Estimated time of debt departure: Unclear

You would expect the company that runs two of India’s busiest airports to be an investors’ darling. But that’s not quite how it is for GVK Power & Infrastructure. From trading around ₹40 a couple of years ago, the company’s stock is down to ₹13 now. On their part, investors have had good reason to be spooked. The company has been posting a net loss since Q3FY12. For the latest quarter for which financials are available, GVK reported a net loss of ₹43.66 crore. Adding to the company’s woes is a gross consolidated debt of around ₹15,000 crore which translates to an interest outgo of over ₹700 crore every year. 

Certainly, the flagship power business hasn’t been doing too well. Operational performance has been deteriorating, with a total generation of 684 million units in Q2FY13 against 1,299 million units in the previous quarter. “The losses could continue for a few more quarters because of the shortage of gas supply for our power plants and the high interest burden,” says a candid Isaac George, chief financial officer, GVK Power & Infrastructure.

Still, there is a glimmer of hope here: the Andhra Pradesh government has agreed to allow two of GVK’s gas-based power plants (Jegurupadu Phase 1 and 2 and Gautami), among others, to run on imported liquefied natural gas, since they’re not getting sufficient supply from Reliance’s KG-D6 basin. “If this comes through, it will put us back on track,” says George. More significant for GVK, though, is a recent positive development in its airport business.

Cash counter 

While the airport business now brings in as much revenue as the power arm, it continues to drain cash. GVK’s attempts to bridge its cash flow requirements received a boost when the Airport Economic Regulatory Authority (AERA) decided that Mumbai International Airport (MIAL) — in which GVK has a 50.5% stake through its subsidiary GVK Airport Holdings — could continue to levy airport development fee (ADF) for another eight years. The earlier decision to discontinue the fee by January 2013 was overturned, although MIAL’s request to increase the levy to ₹200 for domestic passengers and ₹1,300 for international passengers (against the current ₹100 and ₹600, respectively) was rejected. AERA has said that a total ₹3,400 crore can be collected through ADF, including the ₹750 crore already collected from passengers since 2009. The fee will help bridge the funding gap of redeveloping the airport — against an earlier estimated ₹9,802 crore, the final cost of construction is now estimated at ₹12,070 crore. “This approval significantly addresses the overhang of the large funding gap that existed in financing the Mumbai airport capex,” write IDFC analysts Shirish Rane and Ashish Shah in a report.

There’s more. The company’s two-year wait to develop 200 acres of land around Mumbai airport may also soon be over. “We are waiting for just one sign-off from the chief minister. The moment it happens, we will start work on monetisation,” says George.

About 15-20 million sq ft can be developed on the land, where use is restricted to hotels, serviced apartments, office space and retail development. The marketing rights for the project, named GVK Sky City, has been bagged by property advisory Jones Lang LaSalle (JLL). 

Some 3.5 million sq ft will be developed in the first tranche, which will start by end-CY13. “We are waiting for permission from MMRDA and other local authorities,” says Anuj Puri, country head, JLL India. “The good thing GVK is doing is that it is not coming out with auctions till all the approvals are in place, which is why the process has taken a little longer. We expect that over the next two to three months, all approvals will be in place.” Six plots totalling 15 acres will come up for auction this year — since the government through Airports Authority of India (AAI) holds 26% in MIAL, there will be a public auction. The land will be given on 30-year lease to developers with the option to extend for another 30 years — MIAL will not develop the land, but will earn revenue through lease rentals. A January 8 report by JP Morgan Equity Research — perhaps the only report that views the company positively — values the airport land at ₹1,250 crore and has said that approval of monetisation of Mumbai airport land will be a positive. Nevertheless, other analysts remain sceptical of GVK’s future prospects — with good reason.

Heavy weather

A big overhang on the stock is GVK’s $1.26 billion acquisition of Australia’s Hancock Coal in 2011. “It is a negative because nobody knows the deal contours and how exactly it is going to pan out,” says Phillip Capital analyst Vibhor Singhal. While GVK Power holds just 10% in the project — the rest is held by GVK Coal Developers (Singapore), a subsidiary of group company GVK Natural Resources — it stands guarantee for 49% of the debt taken for making the acquisition. Analysts say this is not good governance, a charge George denies. “It would have been bad corporate governance if we had not disclosed this structure, but we did. Besides, this is not the final structure — the promoters may collapse their holding company into GVK Power plus there is the option to increase our stake,” he defends. Certainly, GVK Power has the option of increasing its stake in Hancock Coal to 49%, but that would mean additional equity requirement. “It would be a very bad idea,” cautions Singhal. “The company already has huge debt.” While the company is trying to reduce that — by selling stake in its airports and roads business — it hasn’t had any success yet.

