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Dec 30, 202413 min read

Tata Group finalizes the acquisition of Air India for $2.2 billion


Vice President: Chirag Agarwal, Devansh Jain, Deepansh Kalra


Analysts: Heteshi Somani, Keyah Singh, Ishaan Vermani, Meet Gupta, Samiksha Manuja, Md Imran, Pratham Arora


Associate: Kshirja Gambhir, Gautam Bansal, Nidhi Singh, Adrij Bhattacharya


Deal Overview


Acquirer: Tata Group (via Talace Pvt Ltd)


Acquiree: Air India (including its subsidiary Air India Express and a 50% stake in Air India SATS)


Deal Size: $2.2 Billion (₹18,000 Crores)


Buy Side Advisors: Bain & Company, Seabury Group


Sell Side Advisors: EY, Alvarez & Marsal, RBSA Advisors, AZB & Partners


Introduction


On October 8, 2021, Ratan Tata announced the acquisition of Air India by Tata Group after winning the bid, and the airline was officially taken over on January 27, 2022.

Air India has been sold at an enterprise value of ₹18,000 Crores, which consists of a payment of ₹2,700 Crores in cash by the acquirer and the takeover of the remaining ₹15,300 Crore debt. Talace Pvt Ltd outbid the consortium led by the promoter of SpiceJet, Ajay Singh, which bid ₹15,100 Crores, as well as the reserve price of ₹12,906 set by the government for the sale of the acquiree.

This deal will see Tata Group taking control of a fleet of 141 planes, the airline’s 4,400 domestic and 1,800 international landing and parking slots at national airports, as well as 900 slots at foreign airports.

With a majority stake in AirAsia and a joint venture stake in Vistara, this deal will make Tata Group the second-largest domestic carrier and the largest international carrier in India.


Company Overview


Tata Sons/Vistara Group


Tata Sons Pvt Ltd was established in 1917 as a trading enterprise and is a holding company of Tata Group. As of FY '21, Tata Sons had a consolidated revenue of ₹2437 Crores, driven primarily by its huge subsidiaries such as TCS. The company's consolidated profit reached approximately ₹194 billion, highlighting its strong profitability. Air India holds a strong cultural and historical significance for Tata Sons, as it was established originally by J.R.D. Tata in 1932. With already having Vistara Airlines, the acquisition of Air India provides an established international footprint as Air India’s two-thirds of revenue came from intercontinental operations.


Air India Group


Air India, founded in 1932 by the name Tata Airlines, became a public enterprise after World War II in 1946 and was renamed Air India Limited. In 1953, the Indian government established two entities as a part of the naturalization process, where the internal travel needs were catered by the Indian Airlines Corporation, which amalgamated with Air India afterward in 2007. In 2000-01, the attempts to privatize Air India emerged as a part of the government’s privatization and disinvestment push. The airline firm took a huge blow since merging with Indian Airlines in 2007, as it has never generated a profit after the merger. By March 2011, Air India stacked an accumulated debt and operating loss of ₹426 Billion and ₹220 Billion respectively.




The recent decline in the financial performance of Air India reflects on its standalone revenue as well, which went down from ₹285 billion to ₹121 billion from FY’20 to FY’21, a decline of ~58%. This was accompanied by a loss of ~₹70 billion in FY’21. All of this historical and recent financial hardship led to the government’s compulsion to completely exit the distressed firm.


Industry Overview


The civil aviation industry comprises the operation, development, and design of aircraft for air transport. This industry saw a dip in passenger levels in 2020 and 2021, during COVID-19, but has recovered recently rising above the pre-COVID levels indicating a healthy recovery of the sector. 



Based on the nature and need of flights, the industry can be classified into scheduled air transport (includes airlines operating domestically & internationally), non-scheduled air transport (includes charter and air taxi operators), and air cargo service (includes transportation of cargo and mail via air transport). The domestic passenger traffic saw a YoY growth of 13.5% and the international counterpart’s YoY growth stood at 22.3%. Also, domestic and international freight traffic saw a CAGR of 3% and 2.7% from 2016 to 2024 respectively.

India is the third largest domestic aviation market in the world, behind the USA and China, and has seen the highest 10-year average annual growth rate among the 5 biggest markets. The market size of the Indian aviation industry stands at $13.89 Billion in 2024 and is projected to reach $26.08 Billion by 2030, showing a CAGR of 11.08% during the period. This growth rate outperforms India’s expected long-term GDP growth rate.


