INDUSTRY OUTLOOK

AIRPORT

INTRODUCTION

The primary responsibility for the development and management of Indian airports has been with the Gov- ernment of (GoI) through the Ministry of Civil Aviation (MoCA)-controlled Airports Authority of India (AAI).During the last decade, the Indian aviation industry reported healthy growth following liberali- sation of the airlines industry, advent of low-cost carriers, competition-induced decline in travel costs etc¹.

CAPITAL MARKET SIZE

EXPENDITURE The international and domestic aircraft movements have witnessed an (Capex) PLANS increase of 9.5 per cent and 13.9 per cent respectively resulting into 13.0 percent increase in total aircraft movements during Airports Authority of India (AAI) (April- February) 2017-18 has chalked out a programme for as compared to upgradation of airports with an (April- February) 2016-17; expenditure of Rs 18,000 crore in whereas the international the next four years³. and domestic passengers The capital expenditure is project- traffic have shown an edto be around Rs 4,100 crore for increase of 10.1% and 2018-19. 17.4 % respectively resulting into overall increase of 15.8 % in total passenger traffic during the period (April- February) 2017-18 as compared to (April- February) 2016-17. Further, the international and domestic freight traffic have shown growth of 17.2 % and 8.0 % respectively resulting into overall increase of 13.7 % in total freight traffic during the period (April- February) 2017-18 as compared to (April- February) 2016-17². REGIONAL CONNECTIVITY SCHEME

Last Year, Regional connectivity scheme of UDAN (Ude Services, Turbo Aviation, Zoom Air and Pinnacle Desh ka Aam Nagrik) initiated by the Government of are some of the new private players. India (GoI) shall connect 56 unserved airports and 31 unserved helipads across the country. UDAN is the The Union Budget 2018 stated that the Airport Government’s initiative to make air travel to India’s tier Authority of India (AAI) has 124 airports and II and tier III cities affordable to the common people by proposed to expand airport capacity more than placing/connecting smaller cities and remote regions five times to handle a billion trips a year under a on the aviation map. Under the scheme, the Govern- new initiative- NABH Nirman; this expansion will ment offers incentives to airlines to flag off new flights be funded by leveraging the balance sheet of to neglected smaller cities and towns by providing Airport Authority of India (AAI). The AAI is likely to Viability Gap Funding (VGF) to make these operations invest INR 15,000 Crore in FY2018-19 to expand profitable. Airlines are required to bid for exclusive existing terminal buildings as well as construct new rights to fly on the regional routes opened up under the buildings. scheme. Heritage Aviation, Maritime Energy Heli Air

the State Civil Aviation Department, while another Rs. 1500 crore will be provided by the Devel- opment Authority. An amount of Rs. 500 crore each, shall be shared by Authority and Industrial Development Author- ity (YEIDA) respectively. Around 1441 hectares have been identified in the first phase of the project. The airport is expected to start operation in The international and domestic aircraft movements have witnessed an 2022-23, with an initial capacity of 60 lakh passen- increase of 9.5 per cent and 13.9 per cent respectively resulting into gers. The airport is expected to have 4 runways (2 in 13.0 percent increase in total aircraft movements during 1st phase; 2 in 2nd phase) to cater over 300 million (April- February) 2017-18 passengers. Site clearance for the project was grant- as compared to ed by the Ministry of Civil Aviation (MoCA) on July (April- February) 2016-17; 6, 2017, and the Government whereas the international RECENT DEVELOPMENTS appointed Yamuna Expressway Industrial Develop- and domestic passengers ment Authority (YEIDA) as the implementing agency traffic have shown an • An airport at international level, that will be locat- on its behalf in October 2017. used to be a increase of 10.1% and ed at Jewar in the northern state of Uttar Pradesh and part of the Bulandshahr district but now is a Nagar 17.4 % respectively resulting into overall increase of 15.8 % in total 72km from the Indira Gandhi International Panchayat in the Gautam Buddha Nagar district. passenger traffic during the period (April- February) 2017-18 as airport, to "decongest" Delhi airport, got approval The area with a population of 32,000. YEIDA has compared to (April- February) 2016-17. Further, the international and recently to be built under the Public Private Partner- identified nine villages which have to be acquired ship model (PPP); estimated to spread over 3,000 for the airport; however, land acquisition issue is hectares of land. The Uttar Pradesh government is likely to be less prominent provided farmers receive likely to spend Rs. 4000 crore for land acquisition for adequate compensation. the Noida international near Jewar. Out of this amount, Rs.1500 will be spent by • On 26 February 2018, Jammu-Bhatinda flight service began from under Ude Desh ka Aam Nagrik(UDAN) regional connectivity scheme. in western has been completed at INR 200 crore. Foundation stone of Navi Mumbai airport is underway; where the City and Industrial Development Corporation of Maharashtra (CIDCO) is facing an arduous task of relocating project affected persons and flattening the Ulwe hill and diverting Ulwe river; hill operation and rehabilitation of local habitants also got delayed due to monsoon challenges.

