Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of GMR Hyderabad International Airport Ltd (GHIAL) to ‘CRISIL AA+/Stable’ from ‘CRISIL AA/Positive’.

 

The rating upgrade is driven by strong growth in passenger traffic and non-aeronautical revenues, which is likely to lead to better-than-expected traffic of over 24 million. In fact, passenger traffic for the first eight months of fiscal 2024 was 16.3 million, registering 10.5% growth over the corresponding period of pre-pandemic fiscal 2020. It is also higher than the all-India average. Also, as per CRISIL Ratings, non-aeronautical revenues for fiscal 2024 are expected to be around Rs 550 crore, driven by strong traction during the year. Non-aeronautical revenues were at Rs 134 crore for the second quarter of this fiscal and Rs 139 crore for the third quarter, against expectation of Rs 130 crore on quarterly basis.

 

Furthermore, the sector has demonstrated healthy financial flexibility through continued debt and equity capital availability. This conducive capital availability was also seen for GHIAL when it raised over Rs 1,990 crore of debt capital from domestic markets in fiscal 2023 at competitive rates.

 

The rating continues to reflect the company’s diversified revenue profile with structured returns on its regulatory asset base (RAB) under the hybrid till mechanism, strong position as an exclusive operator of the Rajiv Gandhi International Airport (RGIA) at Hyderabad, and above-average financial profile with ring-fenced financing structure. These strengths are partially offset by exposure to project implementation and regulatory risks.

 

The GMR group is in the process of merging GMR Airports Limited and GMR Airport Infrastructure Ltd. Post merger, GMR Airport Infrastructure Ltd, the resultant entity and the current indirect holding company of GHIAL, will have GMR group and Groupe ADP as co-promoters with commensurate board representation. This would lead to a stronger corporate structure and boost financial flexibility.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of GHIAL and its subsidiaries including GMR Air Cargo and Aerospace Engineering Ltd, GMR Hyderabad Aviation SEZ Ltd, GMR Hospitality and Retail Ltd, and GMR Hyderabad Aerotropolis Ltd (rated ‘CRISIL AA+/Stable’). This is because all these companies, collectively referred to as GHIAL, are in allied businesses and under common management.

 

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:

• Diversified revenue profile with regulated returns under the hybrid till mechanism: The company has a regulated revenue profile, which provides for fixed returns on RAB and upside potential on 70% of the non-aero revenue under the hybrid till mechanism. Nearly 63% of revenue in fiscal 2023 was in the form of aero charges regulated by the Airports Economic Regulatory Authority (AERA) of India. Regulation provides for true up of aero revenue, in case of any variation in traffic or change in capital expenditure (capex), aero operating expense and aero tax. This lends stability to the company’s revenue base. There exists track record of true ups allowed in the past pertaining to operating expenses/capex/ARR on actuals.

 

Lockdowns, restrictions on movement of people and overall economic slowdown had impacted the traffic with GHIAL handling only 8 million passengers in fiscal 2021 against 21.6 million in fiscal 2020. Traffic recovered in fiscal 2022 to touch 12.4 million passengers (55% increase from fiscal 2021) and 21 million passengers (97% of fiscal 2020) in fiscal 2023. Strong market position within a defined catchment area is expected to restore passenger volumes and healthy growth as seen in the past. Furthermore, revival in the economy and corporate travel is likely to provide a moderate growth of 10% in fiscal 2024 (over fiscal 2023 volumes).

 

• Strong position as the operator of the RGIA: RGIA is the sixth largest airport in the country in terms of passengers handled with a total of 21.7 million in fiscal 2020. Since commencement of operations in 2008, passenger traffic increased at a compound annual growth rate (CAGR) of more than 10% till fiscal 2020, amongst the highest in the country. The airport is favourably located with major domestic and international destinations being within a flying radius of 2-5 hours. This is expected to help develop the airport as an aero hub for both passengers as well as cargo, in the long run. Furthermore, as per the concession agreement, GHIAL has an exclusivity right that no new airport shall be permitted by the government within an aerial distance of 150 kilometre before the 25th year of its operations (2033). The favourable location and growing economy of Hyderabad are expected to ensure healthy growth in traffic over the medium term.

