -70 -70 -70 -70 STAFF -70 -70 -70 -70 -70 -70
ADMIN EXPENSES -15 -15 -15 -15 -15 -15 ADMIN EXPENSES -15 -15 -15 -15 -15 -15
MAKETING -50 -50 -50 -50 -50 -50 MAKETING -50 -50 -50 -50 -50 -50
EBITDA 90.4 106.2 125.4 146.3 166 185.5 EBITDA 90.4 106.2 125.4 146.3 166 185.5
LAND -250 LAND -250
PP&E -860 PP&E -860
AIRCRAFT -8500 LEASE -500
NPV ₹ -6,913.81 NPV ₹ -563.95
IRR -41% IRR -13%

Table 1.2 (a & b): Calculation of NPV in cases of acquiring an aircraft & lease (geo expansion)
SCENARIO 3 (Sell out or merge)

• At this stage, restructuring is not a viable option for the growth and expansion of the airline business, as there are
other strategic alternatives available.
• There are no specific offers as of now and thus, post-merger/acquisition valuation of synergies to determine
profitability is uncertain or difficult.
• Joining an international giant may cause the airline to lose its original identity, integration issues and even face
resistance from its employees (fearing potential job losses role changes etc.).
• Further, the emotional aspect of being a homegrown "Made in India" brand will no longer resonate strongly. It
can cause a dip in connection between our airline and our domestic customers.
• The company's valuation has been estimated using the EBITDA multiplier method due to the lack of cost of
capital data, which is 4 billion multiplied by 13.3 (as DD Airlines is the closest substitute of our airlines, for
taking EPIDTA multiplier). So, the multiplier shows the market value of the company as 53.2 billion as
against the given book value of 40-45 billion. The higher market value compared to the book value suggests that
investors have high confidence in the company's future prospects for growth, expansion, and increased
profits. Therefore, the company is estimated to earn profit, as per industry experts. However, the absence
of cash flow information presents a challenge in valuing a company, as relying solely on one metric is
insufficient for making informed decisions, particularly in the context of mergers and acquisitions
• Acquiring a multinational parent company will provide valuable international exposure, bringing in technical
expertise and improved business practices, leading to enhanced customer satisfaction. It may also open up
opportunities for expansion into new markets and geographies.
• The sale would release the cash value held in the business, which is tied to the respective stakes of the shareholders.
Furthermore, being part of a multinational parent company would provide access to a larger scale, creating
additional business opportunities.
• NPV can not be calculated or estimated, due to lack of data given, for any clear financial estimation.
FINAL Decision:
After carefully evaluating all the advantages and disadvantages of each option and considering the key risks involved, it
becomes evident that Option 1, which involves increasing the service line through leasing aircraft, is the most viable choice.
The positive Net Present Value (NPV) within a 5-year timeframe serves as strong evidence of its potential as a sound
investment. Additionally, there are several other favourable factors associated with expanding the service line in this manner,
as mentioned above. The flexibility and scalability offered by leasing, along with the opportunity for diversified revenue
streams and improved customer experience, make this option highly attractive.