MAJOR PLAYERS assumption that the transaction takes place on or before December 1, 2018. GMR Hyderabad Inter- national Airport Limited (GHAIL) has a concession GMR Infrastructure Ltd period of 60 years starting March 2008. The infra- structure company is in the process of taking up GMR Airports Ltd, a subsidiary of GMR Infrastructure Airports Authority of India (AAI) expansion of the Hyderabad airport with an outlay Ltd and part of GMR Group, has entered into an has chalked out a programme for of over Rs.2,500 crore. It has recently raised $350 agreement with Malaysia Airports Holdings Berhard upgradation of airports with an million by offer of bonds for expansion and repay- (MAHB) to acquire the 11 per cent stake that the expenditure of Rs 18,000 crore in ment of older debt. However, possibility of further latter holds in GMR Hyderabad International Airport the next four years³. financial leverage due to expansion might pose a Thefor capital Rs.484 expenditure crore (about is projected$ 76 million). In a regulatory challenge. to filingbe around made Rs to 4,100 exchange, crore forGMR had informed it will 2018-19.acquire 4.15 crore shares of ₹10 each from MAHB, equivalent to 11 per cent equity in the airport, sub- GVK Power & Infrastructure Ltd ject to regulatory approvals. Thus far, GMR held 63 per cent equity stake through its airports arm and Mumbai International Airport (MIAL) operator GVK with the acquisition of 11 per cent stake from MAHB Power and Infrastructure is building Mumbai's second it goes up to 74 per cent. Of the remaining stake, airport and will raise up to $1b by issuing dollar while the Airports Authority of India holds 13 per bonds to fund the Greenfield project and refinance cent, the balance stake of 13 per cent is with the existing debt. The proposed overseas securities would Telangana government. As per the transaction be of "144A" nature, where institutional buyers across arrangement, the price is based on the Asia, Europe and the US can invest. The bonds may have five-ten year maturities. Going by the latest tra, owns the rest. GVK's total debt was about Rs market trend, the bonds may offer coupons in the 5,811 crore as on March 31, 2017, which was 5% range of 5-10% as the company is rated below less a year earlier, show data from Bloomberg. Total investment grade. The company has to seek a fresh debt was Rs 22,464 crore three years ago. During re-rating for its proposed offshore bond-sale, which the July-September quarter, GVK reported a net loss could be marked as high-yield by any global rating of Rs 77 crore. Recently GVK also expressed interest company. Since GVK is burdened with debt, GVK will in running the Airport Authority of India’s Ahmedabad raise money either to refinance or fund new projects. and Jaipur airports; GVK has submitted bids for In October last year, the Maharashtra government taking over maintenance and operations of the two approved GVK's bid for the Rs 16,000-crore Navi profit-making airports belonging to the Airport Mumbai airport project. A special purpose vehicle Authority of India (AAI). While Ahmedabad handles (subsidiary), Navi Mumbai International Airport Pvt 8.42 million passengers annually, Jaipur currently Ltd, is building the airport. GVK holds about caters to 4.34 million tourists each year. three-fourths ownership in the company while City and Industrial Development Corporation (CIDCO), the nodal authority of the government of Maharash FUTURE OUTLOOK

• In December 2017, the International Air Transport Association (IATA) increased its estimates for 2018 industry net profit to $38.4 billion. Passenger numbers are expected to increase to 4.3 billion in 2018.

• India is poised to become the third largest civil aviation market by 2020 and the largest by 2030. Freight traffic on airports in India is expected to cross 11.4 million tonnes by 2032. Growth in import and export in India will be the key driver for growth in freight traffic as 30 per cent of total trade is undertaken via airways.

