GMR Hyderabad International Airport Limited - ICRA

GMR Hyderabad International Airport Limited - ICRA

July 05, 2017 GMR Hyderabad International Airport Limited Instrument Amount (Rs. crore) 1612.36 [ICRA]AA (Stable); Upgraded from [ICRA]AA- (Stable)...

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July 05, 2017

GMR Hyderabad International Airport Limited Instrument

Amount (Rs. crore) 1612.36

[ICRA]AA (Stable); Upgraded from [ICRA]AA- (Stable)

Cash-credit Limits

55.00

[ICRA]AA (Stable); Upgraded from [ICRA]AA- (Stable)

Non-fund Based limits

75.00

[ICRA]A1+; Re-affirmed

Unallocated Limits

11.24

Upgraded to [ICRA]AA from [ICRA]AA-; Stable outlook

Term Loans

Rating Action

*Instrument details are provided in Annexure-1 Rating action ICRA has upgraded the long-term rating assigned to the Rs. 1667.36 crore1 fund-based facilities and the Rs. 11.24 crore unallocated limits of GMR Hyderabad International Airport Limited (GHIAL) † to [ICRA]AA (pronounced ICRA double A) from [ICRA]AA- (pronounced ICRA double A minus). ICRA has re-affirmed the short-term rating assigned to the Rs.75.00 crore non-fund based limits at [ICRA]A1+ (pronounced as ICRA A one plus). The outlook on the long-term rating is Stable. Rationale The rating upgrade reflects GHIAL’s robust cash accruals and strong liquidity position as reflected by a liquid surplus of Rs. 641.75 crore as on March 31, 2017. The traffic growth at GHIAL was the highest among the major private airports in FY2017, with air traffic movement (ATMs) growing by 24% and passenger traffic by 22%. Overall, passenger traffic grew at a CAGR of 15.8% during FY2013-FY2017 to 15.1 mn and ATMs grew at a CAGR of 9.5% to 131,000 during the period. The rating favourably factors in the policy directive from Ministry of Civil Aviation (MoCA), which recommended hybrid till (as per National Civil Aviation Policy, 2016 (NCAP-2016)) for future tariff determination at all airports. In this context, ICRA views the Airports Economic Regulatory Authority’s (AERA) order dated January 12, 2017 aligning the regulatory till approach with the NCAP-2016 as a positive development. However, the tariff for the current control period (FY2017-FY2021) is yet to be determined and till such time, the current user development fee (UDF) rates, allowed on ad-hoc basis, apply. The rating also takes into account the strengths arising from the regulatory framework which allows efficient cost recovery as a part of the tariff from the users. This, together with GHIAL’s strategic position, significantly mitigates the concerns on revenues. The variation in passenger traffic due to economic cycles, which may lead to temporary traffic de-growth and in-turn revenue decline is compensated by truing up for the shortfall in the next regulatory period, albeit with a lag. This apart, financial support from the Government of Telangana (GoTS) in the form of development grant and interest free loans with deferred payment terms, modest revenue-sharing terms with the Government of India (GoI) are also comforting factors.

1 †

100 lakh = 1 crore = 10 million For complete rating scale and definitions please refer to ICRA's website www.icra.in or other ICRA Rating Publications

The rating, however, is constrained by the substantial capex requirement to augment the airport’s capacity. Currently, the airport is operating at more than 100% of its designed capacity of 12 mn PAX per annum. GHIAL plans to undertake the next phase of capex (modular expansion), which is to be completed by FY2021 to increase the capacity to 20 mn PAX per annum. The total capex (including terminal expansion, re-carpeting of runway and regular maintenance) is estimated at Rs. 2,512.5 crore during FY2017-FY2021. This is proposed to be funded through debt of Rs.1,715 crore and internal accruals of Rs. 797.50 crore. For the capex related to the terminal building, AERA is expected to appoint a consultant to vet the project cost. GHIAL’s management intends to finalise the terminal building capex only after receiving sufficient clarity on the issue of normative capex. The terminal expansion is expected to be completed by end of the second control period thus the full impact of the capex on UDF will be visible from the third control period starting FY2022. Till that time, the company will witness an increase in debt levels and consequently, higher gearing. GHIAL’s ability to execute the large capex program within the budgeted costs and timelines and get the same approved by AERA for tariff determination will be critical. GHIAL’s passenger throughput has exceeded the terminal capacity leading to capacity constraints during peak hours. To cater to the present level of growth, GHIAL has undertaken various debottlenecking measures like, re-orientation of security checks, kerb side expansion, ramp expansion, de-peaking of passengers to increase asset sweating. ICRA notes that GHIAL is required to maintain airport service quality (ASQ) of 3.5 (out of 5), as per the concession agreement. The actual ASQ achieved during 2016 was 4.96. With the de-bottlenecking measures in place and available cushion between actual and desired ASQ, the company should be in a position to handle increased passenger traffic without compromising on user experience till the time the terminal expansion is completed. The rating is also constrained by the funding support, which may be required by the weaker subsidiaries (primarily for their debt servicing), for which GHIAL has extended corporate guarantees. However, with improved performance of the major subsidiaries during the last one year, including the merger of Duty Free operations with the Hotel asset, the need for support is expected to reduce going forward. Further, ICRA notes that GHIAL declared its first dividend in FY2017 – nine years after COD – and may continue doing so in the future. Given the huge liquid surplus and the robust cash generation expected during the current control period, ICRA expects GHIAL’s financial profile to remain strong in spite of the dividend payout and the funding support requirement of subsidiaries. Going forward, passenger traffic growth rates and improvement in non-aero revenue streams will drive GHIAL’s cash accruals. The company’s ability to execute the proposed capex program within the budgeted costs and timelines and get the same approved by AERA for tariff determination will be a key rating sensitivity. Any loans and advances extended to Group companies (other than the committed funding support to GHIAL’s subsidiaries) will be viewed negatively from a credit perspective. Key rating drivers Credit strengths   