This tremendous growth trajectory is driven by some key drivers in the industry, comprising of the following:


1. Rising middle class and household income: The surge in the middle-class population in India has been huge and is expected to reach 583 million by 202. According to the SBI research report, the weighted mean annual income of the middle class rose to ₹13 Lakh in 2023 compared to ₹3.3 Lakh in 2013, the rise in disposable income causes the scope for discretionary spending, such as on air travel, to widen. 


2. Infrastructure development: The Indian government is committed to building new airports as they plan on building over 300 airports by 2047, which currently are 138. Through the Udan scheme, they aim to modernize the existing ones and enhance regional connectivity, supporting growing demand in the industry.


3. Under penetrated market and high potential: India, even after being the third largest domestic market of passengers, has a per capita domestic seat of 0.13, compared to 3.09 in the USA, and per capita international seats of just 0.06, compared to 0.88 in USA & 4.28 in the UK. This highlights the potential of the Indian aviation market, which when exploited well can be a source of tremendous growth in the sector.


4. Emergence of Low-Cost Carriers (LCC): The low-cost carriers segment has grown significantly in recent years, filling in the rising demand for affordable air travel options with the rise in economic growth and liberalization of the aviation industry.


The aviation industry is complex and ever-evolving, renowned for its positive economic and social externalities. The aviation sector is a complex ecosystem comprised of subsectors of varied sizes, composition, and financial performances. The value chain of the aviation sector is important to decipher the intricacies behind the subsectors collaboratively running the industry. 

The subsector dominating the aviation sector globally is apparently the airline industry with a revenue of $732 billion, followed by fuel production with a revenue of $214 billion, while the other significant subsectors include airports, freight forwarders, aircraft OEMs, ground services, MRO, aircraft lessors, ASNPs, catering, and travel tech.

Economic performance is one of the vital metrics to figure out the state of the value chain in the industry as a whole. A subsector creates value when its return on capital employed (ROIC) exceeds WACC and destroys value when the situation is the other way around. Hence, the economic value is measured here as the difference between ROIC and WACC.




As a matter of fact, no subsector, with the exception of fuel production and freight forwarders, has been able to create positive economic benefits for investors, which makes the aviation sector as a whole unprofitable considering remarkable economic losses of ~$69 billion.

The aviation sector has failed to create economic value and the repercussions of it go beyond the aviation industry impacting local and global economies. One apparent issue is the highly oligopolistic nature of pricing power in the upstream supply chain, which certainly has no immediate solutions. A collaborative environment among subsectors in terms of data analytics and polling is needed to navigate the challenges in value creation. A robust value chain is needed more than forever considering the increasing positive impacts of industry on economies and individuals. 


Financial Analysis


Comparable Company Analysis



Precedent Transactions



The Tata Group’s acquisition of Air India, valued at ₹18,000 crores, reflects a 14.74% discount to its DCF valuation of ₹21,120 crores. This deviation from industry norms, where typical airline M&A deals see average multiples of 1.1x EV/Revenue and 18.0x EV/EBITDA (with medians of 0.9x EV/Revenue and 7.0x EV/EBITDA), can be attributed to Air India’s distressed financial condition. The airline’s significant debt load and operational inefficiencies led to a lower valuation, and the Government of India’s emphasis on resolving debt rather than maximizing transaction value played a key role. The ₹15,300 crores of debt assumed by Tata reduced the immediate equity cost to ₹2,700 crores, which allowed the conglomerate to regain control of Air India at a lower upfront cash expenditure than typical airline acquisitions.


This strategy of absorbing a large amount of debt in exchange for a lower upfront cash payment deviates from typical M&A norms, where acquirers often purchase both equity and debt at face value. The Air India deal reflects an effort to balance the high debt load of the airline with a comparatively low equity cost for Tata, aligning with the Government’s priorities to alleviate Air India’s debt burden. The structure of the deal, emphasizing long-term value and focusing on the national carrier’s potential turnaround, departs from traditional M&A structures and is reflective of Tata’s vision for revitalizing the airline without incurring excessive immediate expenditure.



The Actual EV/Revenue multiple for Air India stands at 9.56x, which is significantly higher than the industry average of 1.1x.


