Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank loan facilities of Air India SATS Airport Services Private Limited (AISATS).

 

The operating income in fiscal 2023 stood at Rs 766 crore, a 38% growth on-year (albeit on a lower base of fiscal 2022). The adjusted earnings before interest, taxes, depreciation, and amortisation (adjusted EBITDA), however, witnessed a significant dip to ~7.5%[1] in fiscal 2023 against that of ~15.1%1 in the previous fiscal. The margin dip was primarily due to significant increase in manpower cost on account of increase in employee base as compared to pandemic affected fiscals and due to reduction in volume in cargo handling segment.

 

The financial risk profile of the company stands comfortable characterised by complete repayment of long-term debt in fiscal 2023. The liquidity profile also remains adequate with cash and equivalents were ~Rs 43 crore as on Aug 31, 2023 with timely realisation of receivables from AIL and Alliance Air in recent months. Going forward, with no major debt-funded capital expenditure (capex) plans and steady recovery of receivables, the debt levels are not expected to increase.

 

The company has incorporated four SPVs during fiscal 2023 – two of them have been formed for foraying into Ranchi and Raipur airports for increasing the business from cargo handling segment. Other two SPVs have been formed for developing Integrated Cargo Terminal (ICT) and Integrated Warehousing Logistics Zone (IWLZ) at the upcoming Noida International Airport (NIA) at Jewar, Uttar Pradesh. Both the projects at NIA are expected to be completed in multiple phases over a long period. The phase-1 of both the project has started which has a total cost of ~Rs 1200 crores. The projects will be funded by debt-to-equity proportion of 73:27 i.e. total debt of ~Rs 850 crore across both the projects. The equity of ~Rs 350 crore will be completely infused by the shareholders of AISATS – Air India Ltd (AIL) and SATS Limited and AISATS balance sheet will not be impacted due to any equity infusion or cost overruns in these projects.

 

The ratings continue to factor in the strong presence of AISATS in the airports that it operates in, its adequate financial risk profile and benefits from the business expertise of SATS Ltd (SATS; which holds 50% stake). These strengths are partially offset by exposure to risks arising from customer concentration, intense competition, and regulatory changes.

 

Any impact on the credit profile of AISATS due to leveraging on account of support required by these SPVs in any form shall be a key monitorable.

¹CRISIL Ratings has adjusted the EBITDA margins after taking into consideration the charges related to ROU assets. However, reported EBITDA margins for the fiscal 2023 and fiscal 2022 were 24.6% and 17.6% respectively.

Analytical Approach

CRISIL Ratings has considered consolidated financials of AISATS (consolidated subsidiaries as mentioned in the annexure). CRISIL Ratings has moderately consolidated two special purpose vehicles (SPVs) (namely AISATS Noida Cargo Terminal Private Limited and AISATS Noida Logistics Park Private Limited) to the extent of support required for these SPVs over the medium term.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong presence in the airport cargo segment and ground handling operations: AISATS is the market leader in the majority of the airports where it manages cargo and ground handling. Managerial and operational support from SATS helps attract international customers who have been associated with SATS at other Asian airports. Revenue in fiscal 2023 recorded a growth rate of 38% over a lower base of fiscal 2022, supported by the addition of customers and sustained demand from existing clients. Though the pandemic and subsequent lockdowns affected performance in fiscals 2021 and 2022, AISATS has benefited from recovery in domestic and international travel in fiscal 2023 with revenue reaching above the pre-pandemic levels.

 

• Improved financial risk profile: Financial risk profile has further improved in fiscal 2023 as long-term debt has been completely paid off in fiscal 2023 and the same is expected to remain strong with no major debt-funded capital expenditure (capex) plans and major receivables from Air India Limited and Alliance Air would be settled on a rolling basis by the end of December, 2023. This would also ease the working capital cycle and reduce the overall dependence on debt. Capital structure and debt protection metrics are likely to remain comfortable, as there are no plans to raise any major debt on the books of AISATS. Gearing should thus remain below 0.1 time and interest cover above 80 times over the medium term.

 

• Benefits from the business expertise of SATS: SATS has proven credentials in the cargo and ground handling business across major airports in the Asia-Pacific region. AISATS derives considerable benefits from the significant involvement of SATS in the management and operations of the joint venture (JV), In fact, several key management positions at AISATS are held by personnel of SATS on secondment basis. The operational expertise of SATS has helped AISATS improve the quality of its cargo and ground handling services substantially and maintain healthy relationships with prominent international airlines.

 

Weaknesses:

• Exposure to customer concentration risk: Though AISATS has added new customers, AIL formed nearly 36% of its revenue in fiscal 2023. Exposure to customer concentration risk is likely to persist as AISATS will function as a captive business unit for TPL, which comprises Vistara, Air Asia and AIL.

