1. Investeurs Chronicle
September 2013, Volume: 80

2. Cover
Story
Right now, there is just one player who is scoring all the goals; the only airline making profits even as competitors flounder with frozen accounts, grounded
planes, and massive losses. That player is IndiGo. Consider these numbers.
IndiGo's profits soar 6-fold to Rs 787 crore despite a spike in fuel prices, weak rupee. This is the first time IndiGo, India's largest airline by passengers carried,
has chosen to go public with its annual results. The airline doesn't need to do so as it's not listed. IndiGo reported a spectacular six-fold jump in net profit to 787
crore in the year to March, seemingly unaffected by a spike in fuel prices and a weak rupee that decimated the earnings of rivals. Low-fare competitor Spice Jet
posted a nearly 10% drop in profit and Jet Airways IndiGo's closest rival in terms of passengers carried, reported a loss of Rs 355 crore in the three months
ended June. Government-run Air India's total losses have increased to around Rs 20,000 crore. Privately-held GoAir recorded aRs 60-80 crore loss in 2012-13,
according to an estimate in May by aviation consultancy CAPA. GoAir is also unlisted.
This is the low-fare airline’s fifth consecutive profitable year. IndiGo’s run of profitability comes as India’s airline industry is estimated to have lost a combined
$1.95 billion (around Rs.12,226crore today) in 2012-13 on a revenue of $9.5 billion, according to consulting firm Centre for Asia Pacific Aviation, or Capa. IndiGo
continues to outperform on every single benchmark—customer ratings are high, service delivery is consistent with quality maintained, operating and financial
measurements are best in the industry.
It doesn’t take long to reach the one obvious conclusion. There is something that is making IndiGo tick, and tick well. And just what that is, is the story that is
fascinating the nation.
King of the pack- Indigo Airlines

3. Cover
Story
IndiGo was set up in early 2006 by Rakesh Gangwal and Rahul Bhatia of InterGlobe Enterprises, with InterGlobe as the parent company holding 51.12 per cent of
the stake while 48 per cent is held by Rakesh Gangwal’s Caelum Investments, a Virginia, US-based Company. Low cost does not mean low quality is something
Aditya Ghosh, President, IndiGo, has been heard saying repeatedly. And it’s a lesson that his low-cost carrier has obviously learnt well.
Staying focused
Many reasons are trotted out for the success but there are some moves that IndiGo has played just right. One of the chief reasons for IndiGo’s success is its sharp
focus — on-time performance, clean, neat aircraft, and good service.
See this early example. Even before starting operations in mid-2006, Indigo placed a firm order for 100 Airbus A320 aircraft in June 2005, an order that gave it a
huge pricing advantage. It followed this up by adopting, for the first time in India, the sale and lease-back arrangement, under which it sells planes back to a
leasing company, keeping its balance sheet light and its fleet younger. The airline then acquired parking lots in Delhi and Mumbai and, by the time the first Indigo
flight was announced, it had already scheduled the first 20 aircraft.
IndiGo started life as a low-cost carrier and has stayed there firmly, sticking to its business model even in the worst economic crises, a move that has paid off
brilliantly. Paid-for on-board meals, a single flying class with no-frills service, high aircraft utilization, and optimal use of space (150 seats to the 190 that a full-
fare airline carries) are just some of the cost control methods that IndiGo uses.
Aircraft utilization is maximized by cutting turnaround time, which also reduces fuel burning. With oil prices rising sharply, every bit helps. By not serving hot
meals on board, IndiGo carries no heavy equipment and cutlery, thus lightening the aircraft and allowing for less fuel burn. Besides, the airline also employs far
fewer people, with one of the industry’s leanest work forces.
Back to basics
With a clean business plan, the airline then concentrated on the basics — on-time performance, clean aircraft, and good onboard service. In India, where airlines
compete with the much cheaper options of rail and road travel, it is usually the time advantage that attracts passengers to planes, and a four-hour delay for a 55
minute flight can be disastrous. IndiGo has carved out a reputation for flawless “On Time Performance”, earning itself some serious brownie points and an average
on-time record of an amazing 90 per cent.
How does it do it? By using a technology called ACARS (Aircraft Communications Addressing And Reporting System). In layman’s language, this means constant
radio and satellite communication between aircraft and ground stations. Every plane in the fleet is fitted with ACARS. Before every departure, an automatic
message is triggered from aircraft to control centre and the departure time recorded immediately. Similarly, the moment the flight lands an automatic message is
triggered from aircraft to control centre. These timings are recorded “real time” and without human intervention.