Robust growth in traffic in the last three years; passenger traffic grew at a CAGR of 15.8% during FY2013–FY2017 to 15.1 million and air traffic movement grew at a CAGR of 9.5% to 131,000 during the period Continued healthy financial performance with strong liquidity with liquid surplus of Rs.641.75 crore as on March 31, 2017 Favourable policy directive from the Ministry of Civil Aviation (MoCA) which recommends hybrid till (as per the new civil aviation policy dated June 2016) for future tariff determination at all airports; shift in single to hybrid till would result in increase in cash accruals

 

Monopoly position of the Hyderabad Airport within Hyderabad city; major international airport in Telangana and Andhra Pradesh Financial support from the GoTS in the form of development grant and interest-free loans with deferred payment terms; low revenue sharing with the GoI over the concession term (at 4%) with deferred payment terms (payment deferred till the eleventh year)

Credit challenges 

  

Large capex requirements for capacity augmentation at a total estimated cost of Rs. 2,513 crore over FY2018–FY2021, which is proposed to be funded through additional debt of Rs.1,715 crore. In the light of AERA’s normative approach for capex, uncertainty in terms of allowable capex exists. Therefore, GHIAL’s ability to get the capex approved by AERA and execute the large capex programme within the budgeted costs and timelines will be critical Given the significant delays in tariff orders in the past, timely tariff orders from the regulator which adequately compensates for the forex and prior period losses is important Committed funding support to subsidiaries primarily for their debt servicing; improved performance of major subsidiaries during the last one year, including merger of Duty Free operations with Hotel asset; the need for support is likely to decrease going forward Revenue generation remains exposed to aviation traffic movements; as per the tariff-determination methodology, any shortfall in aeronautical revenue generation from the levels estimated at the time of tariff fixation is compensated through a true-up, albeit with a lag. Thus any shortfall in aeronautical revenues in the medium term remains a credit risk

Description of key rating drivers: The rating favourably factors in the policy directive from the MoCA, which recommended hybrid till for the future tariff determination at all airports. Thirty percent of non-aeronautical revenue will be used to cross-subsidise aeronautical charges. The shift from single to hybrid till is expected to improve cash accruals for GHIAL. ICRA views the AERA’s order dated January 12, 2017 aligning the regulatory till approach with the NCAP-2016 as a positive development. The growth in traffic at GHIAL both in terms of PAX and ATM has been healthy over the last five years. Passenger traffic grew at a CAGR of 15.8% during FY2013-FY2017 to 15.1 mn and ATMs grew at a CAGR of 9.5% to 131,000 during the period. At present, the airport is operating at more than 100% of its designed capacity of 12 mn PAX per annum. GHIAL plans to undertake the next phase of capex (modular expansion) to be completed by FY2021 to increase the capacity to 20 mn PAX per annum. The total capex (including terminal expansion, recarpeting of runway and regular maintenance) is estimated at Rs. 2,512.5 crore over FY2017-FY2021, which is proposed to be funded through debt of Rs.1,715 crore and internal accruals of Rs. 797.50 crore. In the light of AERA’s normative approach for capex, uncertainty in terms of allowable capex exists. However, GHIAL’s management intends to finalise the capex programme only after receiving enough clarity on the issue of normative capex. Timely tariff orders from the regulator and ability of the company to get the capex approved by AERA for tariff determination will remain critical. GHIAL has extended corporate guarantees to its subsidiaries and is required to extend funding support to the weaker subsidiaries (primarily for their debt servicing). However, with improved performance of major subsidiaries during last one year; including merger of Duty Free operations with Hotel asset, the need for support is likely to decrease going forward. Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.

Links to applicable criteria: Rating Methodology for Airports Corporate Credit Rating Methodology Company Profile GHIAL operates the Rajiv Gandhi International Airport at Shamshabad in Hyderabad. It commenced commercial operations on March 23, 2008. The company’s sponsors include GMR Airports Limited (63% holding), Malaysia Airport Holdings Berhad (MAHB) (11% holding), Airports Authority of India (AAI) (13% holding), and GoTS (13% holding). GHIAL has a 30-year concession for the development, maintenance and operation of the Shamshabad airport, which is extendable for 30 years at its option and another 30 years on mutual agreement. The airport was constructed at a total cost of Rs. 2920 crore with an initial handling capacity of 12 million passengers per annum. The master plan envisages a terminal capacity of 40 million passengers per annum, by the end of the 30-year term of the concession agreement.

