BIAL to invest $2 bn for creating infrastructure to cater to 65 mn flyers

Bengaluru airport caters to 20 million passengers now

Bengaluru International Airport (BIAL) is set to invest around $2 billion for creating infrastructure to cater to 65 million passengers against 20 million now.

India-born Canadian billionaire Prem Watsa, who is chairman of Fairfax, which owns majority stake in BIAL, wrote in a letter to shareholders that the airport’s second runway would be completed in 2019 and construction of the second terminal is likely to be over in 2021.

BIAL’s total equity value is estimated to be around $1.2 billion.

A syndicate of Indian banks has approved the debt-to-equity ratio of 80:20 at attractive interest rates, he said.

BIAL has had an outstanding year, said Watsa. While the revenue grew six per cent to $234 million in 2018, profit declined one per cent to $99 million. The second-fastest growing airport in the world handled 32 million passengers, up by 29.1 per cent, and cargo grew 12.9 per cent.

BIAL’s aero revenue went up at a compound annual growth rate (CAGR) of 21 per cent from 2009 to 2018. Revenue has also been generated through landing, parking and other services charged as user development fees (UDF) to airlines and passengers. The non-aero revenue has grown at a CAGR of 17 per cent from 2009 to 2018 and is expected to go up substantially due to an increase in passenger growth rate.

Watsa said the Airport Economic Regulatory Authority (AERA) has finalised the tariff order for the second control period (from April 2016 to March 2021) in August 2018. The tariffs that the airport can charge have a very significant impact on the cash flow generated and on the financing for the planned expansion of the airport. In the tariff order, AERA also approves the projected capital expenditure for the planned expansion of the airport.

The tariff order resulted in higher revenue by about $100 million. This was important to secure sufficient cash flow to complete capital projects.

BIAL’s aero revenue and total profits will be significantly lower because tariffs have been reduced to compensate for the higher tariff achieved in the first control period and part of the second control period. This situation, which was anticipated in BIAL’s financial plans, will persist until the end of the second control period in March 2021. BIAL is estimated to generate a total return on equity (RoE) of 17.8 per cent for the second control period, said Watsa.

In May 2018, Fairfax acquired six per cent more of BIAL from Siemens for $67 million, taking its ownership to 54 per cent. In total, Fairfax has invested $653 million in BIAL, implying an equity value of approximately $1.2 billion for the whole company.

Focus on realty

BIAL has appointed a chief real estate officer who is mandated to complete a real estate master plan and development strategy in the first half of 2019. The aim is to complete at least one real estate project in 2019, said its Chairman Prem Watsa. BIAL has around 460 acres adjoining the airport. All of this land is undeveloped except for a small piece on which BIAL has built a hotel, currently operated by the Taj Hotels brand under a management contract  The city is expanding in the airport’s direction and BIAL anticipates significant upside from monetisation of this real estate. 

Fairfax earnings down by 79% 

Fairfax India’s net earnings in 2018 were down 79 per cent to $96 million from $453 million in 2017. The firm said this was largely due to net unrealised gains on investments being $179 million compared to $592 million in 2017. Over the four years since its inception, it has outperformed the markets. The performance measure, grew at a compound annual rate of 15 per cent Fairfax India’s book value per share, declined by 4.1 per cent in 2018, from $14.46 at the end of 2017 to $13.86.