4. Flyaway profits
Indigo is in an enviable position, slowly but surely outclassing the biggies in the business, filling the vacuum created by cancelled flights and rising fares. Given
that India is one of the most underpenetrated airline markets in the world, IndiGo’s potential for growth is huge. Already, its flights are the most utilized, with an
average load factor of over 80 per cent, sure sign of its profitability.
One of the major reasons here is using just one type of aircraft, which has its benefits, and Indigo has chosen to stick to the world’s best-selling single-aisle
aircraft, the Airbus A320. The A320neo, available from 2016, incorporates a more efficient engine and large wing-tip devices called Sharklets that deliver
significant fuel savings of up to 15 per cent, which represents savings of over 400,000 US Gal of fuel and up to 3,600 tonnes of CO 2 annually per aircraft. In
addition, the A320neo provides a double-digit reduction in NOx emissions and reduced engine noise.
Many observers say that a major portion of the airlines’ profitability is attributed to the leaseback model adopted by the airlines.
IndiGo had ordered 100 Airbus A320 aircraft in 2005 from Airbus SAS. The airline adds about a dozen aircraft each year to its fleet with this order. But many of
these aircraft are sold to the lessors and leased back into the IndiGo fleet. The funds generated by this, which is typically a few million dollars more than the price
the airline would have paid for the aircraft in 2005 for a bulk order, is also booked into the airline’s profits, according to analysts.
With the government allowing more overseas investment in Indian airlines, IndiGo faces competition from foreign airlines that could bring in higher operating
standards.
While Jet Airways has agreed to sell a 24% stake to Abu Dhabi-based Etihad Airways PJSC, Tata Sons Ltd is entering into a joint venture with Malaysia’s
AirAsiaBhd to launch a domestic low-fare airline as well as teaming up with Singapore Airlines Ltd for a full-service airline.
It’s also no secret that IndiGo has faced its share of setbacks, with the DGCA’s January 2012 report of a violation of mandatory safety norms.
While it’s impossible to get everything right, IndiGo seems to be coping quite well, managing to stay in the air in an industry that is looking quite dismally
grounded at the moment. The low-cost carrier might not offer any frequent flyer programmes, but it has a huge share of loyal customers who swear by its
performance. And if it can weather the gathering storm of fuel prices, high taxes, airport fees and the weakening rupee, it should be able to leave competition
way behind its vapour trail.
In India as elsewhere, you look at and complain about fuel cost, red-tape, the macroeconomic drivers. All these factors are “outside our control”. But there are
always some factors within management control. A good management can make a difference!

5. The Japanese yen (JPY) was relatively stable in August 2013; however, it has lost 20% versus the USD over the past 12 months. The Japanese Yen lost ground
quickly after the Federal Reserve (on September 18, 2013) surprised investors by keeping QE3 in place at its current $85B/month pace.
Emerging market and commodity currencies surged to the Yen’s detriment. Perhaps for good reason, too: Japanese yields plummeted to their lowest level since
early-May 2013, transforming the Yen not as a vehicle to benefit as a safe haven but as a funding currency amid a swell in central bank-fueled exuberance. It is
likely that the Yen suffers against higher yielding FX over the near-term.
In Japan, influences are neutral on the Yen as the economy is generally better than previously expected. The sales tax hike appears to be a go, with Prime Minister
Shinzo Abe set to decide the matter on October 1, and the Bank of Japan has thus far indicated that it would be willing to extend further monetary easing to
prevent a dip in economic activity (higher taxes lead to lower consumption).We expect that BoJ policy will weigh on the currency into year-end, driving USDJPY
towards 105.
Insignificant growth in World TradeStats
Outlook-Japanese Yen
Gloss
Inter Corporate Deposit
A type of unsecured loan extended by one
corporate to another.
Existing mainly as a refuge for low rated
corporates, this market allows funds
surplus corporates to lend to other
corporates.

