Where does GVK want to be in the next five years? What is your key focus area for growth?

Though it will be difficult to quantify revenues and profits, we have set some quantitative targets in terms of capacities. We will like to grow big time in power and it will remain our focus area. Over the next five years, we want to add another 5,000 mw to our existing capacity of 2,141 mw, of which 900 mw is operational and others are under various stages of development. We did not make much headway into roads because competition had intensified. However, we believe that because of the new minister and the government keen on getting its act together, there will be lot of opportunities and we certainly want to be a participant in the sector’s growth. We have been short-listed for 12 projects and hope to bag a couple of good projects. Eventually, we want to grow our 100 km road portfolio to 1,000 km in five years. These are the two focus areas going ahead.

In airports, currently we have 37 per cent stake in Mumbai International Airport (MIAL) and have recently bought 12 per cent in Bangalore International Airport (BIAL). We have right of first refusal on the Navi Mumbai airport. Our target is to have at least 100 million passengers. Though airports will also be a growth driver, there are limitations to growing the business as Mumbai, Delhi, Hyderabad and Bangalore airports have been given for development, while airports in other metros are unlikely to be privatised.

Strong Numbers

Recent commissioning of power projects will boost the financials

What is the capex plan for achieving these targets?

Today, we have capitalised assets (gross block) of around Rs 6,000 crore, which mainly consists of power and roads. The capex in airports is low as they are in the construction phase. Capitalisation in airports will happen as and when we start putting our assets to use.

We have around Rs 18,000 crore worth of projects in the pipeline, which will fructify by December 2013. Of this, airports will account for Rs 10,000 crore and the rest will be in power. As and when we win some road projects and go for expansion of the Bangalore airport, the numbers will increase.

So you will be constantly raising capital for your growth. But wouldn’t that stretch your balance sheet?

For our capex of Rs 18,000 crore, the debt to equity ratio (D/E) will be roughly 75:25. Our D/E structure generally ranges between 80:20 and 70:30. Funding requirements have been mostly tied up, except the Rs 2,500 crore capex for the Goriganga hydro project. Most of the equity has been put in projects such as MIAL, Goindwal Sahib and Alaknanda.

Besides, the listed entity has a cash balance of Rs 600 crore. As far as stretching the balance sheet goes, it is important to understand that cash is the raw material for infrastructure projects. There is a huge amount of cash involved in funding such projects.

So we have no choice but to continuously tap the market. But thus far there has been no problem in raising capital from the market.

In the remaining part of this fiscal, there is a possibility of raising capital to fund our acquisitions. In the Bangalore airport, we will need money to buy additional stake. We are evaluating certain proposals in the power sector, which will require funding as well.

What will the scenario for profitability be over the next few years?

We avoid projects which are below our threshold returns. Our benchmark internal rate of return is 18 per cent.

In power, we have a mix of regulated and non-regulated returns. In regulated return-based projects, the returns are based on CERC guidelines, which allows a maximum return on equity of 15.5 per cent with half a per cent thrown in if you complete the project in time. However, not all our projects are based on CERC guidelines. For instance, in Jegurupadu-II and Gautami in Andhra Pradesh, which are tariff-based projects and also have 20 per cent capacity merchant sales, the returns will be much higher depending on the realisation from merchant sales.

Total Control

GVK always strives to have controlling stake in its businesses

How do you differentiate from peers, particularly GMR, which have similar businesses?

We have been growing slowly and steadily. And I think, possibly, that’s our strength and that’s what differentiates us from other companies.

We are not an aggressive bidder. If it makes commercial sense for us and meets our threshold targets, then we bid for projects. If volumes were our focus, we would have been in a different league today.

As far as we are concerned, 46 per cent of our stake is held by outside shareholders. We are answerable to them more than our promoters. For us, the paramount importance is value accretion for shareholders. And we will be in position to do it only if we get projects which gives us decent and sensible returns. All our projects are going to give us reasonable returns in the short- as well as the long-term.

What is the potential upside from the merchant sale from your AP power plants?

Though the government has given its nod, the Andhra Pradesh Electricity Regulatory Commission (APERC) is yet to give its final approval. The Andhra Pradesh High Court has given the APERC five weeks to decide and I am confident that by the end of December we will get the final nod. In FY11, if we were to take 20 per cent for the entire financial year, the additional contribution to profits from both these projects will range between Rs 100 and Rs 150 crore, depending on the price realisation from merchant power sale.

What kind of mix are you looking in your power portfolio?

Today, we have three gas-based projects (900 MW), two hydro projects (700 mw) and one coal-based project (540 mw). This is a fairly good mix from a fuel point of view. The additional 5,000 mw will mainly be coal-based thermal power. Wind and solar is also an area of interest for us. We are adding 400 mw to Jegurupadu in phase III and 800 mw to Gautami in phase II with a total expenditure of around Rs 5,000 crore, which is not included in the Rs 18,000 crore capex. We hope to start construction next year.