• Government of India (GoI) is also encouraging private participation and PPP route. Domestic passenger traffic is also likely to increase in near future. Passengers carried by domestic airlines during Jan-Mar 2018 were 337.90 lakhs as against 272.79 lakhs during the corresponding period of previous year thereby register- ing a growth of 23.87 % (see Annexure, Chart 1). A growing middle class, under penetration of the sector, fleet augmentation plans, exploring new routes under UDAN scheme are supposed to increase passenger traffic.

• In spite of a strong order book of aircraft by , demand is likely to outpace capacity growth due to slot constraints at certain airports coupled with other infrastructure bottlenecks as well as slow deliveries of aircraft. Novel technologies that will take challenges of fuel efficiency by cutting operating and mainte- nance costs is a key for improving margins for industry players.

• Potential risks, like rising oil prices, operational costs, increasing competition might impact airlines yields.

• Regarding regional outlook, challenges and areas of stress do vary by region. It seems that optimism levels highest for China and Asia in general, although pockets of stress in South East Asia are a concern for some.

• New entrants to the leasing space and the desire for scale to heighten efficiencies and cut costs is driving consolidation in the leasing market; nevertheless, it seems there will be more smaller scale deals than larger scale mergers although there remains the potential for some larger scale transactions, particularly if the market changes.

• Private companies like GVK, GMR are saddled with debt and future expansion through further financial leverage can pose a challenge for such companies. For instance, about 90% of GMR Enterprises sharehold- ing in listed GMR infra was pledged to lenders. The promoter group of GMR Holding Company is also explor- ing to restructure a portion of its Rs. 4000 crore debt liability. GMR has planned a Rs 5,000-crore IPO of its airports division, that might be delayed due to ongoing dispute with a group of private equity (PE) investors led by Macquaire Group.

ANNEXURE

Chart 1: Passenger Growth (Passengers carried by domestic airlines during Jan-Mar 2018 were 337.90 lakhs as against 272.79 lakhs during the corresponding period of previous year thereby registering a growth of 23.87 %)

Source: Director General of Civil Aviation (DGCA)