6. Emerging Country- Ukraine
Ukraine is a country in Eastern Europe. Ukraine borders the Russian Federation to the east and northeast, Belarus
to the northwest, Poland, Slovakia and Hungary to the west, Romania and Moldova to the southwest, and the
Black Sea and Sea of Azov to the south and southeast, respectively.
Ukraine economy continues to show peer result due to slack external demand and microeconomic imbalance.
According to the data of the state statistics services of Ukraine, Ukraine’s GDP decreased by 1.15 in the second
quarter of 2013 compared to the same period of 2012, which corresponds to the rate of decline in the first quarter
(-1.1%). At midyear 2013, industrial production dropped by 5.3% compared to the same period of 2012.
According to estimate deficit of the current account, it may reach nearly $13.5bn, or 8% of GDP this year (a record
high since 2004).The capital account surplus may decline to $3bn in 2013 vs. $7bn expected in 2012.
In Ukraine, main industries, like, heavy metallurgical, machine-building, and chemical industries are based on the
iron mines, manganese ores and the coking coal. Food processing, notably the refining of sugar, is also a major
industry. In spite of its many resources, Ukraine must import large quantities of natural gas and oil. Steel,
petroleum products, machinery, and processed foods are exported. Russia is by far the largest trading partner;
others include Germany, Turkmenistan, and Turkey.
Exports remained unchanged y/y as decline in exports of steel was offset by higher agricultural exports.
In the first quarter of 2013 the volume of foreign direct investment (FDI) in the Ukrainian economy grew by 1.3%
– $ 55.709 billion. FDI volume in the Ukrainian economy amounted to $ 1,560 billion; this is by 76.25% higher
than last year. The share of foreign direct investments into the Ukrainian industry makes 30.8% of total ($ 17.171
billion), and in the financial sector – 29.1% ($ 16.221 billion).
Between India and Ukraine more than 17 bilateral agreements have been signed. India’s bilateral trade turnover
has increased from USD 138.62 million in 1992 to US$ 3,103.93 billion in 2012-13 (India’s exports were
US$519.66 million and imports were US$2,584.27 million). The FDI from Ukraine to India was $1.12million as on
February 2013.
Vital Economic Statistics of Ukraine
Economy
Particulars Details
GDP (nominal) $176 billion(2012)
GDP growth
rate
0.2% (2012)
Currency Hryvnia
Credit Rating B (S&P)
B (Fitch)
Caa1 ( Moody’s)
Fiscal Deficit 3.2% of GDP (2012)
Current
account deficit
7% (2012)

7. In FocusForex
Blackberry’s Knight: V Prem Watsa
Forty two years after he migrated to Canada, V Prem Watsa, who was then just
another IIT engineer in search of an MBA, now holds the future of an ailing, but still
iconic Blackberry in his hands. On 23rd September 2013, a consortium led by Fairfax
Financial Holdings, Watsa's flagship company, bid $9 a share to buy out Blackberry.
Hailed as “Canada’s Warren Buffett”, Watsa has made a name for himself, mostly as an
investor who identifies distressed and undervalued assets, bets on them, and reaps
returns. Fairfax Financial Holdings, an insurance-cum-investment company that
Watsa founded in 1985, went on to become Canada's most profitable company in
2008. Despite a couple of recent lacklustre years, Fairfax Financial Holdings' revenue
crossed $8 billion in 2012, up over 7% from a year earlier, with net profit at $532.4
million and nearly $37 billion in assets, spread across pulp mills, specialty retailers,
and restaurant chains. Its stock price has compounded at 19 percent annually.
Watsa's mantra of risk-averseness and long term view has stood him well over the
years, but it's his eye for the big picture that enables him to see investment pitfalls and
financial crises way before others, say observers. He was among the first to predict the
crash of 1987, the Japanese collapse of 1990 and the 2008 sub-prime mortgage crisis
in the US.
Reclusive so long his company’s $4.7 billion bid to buy smart phone maker
BlackBerry, has put the spot light on the Hyderabad-born billionaire. BlackBerry is by
far the most high profile company in Canada and Watsa has been a strong believer in
Blackberry from the time he started buying its shares. Fairfax raised its stake in
Blackberry from 2 percent in January 2012 (when he joined the Blackberry board) to
10% by mid-2013, during a period when the company stock prices were on a decline.
But while Watsa has a history of investing when things look bleak, he has never before
done a deal of this size, nor executed a trade in which his company will likely be
forced to take such a large operational role. Noting that BlackBerry lost nearly $1
billion in just the last quarter, Watsa will have to take drastic measures, potentially
selling off large parts of the company and shuttering its consumer phone business
entirely.
Data from 16th
September 2013 to 29th
September 2013
Sensex Nifty
19,742
.47
19,727
.27 5840.
55
5833.
20
Gold (10 gm) Silver (1 Kg)
29684
30685
49646
49659
Crude Oil ($/barrel) Dollar/INR
110.07
108.63
62.48
61.81

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Disclaimer: Investeurs Chronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The
information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided.
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