CGS-CIMB asks if Vistara-Air India merger ‘makes sense’ for SIA

CGS-CIMB Research analyst Raymond Yap notes that since Vistara’s carrying value in SIA’s balance sheet as of Sept 30 was zero, and the value of SIA’s 20.6% stake in the enlarged Air India has been determined as $1.11 billion, SIA will book a $1.11 billion gain from the sale of Vistara to Air India.

This is incorporated into his FY2024 forecast as an exceptional gain, which boosts his reported net profit forecast.

Does it make sense?

While there are near term losses to bear, Yap believes that SIA’s 25.1% stake in the larger entity will be more useful for its long-term goal of establishing a foothold in a fast-growing aviation market west of Singapore.

Vistara incurred a net loss of $264 million during its 1HFY2023 ended 30 Sep, and Air India incurred a net loss of $736 million in the same time frame.

Yap’s model assumes that the enlarged Air India will incur a loss of $600 million from the date of the implementation agreement on Nov 29 to Mar 31, 2023, another $1.5 billion in FY2024, and $1 billion in FY2025.

With SIA’s 25.1% stake, that translates into a loss of $527 million that SIA has to book in FY2024 and another $251 million for FY2025, says Yap.

As such, he is of the view that merger synergies may help both airlines reduce their losses, and more pertinently, without access to sufficient air traffic rights for international flights, Yap says Vistara’s growth may be constrained over the foreseeable future.