Bangalore airport's capacity to grow 3x by 2028, expansion to cost $2 bn

BIAL's passenger traffic in 2017 grew 12.9 per cent over a year earlier to 25 million; cargo handled by the airport increased 8.1 per cent

Fairfax-owned Bangalore International Airport (BIAL) is expected to see a capacity expansion in with an investment of around $2 billion. This will help the airport handle 65 million passengers a year by 2028, against 20 million passengers at present. 

In a letter to shareholders enclosed with Fairfax India's annual report and shared with shareholders recently, Prem Watsa, chairman and chief executive of Fairfax Financial Holding, said: "This (BIAL) is indeed a very exciting investment for Fairfax India."

A second runway is under development with 2019 as the deadline for completion. A second terminal is scheduled to be completed in 2021, for which the phase 1 schematic design has been completed and detailed planning is ongoing.

"The investment required to complete the expansion projects is approximately $2 billion and will be funded through internally generated funds and debt. The financing plan, based on a debt to equity ratio of 80:20, and negotiations with banks are well underway," he said.

In March 2017, Fairfax India had acquired 38 per cent of BIAL for $385 million (including 33% from GVK Group, BIAL’s promoter), implying an equity value of above $1 billion for the whole company. Based on BIAL’s March 2017 financial statements, the purchase price valued BIAL at a price-to-earnings ratio of 14.5, the price-to-book value of 4.7 times and price-to-free cash flow of 8.7 times, without considering the value of the real estate that can be monetised.

In July 2017, Fairfax India acquired the final 10 per cent of BIAL-owned by GVK for $200 million.

"The higher price being justified by this purchase enabling Fairfax India and the other remaining shareholders to reconstitute BIAL’s Board, to appoint the best-qualified person as BIAL’s CEO, and generally to allow it to be managed according to Fairfax India’s standards of corporate governance and guiding principles", said the Indo- Canadian businessman.

Watsa said that aero revenue has grown at a CAGR of 22 per cent from 2009 to 2017. This is the revenue earned for providing services such as landing, take-off, parking, ground-handling, ground safety, facilities, amenities and services to airlines and passengers.

The tariffs for these services are set for five-year periods and are fixed so as to yield a regulated 16% Return on Equity (ROE). The regulatory authority treats 30% of non-aero revenue as aero revenue.

All revenues other than aero revenue, including cargo handling, fuel sales, food and beverage sales and duty-free shops, grew at a CAGR of 19% from 2009 to 2017 and are expected to grow substantially due to an increase in passenger growth rates. 

On real estate monetisation, he said, BIAL also has around 460 acres of land adjoining the airport that can be developed. All of this land is undeveloped, except for a small piece on which BIAL has built a hotel. Bangalore’s historical population areas are getting congested, so the city is expanding in the airport’s direction. BIAL anticipates significant upside, over time, from monetisation of this real estate, he said.

BIAL's passenger traffic grew 12.9 per cent in 2017 to 25 million passengers and cargo handled was up 8.1 per cent. Revenue increased 16 per cent to $231 million and profit after tax grew 25 per cent to $105 million. Free cash flow after maintenance capex grew 15% to $151 million. This implies a free cash flow yield of 12.3% if 100% of BIAL was valued on the basis of the aggregate purchase price of Fairfax India’s 48% interest.

For the second terminal, which is scheduled to be completed in 2021, detailed planning has commenced. The investment required to complete the expansion projects is around $2 billion and will be funded through internally generated funds and debt. The financing plan, based on a debt to equity ratio of 80:20.