 

• Vulnerability to intense competition: Several established players have entered the cargo and ground handling business in India, encouraged by the growing passenger traffic and upgradation of airports. Though AISATS may continue to face intense competition, faster-than-expected expansion in all major airports and the ability to capture market share from existing players will be closely monitored.

 

• Susceptibility to regulatory changes: Government policies play a significant role in the ground handling business. The Airports Economic Regulatory Authority sets the tariffs. Any negative regulatory response to a fresh wave of covid in future may impact the business operations of AISATS. Any increase in competition may exert pressure on profitability.

Liquidity: Adequate

Expected cash accrual should suffice to cover the debt obligation over the medium term. Bank limit utilisation was negligible during the last 6 months ended July 2023. Utilisation has reduced gradually over the past few months, as receivables from AIL and Alliance Air were realised. Cash and equivalents were ~Rs 43 crore as on Aug 31, 2023. Further, the company had unutilised limit of Rs 149 crore as on the same date.

Outlook: Stable

The business and financial risk profile of AISATS should remain adequate over the medium term, driven by normalcy in operations, supported by a steady increase in cash accrual.

Rating Sensitivity Factors

Upward factors:

• Significant growth in scale of operations, and steady operating margin (after adjustment of charges related to ROU assets) of over 18-20% on a sustained basis, aiding cash flow generation.
• Significant market share of ground and cargo handling in new airports with adequate support from shareholders.

 

Downward factors:

• Sluggish business performance, with the drop in air travel, cargo volume and market share at airports, impacting revenue growth.
• Inability to improve operating profitability to above 13-15% margin (after adjustment of charges related to ROU assets) on a sustained basis.
• Material increase in debt due to a stretched receivable cycle or any large capex or support to SPVs, leading to moderation in debt metrics.

About the Company

AISATS was formed as an equal JV between AIL (currently held by TPL) and Singapore-based SATS. The company provides cargo and ground handling services at Indian airports. It commenced operations in 2008, at the Hyderabad and Bengaluru airports and functioned as an unincorporated JV until AIL finalised SATS as its partner for all Indian metro airports. Once the cabinet approval was received, AISATS was incorporated in April 2010, and all the JVs existing at that time, were transferred to the company in August 2010.

 

AISATS provides cargo handling services at the Bengaluru airport and ground handling services at airports in Bengaluru, Hyderabad, Delhi, Mangaluru (Karnataka) and Thiruvananthapuram (Kerala). It serves over 40 international and five Indian airline customers, including Air India, Emirates, Malaysia Airlines, Singapore Airlines, Air Vistara and Thai Airways.

 

About SATS

Established in 1972, Singapore-based SATS is a prominent provider of gateway services (ground and cargo handling services) and food solutions, primarily in the Asia-Pacific region. It is the leading ground and inflight catering service provider at the Singapore Airport (wherein the company controls 80% of the market share and handles around 60 airlines) and is present at over 60 locations in 13 countries. The company has established a network in Asia through its subsidiaries, associates and JVs in China, India, the Philippines, Indonesia, Taiwan, Vietnam and the Maldives.

Key Financial Indicators   (Consolidated)*

As on / for the period ended March 31	Units	2023	2022
Operating income	Rs crore	766	554
Profit after tax (PAT)	Rs crore	47	35
PAT margin	%	6.1	6.2
Adjusted debt/adjusted networth	Times	0.00	0.05
Interest coverage	Times	60.76	9.03

*CRISIL Ratings Adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Term Loan*	NA	NA	Dec-27	50	NA	CRISIL A+/Stable
NA	Term Loan*	NA	NA	Dec-24	17.5	NA	CRISIL A+/Stable
NA	Working Capital Demand Loan#	NA	NA	NA	10	NA	CRISIL A+/Stable
NA	Cash Credit##	NA	NA	NA	40	NA	CRISIL A+/Stable
NA	Overdraft Facility##	NA	NA	NA	34	NA	CRISIL A1
NA	Overdraft Facility##	NA	NA	NA	25	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	66	NA	CRISIL A1
NA	Working Capital Facility###	NA	NA	NA	75	NA	CRISIL A+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	307.5	NA	CRISIL A+/Stable

*Interchangeable with Buyer/s Credit

#Interchangeable with Cash Credit upto Rs. 8 crores and Sales Bill Discounting upto Rs. 10 crores.

##Fully Interchangeable with WCDL

###Interchangeable with Bank Guarantee to the extent of Rs. 75 crores, WCDL / Cash Credit / Overdraft of Rs. 33 crores