For a group that has built hundreds of kilometres of highways, power plants that supply electricity to millions and two of the busiest airports in India, debt repayment problems were surely a comedown for the GVK Group. 

But it was not entirely unexpected. Credit Suisse AG, in a 2012 report titled House of Debt, listed the 10 most indebted corporate houses in India. GVK made it to that list and the one that followed next year. Of that list, four including GVK have defaulted in the past year on some projects or bond payments, Credit Suisse pointed out in a note in April.

It took the GVK Group 25,600 crore of debt to become the conglomerate it is today after starting out 25 years ago with an asset base of 100 crore, on the way building India’s first independent power plant, the first six-lane road project and developing two of India’s largest airports, in Mumbai and Bengaluru.

It has 5,900 megawatts (MW) of power plants that are either operational or under development in India, from Andhra Pradesh in the south to Jammu and Kashmir in the north.

To date, it has invested around 20,000 crore and has projects worth some 30,000 crore in the pipeline.

GVK’s ambitions have not been limited to Indian shores. In 2011, it bought coal mines in Queensland in Australia for $1.26 billion. At the time, it also announced plans to set up a 500km rail line and a port capable of handling 80 million tonnes of freight yearly as part of a “pit-to-port" logistics project at a cost of $10 billion.

The debt it has on its books today is roughly what it costs to build a so-called ultra-mega power project capable of generating 4,000MW of electricity. In the quarter ended 30 June, the company’s interest costs rose 28% to 410.9 crore.

“Debt is what is killing us," A. Issac George, director and chief financial officer of GVK Power and Infrastructure Ltd, said last week at a press conference to announce the company’s earnings.

GVK Power and Infrastructure said it is in the process of reducing debt to the tune of 4,000 crore by the end of this financial year. The company said it is exploring various options—ranging from private placement to an initial public offering.

The company said its main focus would be retiring debt raised for the development of Mumbai and Bengaluru airports. The airport division has a debt of 3,500 crore, GVK said.

“We are working out all alternatives. The markets have been looking better than one year ago, so we hope at least by this fiscal year, we will be able to find some solution," said G.V. Sanjay Reddy, vice-chairman of GVK Power and Infrastructure.

GVK has been contemplating a public issue of its airport business, which includes Mumbai International Airport Ltd (MIAL), Bangalore International Airport Ltd (BIAL) and Bali airport in Indonesia, to retire a portion of debt. GVK said a reduction of 4,000 crore in debt will help the company reduce its interest burden by 600 crore a year.

In the quarter ended 30 June, GVK Infrastructure’s net loss narrowed to 124 crore from a net loss of 281.3 crore in the year-ago quarter. It has now posted losses for 15 consecutive quarters.

To be sure, other infrastructure conglomerates such as the GMR and Jaypee groups have also borrowed heavily to fund their growth, and found themselves weighed down by debt after India’s economic boom gave way to a downturn that it’s still struggling to emerge from.

“The infrastructure companies went on a project acquisition spree without considering cash flow issues and ignoring financial prudence. They funded most of the projects with debt, not with equity," said Narayan K. Seshadri, chairman, Tranzmute Capital and Management Pvt. Ltd, a business advisory firm.

A 13 August 2013 report by Credit Suisse said the debt levels of the GVK Group had increased, while its earnings before interest and tax (Ebit) had declined, leading to a fall in its interest coverage ratio—a measure of a company’s ability to service its debt.

A senior GVK executive conceded that infrastructure companies, including GVK, had overleveraged themselves in the process of implementing aggressive expansion plans.

“In an ideal world, infrastructure companies should have bid for an infrastructure project followed by bringing a private equity firm to raise money. But at that time, the ability of companies to raise equity dried up, owing to external factors and poor market conditions. This had affected infrastructure companies’ (ability) to service their debts," he said on condition of anonymity.

This executive said the downturn in the capital market had hurt GVK’s plans to raise equity to replace costly loans.

“The entire corporate sector, especially infrastructure companies, landed up in debt as they borrowed hugely from banks anticipating demand growth. Infrastructure companies including GVK Power had accumulated huge debt, but demand slowed down," said Hemindra Hazari, an independent banking consultant.

One of the biggest hurdles for the company has been getting coal and gas to fuel at least two power plants. One GVK subsidiary has a coal-based power plant in Punjab, valued at 3,889.86 crore. It has limited access to coal.

The power division posted a profit of 22 crore in the year-ago period, compared with a loss of 23.7 crore in the year-ago quarter.

“Management has obtained coal linkage for six months, tied up for importing coal and is mulling other options such as obtaining coal linkage locally and has filed petition with Punjab State Electricity Regulatory Commission for renegotiation of terms of power purchase agreement such as rate revision, approval for using imported coal etc, claiming force majeure and change in law as envisaged under power purchase agreement," the company said in a note on 13 August.

The airport holding company of GVK borrowed around 3,000 crore on hopes that a strategic investor will pick up an equity stake. GVK had signed a term sheet and was close to sealing a deal. But at the last minute, in August 2014, the investor backed out on grounds that it did not buy “the India story" any more, said the GVK executive cited above.

That was after the first budget by the Narendra Modi government in July 2014 stayed away from contentious issues of retrospective tax and General Anti-Avoidance Rules, disappointing many foreign investors.

The investor who backed out was to put in 2,200 crore in GVK’s airport subsidiary for a 26% stake.

The executive mentioned above said the GVK group had taken loans at the holding company level, for use by its airport units. The holding company could service debt only from the dividends received from these units, but they were finding it difficult to pay dividends.

“Call it an internal or external problem, we had to bear the burden of debt. The debt of the holding company is 3,000 crore and the interest charges is around 500-600 crore a year. It is still hurting the financials," the GVK executive admitted.

When the company’s 330MW Alaknanda hydropower plant in Uttarakhand was finally ready to be commissioned after several delays, floods hit the state in June 2013, causing large-scale devastation and delaying its start by more than two years.

The next big shock was from the Supreme Court.

Just when the company’s 540MW Goindwal Sahib Thermal power project in Tarn Taran, Punjab, was ready to be commissioned, the Supreme Court deallocated 214 coal blocks in September.

“The efforts of 10 years vanished in a couple of hours when the Supreme Court deallocated the mines. We had invested around 4,200 crore. Now, there is no coal," the GVK executive said.

And then, there was the case of missing gas supplies.

GVK signed a contract with Reliance Industries Ltd in 2009 for gas, but the company says the supplies never came through. “So, there were multiple problems that we were facing beyond our control," he said. The company had to shut down two of its three gas-based power plants in early 2014.

There has been some relief, of course, as evidenced by its power division returning to a profit in the quarter gone by.

“This improvement was mainly due to commencement of commercial operation of 330 megawatt Alaknanda hydro-power project during the quarter, limited operation of one unit of Gautami Power in the month of April on re-gasified liquefied natural gas and improved gas supply to Jegurupadu Phase-1 plant of GVK Industries Ltd," GVK said in its earnings statement.

“We will be back on track the moment we address the issue of high-cost debt. And we expect that we can sort that out shortly," he said.

A senior banker with a domestic investment banking firm said it would be tough, but not impossible, for GVK to emerge from beneath the mountain of debt that’s weighing it down. The group has created some solid assets and potential buyers are sniffing around some of its road and airport holdings, he said.

Viswanath Pilla in Hyderabad contributed to this story.

This is the last part in a series that looks at four infrastructure companies weighed down by debt that they are struggling to repay.

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