In early January, the market celebrated briefly when GVK announced its exit from a road project in Madhya Pradesh. A year earlier, the company had signed a concession agreement with the National Highways Authority of India (NHAI) for four-laning the Shivpuri-Dewas section of NH-3. The ₹3,200-crore project was to be executed as a build-operate-transfer toll project with a 30-year concession period. But GVK backed out, citing delays in securing environmental clearances from the government — a Supreme Court ruling now makes it mandatory to get the green go-ahead even for projects involving extraction of minor minerals, and road projects use minor minerals such as boulders, fuller’s earth, quartzite and sandstone. “Bankers are no longer willing to fund projects that don’t have clearances,” points out M Murali, director general of the National Highways Builders Federation. So, when NHAI failed to get the necessary clearances, GVK sent a notice to terminate the project. The case is now being heard in the Delhi high court.

Rahul Metkar, an analyst with MSFL Research, says the real reason for the termination must be banks’ refusal to give GVK loans on favourable terms or the company may have had problems with financial closure. “GVK bid for this project when there was euphoria in the market. With the economy not doing well, the road sector is seeing a slowdown. This could have influenced the company’s decision to quit the project,” he adds. But the fallout of this decision is still not clear. Murali says if GVK loses in court, it will have to forfeit part or all of the 10% project cost it had submitted as performance guarantee. Worse, the developer could be blacklisted by NHAI for anywhere up to three or five years. 

Of course, there is a chance that GVK could win the case. “Partially, NHAI is at fault because it is supposed to get clearances by the time the concession agreement is signed,” points out Murali. If the company gets a favourable ruling it could ask NHAI to make good the investment it’s already sunk into the terminated project. A month after signing the concession agreement, GVK hired L&T Construction and KNR Construction as contractors, which, in turn, signed on some 200 people. In the year it waited for clearances, the company had already spent some ₹300-400 crore out of its ₹1,300-crore equity commitment. But if it does petition for recovery of funds, the case will certainly go into arbitration — NHAI already has arbitration cases worth over ₹10,000 crore and it may be well over three years before the case is resolved.

Guided landing

Where the roads business is muddled in litigation, even the airports segment is not without hurdles. The Mumbai and Bengaluru airports saw traffic decline on a year-on-year basis in Q3FY13 — while passenger traffic was down 8% and 10% at these airports, cargo movement had declined 4% and 0.3%, respectively. More worrying, though, is the ₹1,763-crore bridge loan GVK took to increase its stake and become the largest shareholders in these airports. 

GVK part-financed the stake acquisition by securitising its toll collections at subsidiary company Jaipur-Kishangarh Expressway. GVK’s plan to refinance this debt with relatively cheaper USD funding has not materialised yet, wrote BNP Paribas analyst Vishal Sharma in his earlier report. Metkar adds, “The additional stake acquired has not resulted in any cash flow. That is why GVK continues to rely on other project companies to pay interest on the bridge loan.”

To tide over this crunch, GVK is negotiating with a few private equity players to dilute its stake in GVK Airport Holdings. Metkar says the company is looking to raise $250-300 million equity through this, which will help it save at least ₹80-85 crore on interest expense. George, though, thinks the saving will be much higher. “If this deal comes through, we will save close to Rs 400 crore on a debt of ₹3,000 crore,” he says. “We expect to raise ₹3,000 crore, for which we may have to dilute 30-33% stake. But we are prepared to dilute even up to 49% stake, depending on the valuation.” This is the second time GVK is seeking an investor in the airports business after Changi Airports Group backed out of investing ₹2,200 crore for a 26% stake in March 2012. 

The latest development is an internal transfer of promoter shareholding. Stock exchange filings show that matriarch G Indira Krishna Reddy has moved about 5% of her holding to son GV Sanjay Reddy. Analysts say a possible reason is a re-jigging of responsibilities among the promoters. Given that the family is close knit, such a move could also mean that either the promoters might resort to pledging shares or better still, could be in the final stages of selling a stake to a strategic investor. GVK is openly scouting for investors, so the latter could be a likely reason. Group chairman GVK Reddy himself dismisses such a development. “This means nothing. It’s just an internal transfer of shares and does not imply selling or pledging of shares,” he says. 

Despite lagging in the market for so long, most analysts continue to remain deeply sceptical of GVK Power. The poor performance of the gas-based power plants, muted traffic growth in the road segment and the questions around the Hancock deal has led to most analysts rating it as an “under-performer”. Singhal concludes, “There are a lot of moving parts and investors don’t like to invest where there are many moving parts.”