Rating Rationale

Strengths
* Strong market position as the operator of the Indira Gandhi International Airport, Delhi
The company is the operator of the largest airport in India, with capacity of 6.2 crore passengers. Since commencement of operations in 2010, operational performance has remained sound; passenger traffic has increased at a compound annual growth rate of more than 12% (5.8 crore passengers in fiscal 2017). Delhi airport has a locational advantage as there is no other airport in northern India competing materially for international passenger traffic. CRISIL believes the attractive location, a near-monopoly status, and a large catchment area will ensure strong traffic growth over the medium term. This will benefit the non-aero revenue, which is expected to grow at a healthy rate of 9-14% annually over the medium term.

DIAL also has an upside potential from land monetisation. As a part of the agreement with the Airports Authority of India (AAI; rated 'CRISIL AAA/Stable'), DIAL has the right to develop about 230 acre of land around Delhi airport; out of this, 45 acre was leased out in fiscal 2010 and additional 23 acre in fiscal 2017. Over the long term, the non-aero revenue and cash flow from commercial property monetisation are expected to offset lower cash flow from aero revenue.

* Healthy debt service metrics and strong financial flexibility
Strong traffic growth, monopoly status, and an established track record enable healthy cash generation. Additionally, the company has refinanced its debt obligations at lower interest costs (effective rate of 9.6%, including hedging costs) and repayment moratoriums - bullet repayments of USD 289 million (about Rs 1900 crore) in fiscal 2022 and USD 522.6 million (about Rs 3400 crore) in fiscal 2027, leading to comfortable debt-service coverage ratios over the medium term. Although the Supreme Court ordered immediate implementation of the second control period order, resulting in around 89% decline in aeronautical revenue, the delay in its implementation has resulted in healthy build-up of liquidity of about Rs 2,800 crore as on March 31, 2017. CRISIL understands that this liquidity will be primarily used for the upcoming capital expenditure (capex) and not towards providing any supernormal dividends (not over Rs 200-250 crore per annum over the medium term) or loans/investments into group companies. Deviation in this understanding would be a rating sensitivity factor.

* Favourable business structure
DIAL is structured as a special-purpose vehicle and ring-fenced from its parent, the GMR group. Since commencement of operations in 2008, DIAL had announced its maiden dividend in fiscal 2017. Reduction in revenues over the near term may also lower DIALs ability to announce dividends over next few years. Further DIAL has not provided any loans and advances to its group companies in non-airport related businesses. Supervision by AAI for all strategy decisions and related-party transactions, and presence of an escrow account with a payment waterfall mechanism ensuring priority of debt repayment, also restricts free movement of funds within the group companies. CRISIL expects dividend flows and group company exposures to remain restricted over the medium term. Any change to the same will be a key rating sensitivity.

Weaknesses
* Exposure to risks associated with delay in tariff order and allowance of capex
The regulatory regime for airport operators in India is still evolving. Risks pertaining to timeliness of tariff orders and their implementation still persist and will affect airport operators when they seek a true-up either for lower-than-expected revenue or higher capex for past control periods. Also, there is an increasing regulatory scrutiny around capex. With DIAL planning significant capex to meet capacity constraints, timely allowance of the same by the regulator will be a monitorable.

* Exposure to project implementation risks
Capacity is proposed to be expanded over the next five to seven years at an estimated cost of Rs 4500-7000 crore. Although returns on this expansion will be considered at the time of determination of the third control period tariff, there are risks associated with cost overruns and disallowance of certain costs as a pass-through in the tariff. However, DIAL will likely benefit from the experience gained from the implementation of Terminal-3 in Delhi.

Outlook: Stable
CRISIL believes DIAL will continue to benefit over the medium term from its healthy business risk profile driven by a strong market position.

Upside scenario
* Higher-than-expected tariffs leading to significant improvement in debt protection metrics
* Non-aero revenue and commercial property monetisation ramp-up, and stabilisation of the regulatory scenario

Downside scenario
* Sharp deterioration in non-aeronautical revenues or higher-than-expected cash outflow, weakening credit metrics.