This implies that Tata paid a much higher price per unit of revenue than typical airline transactions. However, this could be due to the inclusion of Air India's significant debt load in the enterprise value, and the revenue potential (even if operationally inefficient) was a factor Tata considered in its valuation.


DISCOUNTED CASH FLOW


WACC Calculation :


Analysis:


The Weighted Average Cost of Capital (WACC) for Air India for Air India calculated at 15.50%, reflects the unique challenges of the airline industry and the company’s specific risk profile. It is calculated using a detailed benchmarking approach, incorporating data from comparable companies, including InterGlobe Aviation Ltd (IndiGo), SpiceJet Ltd, and Deutsche Lufthansa AG. To estimate Air India’s beta, the levered betas of the comparable were unlevered using their respective debt-to-equity ratios and tax rates. The derived unlevered beta was then relevered based on Air India’s debt-to-equity ratio of 29.67% and a tax rate of 25%, resulting in a relevered beta of 1.35. This beta reflects Air India’s systematic risk relative to the market.


The cost of equity, calculated using the CAPM approach, was determined to be 20.2%, while the cost of debt was computed at 0.2%. These were assigned weightages of 77.12% and 22.88%, respectively, reflecting Air India's capital structure.


Schedules


Working Capital Schedule



Depreciation Schedule



In formulating the working capital and depreciation schedules, most of the forecasted percentages were based on past trends. It was challenging to identify any significant revamp efforts by the company, making this approach appear reasonable.


The Discounted Cash Flow valuation yields a final figure of INR 21,120 crores, with an equity value of INR 6.46 per share, which is higher than the actual sale value of INR 18,000 crores, indicating that the company was undervalued. This is, however, easily explained when we look at the circumstances surrounding this transaction.

The Government of India had been attempting to privatize Air India for several years, but previous attempts failed due to a lack of interest from bidders. To make the sale more attractive, a special purpose vehicle was created to offload a significant portion of the company’s debt. Also, the successful sale in 2021 offered 100% ownership of Air India, along with control over some key assets, unlike earlier attempts, highlighting that this was indeed a distress sale. Despite transferring much of its liabilities to the SPV, Air India retained approximately ₹5,500 crores in debt, which the Tata Group must now service. Additionally, the airline continues to face enormous losses, despite its cash flow potential, and requires substantial investments for a turnaround. It is also worth noting that the sale was not conducted through traditional negotiations but rather through a bidding process.



Accretion Dilution Analysis


The analysis highlights the dilutive effect of Air India’s persistent losses on Tata Group’s earnings and EPS. While Tata Group’s standalone net income and EPS show steady growth from FY19 to FY25, the inclusion of Air India’s losses results in substantial dilution. However, the dilution percentage decreases over time, from 42.6% in 2019 to 26.8% in 2025, primarily because Tata Group's income grows, reducing the proportional impact of Air India's fixed losses.  If Air India's losses continue at this rate, the overall financial performance will remain under pressure, although the dilution impact might diminish as Tata Group's core operations grow. Addressing Air India’s losses will be crucial for improving Pro Forma financial outcomes.


Despite short-term financial pressure, the acquisition was a strategic move, driven by a government-led privatization initiative and Tata's commitment to nation-building. Reclaiming Air India aligns with Tata’s legacy and provides access to a vast global network, prized airport slots, and synergy opportunities with Vistara and AirAsia India.


Football Field Analysis - Valuation Summary




The football field analysis underpins the valuation range of the company using two approaches, namely Comparable Company Valuation or Comps and Discounted Cash Flow or DCF. The Comps approach computes a valuation in the range of ₹500 crore to ₹868 crore, representing market-driven metrics relative to peers. The DCF valuation differs across scenarios: the base case estimates a range of ₹475.97 crore to ₹547.47 crore, the bullish case projects upside at ₹564.58 crore to ₹681.65 crore, while the bearish case presents conservative estimates in the range of ₹466.08 crore to ₹533.31 crore. Equity value per share is projected at ₹522, rather in line with the DCF Base Case, which seemed to reflect the most realistic outlook. This analysis also highlights the balance of the upside and downside, underpinning strategic insights into the investment and stakeholder landscape.