FOOTNOTES

¹Privatisation of airports became visible with the award of build-operate-transfer (BOT) concessions to private players for greenfield airports at Bengaluru and Hyderabad in 2004, followed by the privatisation of the existing airports at Delhi and Mumbai in 2006. Furthermore, attempts to revive defunct airports and developing greenfield airports was also underway. Gradually, airport development projects are increasingly being implemented through project-specific special purpose vehicles (SPVs) in which the debt is raised to fund part of the project cost. An independent regulator, Airports Economic Regulatory Authority (AERA),has been formed for overhauling regulatory affairs. ²According to latest February 2018 data from Airport Authority of India (AAI), URL: https://www.aai.aero/sites/default/files/traf- fic-news/TR%20of%20%20Feb%202018.pdf ³https://economictimes.indiatimes.com/industry/transporta- tion/airlines-/-aviation/aai-chalks-out-rs-18000-crore-capex-plan-for-next-four-years/articleshow/63219471.cms; accessed on 4 July 2018. 4 http://www.newindianexpress.com/business/2018/jan/21/aai-to-raise-funds-to-meet-capital-expenditure-requirements-1760139.html; accessed on 4 July 2018. 5 https://indianexpress.com/article/business/budget/udan-to-connect-56-unserved-airports-says-arun-jaitley-5047594/ 6 http://www.thehindubusinessline.com/opinion/columns/slate/all-you-want-to-know-about---scheme/article22563182.ece; accessed on 12February2018. 7 https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/aai-to-invest-rs-15000-crore-on-airport-terminals-in-fy19/articleshow/62947624.cms 8 “AAI to invest Rs 15,000 crore on airport terminals in FY19” (16 February 2018), Economic Times, URL: https://economictimes.indiatimes.com/industry/transporta- tion/airlines-/-aviation/aai-to-invest-rs-15000-crore-on-airport-terminals-in-fy19/articleshow/62947624.cms. 9 Techno-Economic Feasibility Study for this project is done by PWC that states-Capacity constraint at Delhi airport along with the horizontal expansion of the city has necessitated requirement of a new airport. 10 https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/jewar-airport-rs-4000-crore-to-be-spent-on-land-acquisition/articleshow/64483350.cms; accessed on 4 July 2018. 11 The airport was a big political promise by Prime Minister during the 2014 Lok Sabha and 2017 UP Assembly polls. The NDA is pushing for a December start of the project, barely a couple of months before the campaign for 2019 make or break Lok Sabha polls. 12 ‘Centre clears Noida Airport project in Jewar (24 April 2018); URL: https://www.indiatoday.in/india/story/centre-clears-noida-airport-project-in-jewar-1218711-2018-04-24; accessed on 24 April 2018. 13 Airport Authority of India (AAI) Quarterly Newsletter, April-June 2018. 14 https://timesofindia.indiatimes.com/city/navi-mumbai/cidco-plans-to-go-full-blast-to-meet-navi-mumbai-airports-2019-deadline/articleshow/63902552.cms; accessed on 25 April 2018. 15 “GMR Airports to acquire MAHB's stake in GMR Hyderabad airport” (3 February 2018); URL: https://www.thehindubusinessline.com/companies/gmr-air- ports-to-acquire-mahbs-stake-in-gmr-hyderabad-airport/article22641876.ece 16 Moody’s Investor Service, in a credit rating statement in October 2017, states that- The ratings could be downgraded if there is a deterioration in financial leverage that is beyond base case expectation, and which could be due to a larger expansion program, or missteps in implementing the expansion project, or a reduction in aeronautical and/or non-aero- nautical revenues relative to Moody’s base case expectation. See, https://www.moodys.com/research/Moodys-as- signs-first-time-Ba1-rating-to-GMR-Hyderabad-International--PR_373511; accessed on 25 April 2018. 17 “GVK to raise up to $1 billion to fund Navi Mumbai airport “ (12 Feb 2018); URL: https://economictimes.indiatimes.com/mar- kets/stocks/news/gvk-to-raise-up-to-1-billion-to-fund-navi-mumbai-airport/articleshow/62880182.cms; accessed on 12 February 2018. https://www.financialexpress.com/industry/gvk-wants-to-run-ahmedabad-jaipur-airports/1143219/ 19 “GMR seeks to restructure portion of its Rs. 4,000 crore debt liability” (20 April 2018), , URL: https://economictimes.indiatimes.com/industry/banking/fi- nance/gmr-seeks-to-restructure-portion-of-its-rs-4000-crore-debt-liability/articleshow/63838898.cms Infomerics Valuation And Rating Pvt. Ltd. SEBI REGISTERED / RBI ACCREDITED / NSIC EMPANELLED CREDIT RATING AGENCY

CONTACT DETAILS Mr. Sankhanath Bandyopadhyay (Economist) Phone:011-24654796

REGISTERED & HEAD OFFICE Mr. Anuj Garg Telephone no: 011-24654796; E-mail:[email protected] # 104/106/108, 1st Floor, Golf Apartments, Sujan Singh Park Maharishi Ramanna Marg, - 110003, India.

CORPORATE OFFICE Mr. Chirag Ganguly Telephone no: +91-22-4003-6966, E-mail: [email protected] # 214/315, Turf Estate Building, Dr. E. Moses Road, Mahalakshmi, Mumbai - 400011, India.

EAST INDIA OFFICE Ms Arunima Guha Telephone no: +91-033-46022266; Email:[email protected] #202, 2nd Floor, Justice Court, 2/3 Justice Dwarkanath Road, Near Elgin Road Lee Road Crossing, - 700020, India

AHMEDABAD OFFICE Mr. Dheeraj Jaiswal E-mail Id: [email protected] Banglow No. –4, Rajtilak Banglow, Opp I.O.C. Petrol Pump, Bhopal, Ahmedabad – 380058

Disclaimer ‘ Infomerics Valuation And Rating Private Limited has taken due care and caution in preparing the report and information is based from sources which it believes to be reliable and authentic. However, Infomerics Valuation and Rating Private Limited does not guarantee the accuracy, timeliness, adequacy or completeness of any information and is not responsible for any errors or omissions. Use of information and data contained in this report is at user’s own and sole risk.The management of Infomerics Valuation and Rating Private Limited are not liable for the results obtained and interpreted from the use of such information.’