GMR gets off to a flying start

Kiran K Grandhi

Hyderabad International Airport, being built by the GMR Group, is indicative of new revenue models.

Consider these facts: Hyderabad is increasingly becoming a hub for domestic airlines; it handles 130 domestic and international flights daily and 3 million passengers annually; and traffic is growing at a scorching 33 per cent (almost twice the rate of Mumbai airport's 18 per cent) per year.

The current airport is operating under serious capacity constraints, but work has already begun on a new airport on the city's outskirts where, if all goes well, Grandhi Mallikarjuna Rao (or GMR, as he is popularly known) would like to see the world's largest aircraft, an Airbus-380, touch down in 2008.

In what is the largest greenfield project for the low-profile, Bangalore-based GMR Group so far, Rao is investing Rs 1,500 crore to build the new airport in Hyderabad with a capacity for handling 5 million passengers in the first phase (early 2008).

By the end of the second phase (2018), the airport will have been expanded to handle over 20 million passengers. By that time the group would have sunk over Rs 5,000 crore into the project.

But that is not proving sufficient to slake the group's ambition to become the country's largest airport infrastructure and services company.

GMR (with German giant Fraport) is also aggressively bidding for the Delhi and Mumbai airports that have been opened up for privatisation. If it lucks out, the group will need to shell out Rs 5,000 crore each for the modernisation of both airports, which carry four-five times more traffic than Hyderabad.

Why is the Rs 2,800 crore (in assets) GMR Group with interests in power, highways, sugar and ferro alloys, so bullish on airport infrastructure?

Ask the 54-year-old media-shy chairman who started his career in the family business of trading in jute from the small town of Rajam on the Andhra-Orissa border, and he elaborates his group's strategy: "We were the first among the private sector in power, but we realised that there was a lot of uncertainty and that the mega power project policy had not taken off. So we needed to get into other areas in infrastructure to hedge our bets. We chose airports."

Rao, chary about talking turnovers, says the group's assets will virtually double by 2008. If it wins Delhi and Mumbai airports, the numbers could be even larger. Plus, the two airports could be extremely lucrative because they would start earning revenues from day one, as the running airports would be handed over to the successful bidder.

That does not mean Rao is moving out of power. In fact, he is aiming to build over 5,000 mw of capacity in the next five-seven years. The group already has power plants running, or under construction, for 880 mw, and has recently grabbed the contract for a Rs 700 crore hydel power plant in Uttaranchal.

That apart, it has signed up with the Maharashtra government for a 1,000 mw plant. Rao is hoping to raise funds by taking his power company public, and wants to scout for fresh power projects in Madhya Pradesh, Orissa and Uttaranchal.

But, increasingly, a large part of the group's revenue will come from the airport infrastructure business "" 40 per cent in the next five years alone. (Again, it could go up if Delhi or Mumbai fall into place.)

During the same period, the group's dependence on power for turnover will come down from 70 per cent to around 50 per cent. Winning the contract for the Hyderabad airport project has given the group a first-mover advantage in a new area of business.

Where did Rao learn about financing long-term infrastructure projects where returns take several years to come?

For instance, in the case of the Hyderabad airport, it expects to make money only after 10-15 years of operation, as the turnover in the initial stages is not expected to be more than Rs 300 crore annually.

Well, it all started with his flirtation with the banking sector. Being part of the Vysya community, in the mid-80s Rao was offered a directorship in the Vysya Bank run by Ramesh Gelli.

Says Rao: "The bank wanted to attract deposits from our community in the coastal areas, and I had linkages with them. A large part of the depositor base came from there."

The bank was set up with a Rs 60 lakh equity capital, but when its rights issues did not get subscribed, Rao moved in and built up a large stake. So when Gelli decided to move out and set up Global Trust Bank, Rao shifted base from his small town to Bangalore to take over the reins of the bank.

