Challenges weigh on GVK's debt recovery plan

GVK has substantially cut its interest outgo by selling stake in the Bengaluru airport to Fairfax, but its power and roads businesses could prove a drag on growth

Long before GVK Power and Infrastructure sold its stake in Bangalore International Airport to Fairfax India Holdings, it had become evident the group was looking to turn into a leaner version of itself. It exited a road project in 2014 and even put its power projects on the block, although it could not find a buyer amid the downturn in the sector.

Burdened by mounting debt, GVK has been looking at asset sale as a strategy to generate additional resources. The interest expenses for the group rose almost 10 per cent to Rs 555 crore in the three months ending December 31, 2015, compared to the preceding quarter. For the full year, it is expected to exceed the 2014-15 outgo of Rs 1,398 crore.

Read more from our special coverage on "GVK"

• GVK fails to pay $560 million for mines in Australia

GVK Reddy

 

The divestment of 33 per cent stake to Prem Watsa-promoted Fairfax Financial Holdings for Rs 2,149 crore (approximately $321 million) will ease the pressure on GVK’s resources to a large extent.

GVK says once the transaction is complete, the debt burden of GVK Airports will stand reduced by around Rs 2,000 crore and will also result in savings on interest costs to the extent of approximately Rs 300 crore per annum.

“This is an important and successful milestone in deleveraging our balance sheet; all the proceeds from this stake sale shall be used to bring down our debt obligations to our lenders,”  GVK’s Founder-Chairman and Managing Director GVK Reddy said in a statement in March.

In addition, the deal with Fairfax, which will buy the stake through its wholly-owned subsidiary in Mauritius, also provide GVK an ally for future airport development projects.

Reddy says, “We would look forward to partnering with them in developing the Kempegowda International Airport (in Bengaluru) through its next stage of expansion as we develop a new world-class Terminal 2 and a new runway.”

The long-standing relationship between Reddy and Watsa was the key reason why GVK chose Fairfax as a strategic partner for the Bangalore International Airport from among a number of other offers. After the stake sale, GVK’s holding in the Bangalore airport has reduced to 10 per cent. However, Watsa said G V Sanjay Reddy will continue to lead the management team as managing director of the airport and Reddy will continue as its co-chairman.

Selling the family silver

Of all the major businesses GVK is present in — power, roads, airports  and hospitality— the airport arm is turning in the highest profit for the group. However, the stake sale may not mark an end to GVK’s debt troubles altogether.

The group’s Bangalore International Airport owns and operates the Kempegowda International Airport under a 30-year concession agreement, which could be extended by another 30 years by the government. Built under the public-private partnership model, the airport began operations in May 2008. In addition, the group also runs and manages the Mumbai airport, Yogyakarta airport in Java in Indonesia, and the non-aeronautical commercial operations of Denpasar in Bali.

The stake sale, which was in the offing for years, has finally come at a time when the business has turned profitable. The airport business brought in Rs 353 crore of its segmented profit for the first three quarters of 2015-16. In contrast, it had reported a loss of Rs 174 crore during the same period in the previous year. At Rs 2,076.45 crore, the airport business accounted for 67 per cent share in the group’s net sales of Rs 3,083.31 crore during the April-December 2015 period. Given its share in the revenue, the stake sale could hurt the group’s overall earnings, even though it will result in savings on interest payment.

Faltering growth

The other businesses have been languishing for a while. The group is reportedly in trouble with its mining business in Australia. The Reddy family, which took over the Kevin’s Corner Coal Mines in Queensland from Hancock Coal for $1.26 billion in 2011, has reportedly failed to pay the final tranche of $560 million to Australian billionaire Gina Rinehart-owned Hancock Prospecting, putting a question mark over the future of the project.

GVK was initially planning to invest $10 billion in developing three coal mines and rail and port infrastructure there. To an extent, its troubles stem from the steep fall in coal prices globally. Coal prices have dropped from $121 a metric tonne at the time of acquisition to around $50 now.

In India, the group has about 1,200 Mw of operational power generation capacity and another 1,390 Mw under development. Its Goindwal Sahib Thermal Power Project in Punjab’s Tarn Taran district has seen a 30-40 per cent cost escalation, says an analyst with a Mumbai-based brokerage who does not want to be quoted.

Though GVK signed a memorandum of understanding with the Punjab government way back in 2000, the project got mired in trouble right from the beginning. Its captive coal block was also cancelled in 2014. “The project continues to be a concern for the group till its petition for higher tariff is accepted,” says the analyst.

In the road sector, the group surrendered the 333-km Shivpuri-Dewas project in Madhya Pradesh in 2014. When the contract was awarded to GVK in 2012, it was valued at about Rs 2,815 crore. GVK now has projects totalling 1,500 lane-kilometres  across Jaipur-Kishangarh (542.4 lane-km) and Deoli–Kota (332.16 lane-km) in Rajasthan, besides Bagodara–Vasad (611.4 lane-km) in Gujarat.  

While a questionnaire sent to GVK remained unanswered, the group has maintained it will remain a long-term investor in airport assets in India. “GVK is bullish on the airport sector in India and shall continue to build iconic assets for the country,” it said in March. However, given its debt woes, it is unlikely to bid for any new road and power projects.