Taneja Aerospace: Speculation’s swift knife, whither will it turn?

This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further

  • Taneja Aerospace and Aviation Limited (TAAL) operates the Hosur Airstrip, 30 minutes from Electronic City Bengaluru
  • The airstrip is 2km long and can accomodate Boeing and Airbus class of narrow-body aircraft, with in-house hangar and repair facilities
  • The government under its low cost flying or UDAN (Uday Desh Ka Aam Nagrik) scheme recently airmarked TAAL’s Hosur Aerodome as a hub for low-cost domestic flights
  • Inspite of many triggers in place TAAL has historically failed to produce returns on assets making it a speculative grade stock

Taneja Aerospace and Aviation Limited (TAAL) is a little known but decades old player in the Indian aviation universe. It is present across the spectrum of the aviation industry – from design, to aerostructure construction to maintainance and repair operations (MRO), running its own airfield to the operation of chartered jets (through its subsidiary TEL). In 2015, it recently built its own aircraft – the first of a kind by any private manufacturer in India

Taneja_Aerospace_Partenavia_P68C_Aircraft.jpg
Partenavia P68C, a six seat, twin-engine aircraft manufactured by Taneja Aerospace

To enumerate TAALs competitive advantages:

  1. Old ties with ISRO, DRDO and the Indian Air Force bring contracts such as Mig-29 repair and Rustom UAV airframe construction
  2. Multiple streams of income – MRO, defence contracts, design, renting airfield operations, drag racing etc
  3. The only private aircraft operator to have its own airstrip that is not already in use as an active airport.

An empty airstrip for use!

A short drive from the aviation hub of Bangalore, in these giddy times of aviation policy and Make in India brouhaha.

2017-06-23_15-07-10.jpg
250 Acres of Land with Hangers that won’t fit in your wardrobe

The Balance Sheet case for Investing

250 acres of land asset in Hosur must be worth at least about 250 crores at market price, although the balance sheet reports it only as 60 crore of free hold land, perhaps due to recording at acquisition price or outdated revaluation.

The market cap is only 150 crore, the enterprise value only about 180 crore. The Price to Book value ratio is resultantly less than 2.

The P & L case for Investing

Although P/B may be <2, if you run a Price to Earnings screener, you will never find TAAL show in the results as the P/E is at a whooping 250.

That’s because the company – inspite of its juicy assets – makes no money off those uniquely placed assets.

That does not stop the young Yale-MBA promoter Salil Taneja paying himself an annual salary of 90 Lakh, which is almost equal to the operating cash flows in 2016 of some 1.2 crore. That brings us to another problem with the company – the promoters can’t get out of their own way.

On paper, the company has many sources of revenue:

  • Manufacturing of fuselages and aerostructures – mostly for drones, UAVs and piecemeal government contracts. The company also makes the bodies for GSLV rockets.
  • Annuities like rent from Air Works, an US Private Equity funded maintainance and repair (MRO) company that uses the TAAL airfield on a rent lease for 15 years
  • Drag racing, advertising shoots and other events conducted at the airfield
  • Airfield usage – 30k per landing and in addition rent for parking of large aircraft at the airfield charged by the hour

The company has little debt. So why is the company generating EPS of just 19 paisa?

Spiralling Expenses

Importing foreign spares and equipment for the manufacturing of aircraft in India is expensive and unviable. It includes import tarrifs and a lot of other expenses. As TAAL’s aspirations scale up – so do its share of import of components and with it – the expenses.

2017-06-23_16-24-42.jpg

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In 2016: the company used imported components worth 32 crore to generate just 60 crores of sales. Sales grew only 2x, while COGS grew 8x. Was this vanity project the Partenavia P68C shown above?

The company’s EPS has historically never gone over 2 rupees. ROE has never rised above single digits. So there is no historical basis for EPS to rise, or an investment case based on creation of shareholder wealth.

TAAL may just be a “good” company in a bad business.

Historically most of the speculation on the stock has happened based on news based triggers.

Earnings have never caught up with expectations.

Can the Hosur UDAN Airport be a trigger for re-rating?

Airport operators listed on global bourses of the like of the Auckland and Shanghai Airports have enjoyed valuations of over 8 times book. Taneja is trading a fraction of those valuations. So if the Ministry of Civil Aviation approves the UDAN Airport officially – as is being reported in the news – could it lead to re-rating of the stock?

Let us first consider the facts:

  • TAAL aerodrome lies in Tamil Nadu, which is seen as a political, regional and economic rival by Karnataka politicians. There is already a defence airport operated by HAL which was closed to domestic and international traffic after the opening of the BIAL International Airport as part of a non-competitive clause (no competing airports allowed in 150 km radius). Hosur Airport is also subject to this contract restriction being just 60 km from BIAL.
  • Now consider that the Modi government is aligned to the AIADMK government and may pull strings to make the Hosur airport legally viable inspite of the non-competitive clause signed with BIAL. The Karnataka government is a Congress government and there are historical precedents of Modi and Co steamrolling regulations to push “progress”.
  • Additionally, under the National Civil Aviation Policy (NCAP) approved in July 2016, the government has an option to make exceptions to the above contract exclusivity rule.
  • In retaliation to Tamil Nadu’s announcement of Hosur Airport, the Karnataka government could open the HAL military airport, which once upon a time served as the international and domestic airport until the BIAL came up. Such a one-upmanship could hamper the business case for Hosur. It is worth a note here that Hosur is already listed one of the 30 airstrips to be developed as part of UDAN in the ministry document (i.e has been officially empanelled)
  • Under the UDAN scheme ticket prices are capped at 2500 per person, and this is enforced through subsidy and restrictions on monetization of the airports – which could hamper the asset turnover of TAAL even if the airport comes up.

A lot is up in the air but the Hosur Airport – if officially announced – would still lead to a steady stream of annuity income for TAAL in the form of parking fees, retail space and miscellaneous other fees which should push up EPS.

Concluding Thoughts

When management owns stock, then rewarding the shareholders becomes a first priority, whereas when management simply collects a paycheck, then increasing salaries becomes a first priority – Peter Lynch

There are numerous tailwinds for the aviation industry in India and the new civil aviation policy regime effective 2016 has made MRO and manufacturing in India very competitive with offset clauses, reduction of tarrifs and subsidies for regional flights. With foreign investment flowing in, the size of the pie is set to grow steadily into the distant future.

Competition is not far behind. Foreign players have entered India, including large domestic players like the Tatas, L&T, Bharat Forge, Reliance Defence have begun to corner the market with Joint Ventures with well-grounded foreign aircraft manufacturers.

TAAL’s promoters have historically shown little inclination towards increasing shareholder wealth. Building aircrafts with expensive foreign parts may not be a viable business plan – giants like Reliance are now manufacturing 200 seater aircraft and have inked agreements with global aerospace giants like Dassault. The manufacturing space is only going to get more competitive.

Due to its disadvantages in scale and clout vis-a-vis its large conglomerate competitors, Taneja may find itself being denied non-aerostructure related defence projects in the future.

The promoters need to “spin off” end-to-end aircraft manufacturing and other vanity projects and “focus” on competence in aerostructures and monetizing the airfield in Hosur, together with making wiser capital allocation decisions. The company needs to generate better returns on its assets and equity. Until that happens the stock price may continue to see the wild speculative swings it has been subject to since 2009.

Special caution – the stock seems to have already priced in the Hosur speculation. If the deal is not confirmed by the Ministry of Civil Aviation the price may be in for a steep correction.

DISCLAIMER:

This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion. I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.

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