Terminal decline: How GVK group's infra bets cost it Mumbai airport biz

While the group hadn't built on its airport assets, its entry into coal, power and roads was the proverbial last straw that saw its lose its crown jewel in Mumbai

2012 was a special year for G V Krishna Reddy as he celebrated 50 years of his business enterprise. A year earlier Reddy, who began his career as an irrigation works contractor in his native Andhra Pradesh, acquired an additional 14 per cent stake in Bangalore airport, making him the largest shareholder with a 43 per cent stake. The same year he took another bold bet, buying three coal mines in Australia in a $1.26 billion deal. Though there were a few black clouds such as the disruption of gas supplies to its power plants, the mood in the GVK group was optimistic as it scouted for investors and partners.

Eight years later, the group was forced to sell its crown jewel, Mumbai International Airport Ltd (MIAL), to the rising star of Indian business, Gautam Adani. That leaves it with a clutch of doubtful projects in coal, gas and power and missed loan repayments. To top it all, Reddy senior and his son Sanjay are being probed for corruption and money laundering. Last month the group's listed arm, GVK Power and Infrastructure Limited's auditor PwC resigned citing non co-operation.

The airport business has been crucial to the GVK group. MIAL, the holding company for the Mumbai airport and the upcoming Navi Mumbai airport, is a profitable venture. Given its potential, Adani group had been vying for an entry in MIAL since last year. Last October, GVK group signed a deal to sell MIAL to a consortium of Abu Dhabi Investment Authority, National Investment and Infrastructure Fund and Canada's PSP Investments to ward off the Adanis and clear debt but the deal remained stuck and was finally terminated.

"The GVK group has done fantastic job at Mumbai airport and has managed the airport extremely well despite its challenges. But unlike the GMR group it has not been able to develop a portfolio of airport assets. GMR group has been far more successful at that and has helped it in value creation," said an aviation expert.

In July, for instance, the GMR group sold 49 per cent stake in its airport business to Group ADP of France for Rs 9,720 crore and retained majority control.

Meanwhile, the GVK group exited the Bangalore airport three years ago, selling its entire 43 per cent stake to Fairfax for Rs 3,492 crore in a two-step transaction. This ended a seven year-old saga in which the GVK group had raised loans from banks for the Bangalore airport deal, and pledged shares for the purchase. After the stake sale to Fairfax, a portion of the loan was paid.

But it was the foray into coal, power and road that proved the backbreaker. "The opening up of the economy made it possible for me to think big," Reddy told an interviewer in 2011. Power sector reforms in early 1990s enabled Reddy to set up India's first independent power plant at Jegurupadu in Andhra Pradesh, even as successes in irrigation contracts helped him diversify into real estate and hospitality in the earlier years. The Reddy family owns luxury hotels in Hyderabad, Chandigarh, Chennai and Mumbai in partnership with the Tata group's Indian Hotels Company  and also runs a biosciences company specialising in clinical trials and contract manufacturing.

But between 2012 and 2018, each of GVK’s non-airport business took a massive knock owing to a series of bad business bets, aggressive bidding and a Supreme Court order.

Industry watchers agree that the group's $1.26 billion investment in coal mines in Australia turned to a millstone around its neck. While, the investment added to the group’s indebtedness, a near halving of coal prices made mining an unviable business.  "Mining is highly regulated and success depends on factors such as mine yield and exchange rates," said a consultant.

"GVK Coal has not been able to achieve financial closure resulting in delays in commencement of mine development activity …. delays in entering into definitive agreements for port and rail development and agreement for sale of coal. Further, certain lenders of GVK Coal have classified the loan as non- performing," GVK Power and Infrastructure Limited said in its notes to accounts in Q3 FY 20 results (GVK Coal is categorised as an associate of GVKPIL). The company has as not announced fourth-quarter or full-year results for FY20. The group did not reply to email queries.

GVK’s second bet -- in gas-based power plants – was also entangled in controversies with the Centre, initially over gas supply and pricing and vanishing demand. Then in November 2014, the Supreme Court abruptly cancelled the licences for 218 coal blocks allocated to various metal and power companies. GVK lost its Tokisud block, which was to supply coal to its Goindwal Sahib power plant.

The roads business suffered for different reasons. GVK’s current transportation portfolio consists of one operational project, which started operations in 2005 and is a 20-year contract for six-lane road between Jaipur and Kishangarh.

In 2010-11, GVK was eager to participate in the public private partnership model for road development. However, the company had to terminate one project owing to aggressive bidding and delay in clearances. Since then, the company has terminated a couple of other road contracts for various reasons.

"This is another story of a conglomerate that focused on infrastructure, which became unviable due to high debt, constantly changing government policies. The company also made the mistake of stretching itself beyond its means, driven by general sentiments in the market that time,” said Harish HV, managing partner at ECube Investment Advisors.

He added, “Like all other companies that invested in infrastructure in the post-2005 period, nobody thought anything could go wrong, they could keep borrowing and can keep growing. I think they got carried away and did not limit ambitions in line with the resources available.”