Are you looking at raising stake in the airports business

We always strive to have a controlling stake in all our businesses.

Would you be going for building or developing smaller airports?

Chennai and Kolkata will be done by the Airports Authority of India. Apart from these, other smaller airports do not interest us because the business model is not attractive enough. But we will certainly look at opportunities in airports in other Asian countries

What is the outlook for the next three years in terms of domestic and international air traffic?

Domestic traffic is improving; in the first half of this fiscal we saw a 10 per cent growth. Growth in international traffic is flat, while cargo has dropped a bit. However, this has been more than compensated by an increase in non-aero revenues such as advertisements, concessions for parking lot, food and beverages outlets, duty free shops among others. We expect this trend to continue. If all goes as per plan, we will make Rs 120-130 crore profit in the current fiscal on revenues of Rs 1,000 crore with 24 million passengers.

But long-term outlook is difficult to predict as it all depends on the economic growth of the country as far as domestic traffic is concerned. What is happening outside the country also has a bearing on international traffic. We are confident that we will touch about 25 million passengers in the next year. But our non-aero revenues will be a major contributor. When the new terminal will be ready in FY13, we expect the share of non-aero revenues to grow to about 60 per cent of our total revenues.

Energy Intensive

Power, which forms 69% of GVK’s revenue, will continue to be the focus area

Many analysts have assigned higher valuations to the real estate of Mumbai airport. Is it right to be so bullish?

We have a plan to develop 20 million square feet of built-up space or FSI space over the next ten years. We are entitled to commercially develop about 197 acres or 10 per cent of the total airport area of 1,970 acres. The entire plan of how exactly we want to develop is ready. Monetisation of real estate through development rights, land lease, self or joint development, should start in next fiscal. However, we are not in a hurry to monetise the real estate as we have tied up the entire debt and equity required to complete the project.

How do you compare Mumbai and Delhi airport in terms of opportunities and challenges? Do you think you missed the Delhi airport opportunity?

I think no other airport in the world is as challenging as the Mumbai International Airport. Firstly, there is constraint on land with just 1,976 acres. Secondly, there is a runaway constraint -- we cannot add more runways. Thirdly, we will have to ensure that the airport, with a traffic of 25 million passengers, is operational when construction is going on. Doing a brownfield expansion without affecting traffic is the biggest challenge. But we believe that within these constraints there are a lot of opportunities and that we will be able to deliver a world class airport.We never bid for Delhi airport as we wanted to focus on only one airport.

When do you expect the Navi Mumbai airport to come up for bidding? How confident are you of winning the project? Will it affect the profitability of MIAL?

I do not have any idea when the Navi Mumbai airport will come up for bidding. MIAL is being revamped to handle 40 million passengers by December 2012. If Navi Mumbai does not happen in the next few years, then there will be over-crowding at Mumbai airport and our service standards will suffer despite constructing a world class airport.
We have a right of first refusal on the Navi Mumbai airport. If we are within 10 per cent of the highest bidder, we will be in a position to match that highest bid and be the preferred bidder. Let us hope that we win the Navi Mumbai airport. Profitability of MIAL will not be affected as we would have anyways reached our capacity of 40 million passengers by then.

Sum Game

Kotak values GVK at Rs 50.4, while Edelweiss sees it at Rs 40.4, as per SOTP

What are the challenges and differences in greenfield and brownfield airport projects?

Navi Mumbai will be a classic case of a greenfield airport. In India, typically the first greenfield project was the Bangalore International Airport (BIAL) – and also the second one in the world. Drafting of concession agreements and creating a security structures were the challenges. But since we already have one greenfield airport executed and running, challenges to that extent will come down. Of course, there will be issues such as environment, but those will be taken care of. Land acquisition will be a challenge. Distribution of traffic between Navi Mumbai and Mumbai, infrastructure and connectivity are also major challenges.

How different are the Bangalore operations from Hyderabad?

The quality of traffic is superior in Bangalore because of it being the IT capital. Bangalore has about nine million passengers, while Hyderabad has around six million. In Bangalore, passengers are mostly white-collared IT employees going international, unlike in Hyderabad. So the spend per passenger in the airport is higher compared with Hyderabad.

Why is BIAL attractive to you?

In Bangalore, the government has given us the right to commercially develop 515 acres of a total 4,000 acres. Another big advantage in Bangalore airport is the revenue sharing agreement. Unlike Delhi and Mumbai, where revenue share is 46 per cent and 38 per cent respectively, in Bangalore it is only 4 per cent.

What is the update on SEZ, besides the oil and gas ventures?

Both the businesses are at a nascent stage. We have bought the complete land of about 3,000 acres for the SEZ, which has received board of approval and notification. We are still evaluating various options for the SEZ.

In the oil and gas business, we have been awarded seven deepwater blocks. We have tied up with BHP Billiton, which will hold 26 per cent equity in the joint venture. We have set aside Rs 300 crore for seismic studies, which should start early next year. This business will take seven to eight years to deliver revenues and profits.