Status of non-cooperation with previous CRA: Not applicable Any other information: Not Applicable Rating History for the last three years Table: Rating History S.No Name of Current Rating Instrument Type Rated Monthamount year & (Rs. Rating Crore) July 2017 1 2 3

5

Term Loans Cash Credit Limits Non-fund Based limits Unallocated Limits

Long Term Long Term Short Term

1,612.36

Long Term

11.24

55.00 75.00

[ICRA]AA (Stable) [ICRA]AA (Stable) [ICRA]A1+

[ICRA]AA (Stable)

Chronology of Rating History for the past 3 years MonthMonthMonth- year & Rating in year & year & FY2017 Rating in Rating in FY2016 FY2015 November August October August 2016 2016 2015 2014 [ICRA]AA[ICRA]A+ [ICRA]A- [ICRA]BBB (Stable) (Stable) (Stable) (Stable) [ICRA]AA[ICRA]A+ [ICRA]A- [ICRA]BBB (Stable) (Stable) (Stable) (Stable) [ICRA]A1+ [ICRA]A1 [ICRA]A2+ [ICRA]A3+

[ICRA]AA(Stable)

[ICRA]A+ (Stable)

-

Complexity level of the rated instrument: ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

-

Annexure-1 Details of Instrument Name of the instrument Term Loan Cash Credit Unallocated Limits Non-fund Based Limits Total (Source: GHIAL)

Date of issuance

Coupon rate

Maturity date

September-2016

-

-

-

April2029 -

-

-

-

Size of the issue (Rs. crore) 1,612.36 55.00 11.24 75.00 1,753.60

Current Rating and Outlook [ICRA]AA (Stable) [ICRA]A1+

Name and Contact Details of the Rating Analysts: Analyst Contacts K Ravichandran +91 44 4596 4301 [email protected]

Shubham Jain +91 124 4545306 [email protected]

Rajeshwar Burla +91 40 4067 6527 [email protected]

Name and Contact Details of Relationship Contact: L Shivakumar +91 22 3047 0005 [email protected]

About ICRA Limited: ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder. For more information, visit www.icra.in © Copyright, 2017, ICRA Limited. All Rights Reserved Contents may be used freely with due acknowledgement to ICRA ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icra.in or contact any ICRA office for the latest information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable, including the rated issuer. ICRA however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents.

Registered Office ICRA Limited 1105, Kailash Building, 11th Floor, 26, Kasturba Gandhi Marg, New Delhi 110001 Tel: +91-11-23357940-50, Fax: +91-11-23357014 Corporate Office Mr. Vivek Mathur Mobile: +91 9871221122 Email: [email protected] Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Ph: +91-124-4545310 (D), 4545300 / 4545800 (B) Fax; +91- 124-4050424 Mumbai Mr. L. Shivakumar Mobile: +91 9821086490 Email: [email protected]

Kolkata Mr. Jayanta Roy Mobile: +91 9903394664 Email: [email protected]

3rd Floor, Electric Mansion Appasaheb Marathe Marg, Prabhadevi Mumbai—400025, Board : +91-22-61796300; Fax: +91-22-24331390 Chennai Mr. Jayanta Chatterjee Mobile: +91 9845022459 Email: [email protected]

A-10 & 11, 3rd Floor, FMC Fortuna 234/3A, A.J.C. Bose Road Kolkata—700020 Tel +91-33-22876617/8839 22800008/22831411, Fax +91-33-22870728 Bangalore Mr. Jayanta Chatterjee Mobile: +91 9845022459 Email: [email protected]

5th Floor, Karumuttu Centre 634 Anna Salai, Nandanam Chennai—600035 Tel: +91-44-45964300; Fax: +91-44 24343663 Ahmedabad Mr. L. Shivakumar Mobile: +91 9821086490 Email: [email protected]

'The Millenia' Tower B, Unit No. 1004,10th Floor, Level 2 12-14, 1 & 2, Murphy Road, Bangalore 560 008 Tel: +91-80-43326400; Fax: +91-80-43326409 Pune Mr. L. Shivakumar Mobile: +91 9821086490 Email: [email protected]

907 & 908 Sakar -II, Ellisbridge, Ahmedabad- 380006 Tel: +91-79-26585049, 26585494, 26584924; Fax: +91-79-25569231 Hyderabad Mr. Jayanta Chatterjee Mobile: +91 9845022459 Email: [email protected]

5A, 5th Floor, Symphony, S.No. 210, CTS 3202, Range Hills Road, Shivajinagar,Pune-411 020 Tel: + 91-20-25561194-25560196; Fax: +91-2025561231

4th Floor, Shobhan, 6-3-927/A&B. Somajiguda, Raj Bhavan Road, Hyderabad—500083 Tel:- +91-40-40676500