 

• Strong financial profile with a ring-fenced structure: GHIAL is structured as a special purpose vehicle and is ring-fenced from its parent, the GMR group. The financial profile is expected to be strong as seen from expected average debt service coverage ratio (DSCR) under CRISIL Ratings’ sensitised projections. Furthermore, the board level representation of the Airports Authority of India (AAI; rated ‘CRISIL AAA/Stable’) and the Government of Telangana, as well as the presence of an escrow account with a payment waterfall mechanism, ensures priority of debt repayment. Liquidity is expected to be sufficient for meeting the obligation towards equity contribution for future capex and for requirements of the subsidiaries. Any deviation from this expectation, most likely, excess dividend distribution by GHIAL to its promoters, will be a rating sensitivity factor.

 

The GMR group is in the process of merging GMR Airports Limited and GMR Airport Infrastructure Ltd. Post merger, GMR Airport Infrastructure Ltd, the resultant entity and the current indirect holding company of GHIAL, will have GMR group and Groupe ADP as co-promoters with commensurate board representation. This would lead to a stronger corporate structure and boost financial flexibility.

 

Weaknesses:

• Regulatory risk leading to uncertainty of cash flow: The regulatory regime for domestic airport operators is evolving. Although regulations have been largely favourable for the developers in recent years, some risks associated with regulatory uncertainty persist.

 

This was seen in tariff order for CP 3 (April 1, 2021, to March 31, 2026), which was released in August 2021. It provided GHIAL lower aeronautical revenue by ~Rs 669 crore within CP 3 by delaying/ holding ramp up in tariffs (expected to be recovered in CP 4 with carrying costs). The authority has also reduced tariff rates in the fourth quarter of fiscal 2026. Additionally, GHIAL has been given lower allowance of operating expenses (approved Rs ~2,529 crore over CP 3 tenure) against expectations.

 

• Exposure to project implementation risks: The company plans to increase its capacity over the next 20 years in a phased manner. The current expansion is for 34 million passengers per annum from the current 12 million passengers per annum. It is expected to be completed by end of fiscal 2024, at an estimated cost of over Rs 6,600 crore. The capex is to be financed in debt-to-equity ratio of 70:30. Because of large capex, although it is approved in the CP 3 tariff order, GHIAL is exposed to risks associated with project implementation. Nevertheless, given that it has achieved 98% physical progress as of December 2023, the risk is limited.

Liquidity: Strong

CRISIL Ratings expects net cash accrual for fiscals 2024 and 2025 to be more than Rs 600 crore per annum. Liquidity is sufficient to meet near-term debt, operating expenses and capex. GHIAL has cash and equivalent of around Rs 1,539 crore, exclusive of Rs 150 crore of undrawn working capital demand loan (WCDL) as on September 30, 2023. The company has bond repayment in April 2024, which is expected to be refinanced before the end of March 2024.

Outlook: Stable

GHIAL will benefit from ramp up in overall revenue, driven by a strong market position and growth in passenger traffic.

Rating Sensitivity Factors

Upward factors:

• Materially faster-than-expected ramp-up in non-aero revenue (against the base case expectation of CRISIL Ratings of Rs 610 crore in fiscal 2025) resulting in improvement in expected debt service cushions
• Material improvement in capital structure leading to improvement in the financial profile in the long term

 

Downward factors:

• Material deterioration in air traffic (compared to current expectation of 25 million passengers) and non-aero revenues in fiscal 2025 (compared to current expectation of Rs 610 crore)
• Lowering of liquidity compared to the expectations of CRISIL Ratings or cost/time overrun in ongoing capacity expansion

About the Company

GHIAL was incorporated for the construction, operation, maintenance and subsequent expansion of RGIA in Hyderabad under a 30-year concession agreement expiring in 2038 (extended till 2068 in May 2022). The company is a joint venture between the GMR group (74% held through GMR Airports Ltd), AAI (13%) and Government of Telangana (13%).

Any other information: Not Applicable