Deal Rationale


Synergy


Revenue Synergy


1. Rise in International Traffic: The Tata-Air India merger puts airlines in a pole position to benefit from the predicted annual 20% growth in the aviation business in India in the upcoming years, recovering from the past downfall of the industrial figures, and unlocking new revenue streams. With increasing international routes, mainly through code-sharing arrangements, passenger numbers may increase by 15-20%, bringing an additional crores of revenue.  


2. Increased Market Share and Route Expansion: The merger would imply that Tata's combined airlines, namely Air India, Vistara, and AirAsia India, are estimated to hold about 25% of the domestic market, making them a considerable rival to IndiGo with its leading 57% market share.  The existing reach of Air India in North America, Europe, and Southeast Asia can add upwards of 3 million passengers to the overall traffic of Tata. Moreover, increased market share and network expansion can result in the increase of the annual revenues, on account of increased passenger traffic. 


3. Successful Customer Retention: If the customer retention strategies become a success for the merged entity then there will be an increase in revenue from ticket sales, further adding value to the lifetime customer. Assuming the average passenger travels ₹ 10,000 per year on tickets, retention of an additional 10% of the current Air India passengers assuming 16 million around could roughly equate to ₹ 1,600 crore more in annual revenues from loyalty-driven bookings.


Cost Synergy


1. Fleet Modernization: This merger enables the retirement of older, fuel-inefficient aircraft and allows for optimal fleet utilization. Modern fleets will have lower fuel costs, maintenance expenses, and operational inefficiencies.


2. Operational Efficiency and Digital Transformation: Consolidated operations between Air India, Vistara, and AirAsia India will mean lower costs per passenger on account of economies of scale in route planning, ground handling, and maintenance services. The Tata Group's prowess in digital technologies can smooth out the ticketing, customer service, and operations, thereby bringing about significant cost savings.


Investment Synergy


1. Infrastructure Development: Investments by Tata in modernizing the antiquated infrastructure of Air India, including airports, lounges, and fleets, will enhance customer experience and help attract premium customers.


2. Real Estate Monetization: Air India's premium real estate, valued at more than $6 billion, presents an opportunity for Tata to raise capital for fleet and technology investments.


Risks


1. Integration Challenges and Cultural Clashes: The integration may take 2-3 years, and any delay may increase the costs by a significant amount above the budgeted integration cost. For a merger of this size, the integration cost could be very high. The total amount can exceed materially if the process of integration is longer than expected and may impact financial stability on a short-term basis. 


2. Regulatory and Competition Hurdles: While the timelines for integration may be delayed due to regulatory approvals, synergy realizations could, therefore, get pushed back by 1-2 years. Such a delay in integration owing to regulatory oversight could result in a loss of about ₹1,600 crore (assumed figure) annually in forgone savings for the merged entity.


3. High Debt Burden and Financial Strain: The merger of Air India and Tata Group involves the management of Air India's legacy debt, which stood at approximately ₹61,000 crore before privatization. Although the government absorbed a significant portion of this debt during the privatization process, the remaining liabilities, estimated at ₹15,000-17,000 crore, still pose a substantial challenge. Servicing this debt could strain the cash flow of the merged entity, particularly in the initial years, potentially diverting resources away from critical investments like fleet modernization and service improvements.


4. Service Standardization and Customer Expectations: By offering consistent quality of service across brands, there is a risk that the operations would get so complex that it would be costly. A significant amount would be needed in the first year for training and service standardization so that there will be no risk of cultural clashes. Failure to deliver on customer expectation would result in a 5-10% loss in loyal customers, translating to about ₹1,200-1600 crore every year in lost revenue.


5. Price and Competitiveness in the Market: This would force the merged entity to reduce fares to stay competitive, especially with IndiGo in the domestic segment. This would likely see the average ticket prices drop by 5-10%, while maintaining the service for which Tata is known can put pressure on near-term profitability. Aggressive cost management would thus become imperative to compensate for this.


Conclusion


The Tata Group’s $2.2 billion acquisition of Air India is a transformative move, reclaiming a legacy while securing significant assets, including a fleet of 141 planes and key airport slots. The deal involved ₹2,700 crore in cash and the assumption of ₹15,300 crore in debt. Despite Air India’s financial struggles, including losses of ₹70 billion in FY21 and substantial legacy debt, the acquisition positions Tata as a market leader with 25% domestic share and the largest international footprint. Synergies from integration, modernization, and increased traffic could unlock revenue growth, but high debt and operational challenges demand careful management to ensure long-term profitability.


References


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