GMR Infrastructure Ltd’s plan to deleverage has run into turbulent weather.
Regulations that permit airline groups to hold only up to a 10% stake in Delhi International Airport Ltd (DIAL) may put to test the ₹8,000-crore investment plan of a Tata-led consortium into GMR Airports Ltd—a subsidiary of GMR Infrastructure, said a report by Business Standard. GMR Airports runs DIAL.
To be sure, there is a conflict of interest when an airline group holds a large stake in an airport. Post the deal, the Tata group, which owns stake in two airlines—Vistara and Air Asia India—would have an effective 20% stake in GMR Airports. In this case, the conflict of interest arises because GMR Airports holds a significant stake in DIAL. The concern is that Tatas’ 20% stake in GMR Airports may give the airlines owned by it an unfair edge over others.
Any delay in the deal will put GMR Infrastructure in a precarious position. Its net consolidated debt is as high as ₹20,000 crore. In Q1 FY20, the company’s interest outflow of ₹812 crore was higher than its earnings before interest, taxes, depreciation and amortization of ₹599 crore.
With the airports business faring better than the others—roads and power—over the years, the group’s decision to demerge and eventually monetize it, was its only recourse to lower mounting debt.
A section of analysts who are optimistic said that there were some examples globally, where airlines have a stake of more than 10% in airports. These examples could be cited to circumvent the regulatory hurdle. However, a delay in the Tata-led investment may jeopardize GMR Infrastructure’s debt reduction plans. And, this could have other repercussions, too.
Recently CARE Ratings Ltd assigned an A- to the company’s proposed ₹650 crore non-convertible bond issue. The rating rationale highlighted: “Additional bonds raised are expected to result in higher than envisaged debt levels, thereby weakening the financial risk profile of the company."
It is expected that the proposed deal with the Tata-led consortium will help GMR Airports repay ₹1,000 crore debt, besides retiring ₹7,000 crore of parent GMR Infrastructure’s corporate debt.
Meanwhile, in August, another rating agency, Icra Ltd, revised the outlook on DIAL’s instruments to negative. This is due to the increase in cost of airport expansion. “Further, the delay in tariff determination for the control period 3 (FY2020-FY2024) adds to the uncertainty about the future financial profile of the entity."
Both rating firms were not comfortable with DIAL’s ₹400 crore advance to GMR Infrastructure. This dilutes the comfort of ring-fencing its cash flows, especially against advances to entities in the group, which largely has weak liquidity.
To sum up, the need of the hour is for the Tata-led investment to fructify. If this runs aground, it would set a tough precedent not just for GMR Airports, but for the country’s airport privatization plans.