AAI, Pawan Hans listing a chance to ride aviation growth

The government is in the process of divesting stake in two profitable companies, Airports Authority of India and Pawan Hans.

Apart from the novelty and diversification these companies offer investors, the divestments are also an opportunity for investors to partake in the growth India's aviation sector is expected to witness.

With the government working on a new policy, the sector will remain in focus.

Aviation tends to grow at 1.5-2 times of underlying gross domestic product growth.

In the first half of FY15, AAI handled 92 million passengers, which means the full-year traffic could be 185-190 million.

This would be a growth of 10 per cent.

Analysts believe passenger growth could be explosive, given that the government is planning to develop smaller airports across India.

AAI is much bigger than Pawan Hans and has seen revenue growth of 15.9 per cent a year for the past three years, while net profit has contracted 4.5 per cent.

The net worth is around Rs 9,500 crore (Rs 95 billion).

Analysts believe the company could command a valuation of Rs 10,000-12,000 crore (Rs 100-120 billion).

They claim AAI’s revenue model would be similar to that of GMR and GVK,

which run Delhi and Mumbai airports, respectively.

It would be a combination of service and asset plays. Given that other private players are currently operating airports, AAI would not be a monopoly play anymore.

Since AAI owns and manages 125 airports, investors would look at the company to diversify.

Private players in the segment are struggling with their other infrastructure segments such as roads and power.

The Street believes AAI would be valued on a discounted cash flow basis, as each of AAI’s airports would have different revenue and profit growth estimates.

Other than the service play, AAI will have the opportunity to exploit its land for commercial purposes.

The cash flows would be discounted by 10-14 per cent, claims an infrastructure analyst.

On the other hand, Pawan Hans is a relatively smaller company, and has a net worth of Rs 480 crore (Rs 4.8 billion).

The firm turned in a profit in FY14 after reporting a loss of Rs 10.4 crore (Rs 104 million) in the previous year.

It offers both onshore and offshore helicopter services and can be compared to Global Vectra Helicorp.

These companies tend to command 20 per cent plus margins and the valuation would be based on a price/earnings multiple.

These firms would typically trade at a valuation of 8-10 times price/earnings ratio.