"I learnt the lessons of financial discipline and also how projects are structured," he says. He brought in ING as a partner and scaled down the non-performing assets dramatically.

Rao's rules are simple: you must have the money before you jump into a new project. It is a conservative trait, but that is how Rao prefers to do business. So, a few years ago, Rao sold his 50 per cent stake in the bank and lapped up over Rs 380 crore. Part of that cash has been used to finance the Hyderabad airport project, where he has already pumped in Rs 100 crore as equity.

With the financial closure of the project (which includes Rs 700 crore as debt and Rs 400 crore as an interest-free loan from the state government), expected to be completed by July, the group has ready cash to pump the other Rs 100-150 crore required to ensure its 63 per cent equity stake in the airport company. The remaining equity will be pumped in by partners Malaysia Airports Holdings Berhard.

Ask him how he will finance the Delhi and/or Mumbai airports in case he wins the contracts, and Rao will tell you he has it all worked out.

He has over 48 per cent in ING Vysya Insurance and small stakes in Karnataka Bank and Karur Vysya Bank. If he sells these, he can raise Rs 700-800 crore. Then, he is securing his future earnings on the annuity contracts that he won for two national highway projects, which will fetch him upfront cash of Rs 390 crore.

Says Rao: "This war chest of over Rs 1,200 crore in cash is enough to finance both Delhi and Mumbai airports where the equity component will be around Rs 500 crore. So I am already prepared."

But running a new airport might not be that easy. For instance, the top brass of GMR was recently in Madrid to attend the 'Routes' conference where international carriers meet airport services companies and woo them to land in their airports.

What unsettled the GMR team were the questions from the 30 potential clients there: Was Hyderabad airport located in Pakistan? Did India have airports other than in Delhi and Mumbai?

Says the portly Kiran K Grandhi, one-time cricket player in the state's under-21 team and Rao's son, who heads the group's international airport project in Hyderabad: "The experience strengthened our resolve to market the airport aggressively all over the world."

Not without reason. At twice the size of the private sector airport being built in Bangalore, the challenge will lie in using the huge capacity that is being created in Hyderabad.

Grandhi, a gizmo freak, is in talks with Jet, Indian Airlines, Air-India and the new, no-frills airlines, to make Hyderabad their hub of operations. It's tasted victory with Sahara doing just that. Says Grandhi: "Remember, Hyderabad is virtually equidistant from the three metros. That is a big advantage."

The group is also hoping to earmark a part of the terminal for low-cost airlines. The terminal will be designed to ensure that passengers can walk into the aircraft without a bus service, so airlines save on hiring an aerobridge. That's not the only innovation. Rao and Grandhi are also hoping to bring in passengers from catchment areas outside Hyderabad through feeder aircraft services.

That's for starters. GMR executives, inspired by Dubai airport, are pushing to make Hyderabad airport a distribution hub for companies. Grandhi says the group will build warehouses in the airport, offer freight-forwarding agent support and quick connectivity to ensure that cargo can move speedily from the airport to various destinations.

But more significantly, the group is looking for non-traditional revenues that will reduce its dependence on just aeronautical income (landing and parking charges, aerobridge charges, passenger service fee, among others).

Most Indian airports depend on these revenues for 85 per cent of their turnovers. But GMR hopes this will come down to international levels (around 40 per cent) in the new airport, and that it will make money selling retail space in the 'Airport Village', warehouse space, as well as a revenue share from the airport hotel.

Of course, winning Delhi or Mumbai won't be a cakewalk for the group. Says one of the competitors in the bidding race: "It is highly unlikely that the government would like to create a monopoly by giving GMR another private airport. That will go against him. Plus, his closeness to Chandrababu Naidu might be a problem."

With the country's hot-shot industrial houses "" Bharti, Reliance, real estate giant DLF, and Piramal "" having thrown their hats in the ring, how does the relatively low-profile and smaller GMR group hope to cause an upset?

