Flying high

With a contract for an international airport in the bag, India's largest private sector infrastructure company is going places.

The competition may not have been as keen as it was for the New Delhi airport. But it was nonetheless a fight to the finish with five strong consortia bidding to build a new international terminal, adjacent to the Sabiha Gokcen airport in Istanbul.

In the end, a consortium comprising the Rs 1,968 crore GMR Infrastructure, Limak AS , a Turkish construction company and Malaysia Airports Holdings bagged the contract.

The bidding started out at $1.3 billion but the winning amount was more than twice that at $2.7 billion, to be paid to the government of Turkey over a 20-year period starting 2011.

This is the first time a private infrastructure company in India will be developing an international airport terminal outside of India.

The terminal, to be built next to Sabiha Gokcen airport, will have a passenger capacity of 10 million and is expected to be up and running in about 30 months. Sabiha Gokcen, which lies on the Asian side of the historical city and is named after Turkey's first woman combat pilot, can currently accommodate 3.5 million people.

Says Madhu Terdal, chief financial officer for the GMR group "The terminal will be on a build-operate-transfer basis with the concession extending upto 20 years and once the new international terminal becomes operational, the existing terminal will serve the domestic passengers. We plan to take over the existing airport operations within two months and simultaneously start work on the new international airport." The terminal will cater for residents of cities like Kocaeli, Izmit and Bursa.

"These cities have a sizeable population of international travellers and will drive the traffic for the airport," Terdal observes.

The consortium will need to spend 400 million euros to develop the new international airport. Terdal says that the debt component 80 per cent will be raised from Turkish and other banks. Of the equity component of 80 million euros, GMR Group and Limak will contribute 32 million euros each while Malaysia Airport Holdings will contribute 16 million euros.

Given that GMR's interest expenses were up 22 per cent in FY07 at Rs 159 crore, the Istanbul project could stretch the firm's balance sheet. Terdal is not willing to disclose how exactly GMR is going to find the sum of 32million euros to fund the project's equity.

However, analysts say the firm has been fairly conservative in its approach to projects with the Internal rates of return(IRRs) exceeding the cost of capital.

Given the higher share of non-aeronautical sales for airports, they have an equity IRR of over 30 per cent. In fact, if one were to include real estate the IRRs for the airport projects could even exceed 40 per cent.

Not surprising then that the GMR stock has been a hit with the markets, doubling in value from Rs 400 in April to Rs 911 currently, even though the firm ended FY07 on a subdued note.

Thanks to operating losses of about Rs 14 crore at the company's Vemagiri power plant, earnings for the March quarter were weak with the net profit falling sharply by 47 per cent to Rs 22 crore.

The firm's operating margins too saw a steep fall of nearly 1000 basis points y-o-y to 22.3 per cent. The revenues for the quarter, however, were up a smart 75 per cent y-o-y at Rs 620 crore with a new revenue stream in the New Delhi airport.

GMR Infarstructure today has a portfolio of two airports(New Delhi and Hyderabad), six roads and six power plants, at various stages of development.

Passengers from Hyderabad will be able to fly from the new international airport by March next year. And the New Delhi airport should be fully modernised by 2010 in time for the Commonwealth Games.

Given GMR's track record, it shouldn't also be too long a wait for passengers from Sabiha Gokcen.