Ask Rao, who spends most of his spare time with his grandchildren, and he plays down his chances as well: "We have a good team and the experience, but, of course, it will be a tough challenge." And he's more than up to it.

FAMILY CONSTITUTIONAL

In June, Rao and his family are going on an exclusive, week-long retreat. But make no mistake: they are not going to chill out. Instead, they will be involved in the gruelling exercise of thrashing out the details of a family constitution.

The constitution will detail virtually everything: Rao's succession, qualifications of family members to enter business (they have to be management graduates), their remuneration and perks, including the car they will get to drive, and also how to take care of those who want to opt out of the family business.

Says Rao: "With many business families facing problems and splitting, we decided to work out a legal framework that will ensure the family stays together and disputes are resolved within it."

He makes it clear that he is not apologetic of family-run businesses "" he reels out statistics to show how family-owned businesses offer higher profits, and 60 per cent of Fortune 500 companies are family-owned.

Rao is serious that the leadership baton should continue to be passed within members of the family. He has been closely studying family succession models in Europe and the US. He also hired world expert Marshal Paisner, writer of Sustaining the Family Business, to address the GMR family and share a tip or two.

Of course, it has not been an easy process. Rao and a separate team set up for the purpose have been working for the last two-three years to give shape to this dream. For instance, for those opting out of business to become professionals, Rao's decision is to set up a family fund, the corpus of which will be used for helping such family members.

Legal experts are being also being consulted to look at the best way to divide the family equity in companies. Says Rao: "Instead of setting up just one trust where the all the family members have a stake, which leads to disputes, we are setting up four trusts (known as column trusts) for each of the sons and daughters, so there is clarity."

How does his mantra of keeping the family together work in practice? Rao has already established various formal institutions such as, for instance, the family council. This consists of eight members (two sons and daughters-in-law, his wife, daughter and son-in-law, and Rao himself) and meets once in two months, and looks at ways to keep the family together.

The family board, which consists of only the men in the family, reviews the business, looks at future growth plans and direction for the group. Then, there is the non-family business board that is run by the women and is meant to maintain the emotional bonds in the family.

Interestingly, two members of the family are appointed servant leaders who focus on building an emotional bond with the entire family and resolve tensions.

Of course, family members who want to enter the business cannot expect a cushy jump upwards "" they have to go through the grind. They need to sign an agreement with Rao under which certain parameters of performance are established.

These are reviewed every six months and areas that need improvement are clearly spelled out. No doubt, a model that many others could learn from. Or is it just an experiment that's unlikely to survive the test of time?

AIRPORT FACILITIES

The new Hyderabad International Airport is being jointly promoted by the GMR Group and Malaysia Airports Holdings Berhad with public participation from Airports Authority of India and the Government of Andhra Pradesh.

Indications are that, all things remaining equal, it will be among the smartest airports in the region (think South-east Asia).

The airport will make long queues a thing of the past, with barrier-free access to 60 check-in counters spread across the terminals. Passengers will not need to have their bags x-rayed (that will be done when you check in), and they will be able to walk in through the 10 aerobridges into their planes after a security check.

With four large conveyor belts working round the clock for moving passenger baggage, the airport company hopes that it will be possible for a passenger coming from abroad to be out of the airport and out on the streets within 34 minutes flat (that is nearly half the time it takes currently).

If you are a regular user of the airport, you'll probably enjoy freebies like a loyalty programme for discounts on parking, in restaurants and even in the airport hotel.

Passengers will find they have a lot to occupy themselves with between flights or when taking a connection from the new airport: they can shop in the spacious 10,000 square feet 'Airport Village', have a quick bite or a leisurely meal at any of its restaurants and fast-food outlets, play a round of golf in the mini-golf course.

Or, if you're a workaholic, the airport will have a well-equipped business centre. Or you might prefer to check into the airport hotel in case you have a late night/early morning flight, or are in need of a quick shower.