ADF abolition: Short-term impact for GMR, GVK

Analysts say additional costs due to abolition will be recovered by rationalising rates across airport business

The share price of GMR Infra and GVK Power tanked as much as five per cent intra-day on Wednesday as the ministry of civil aviation proposed to abolish Airport Development Fee (ADF) for Delhi and Mumbai airports starting January 2013, which is expected to result in a funding gap of Rs 1,175 crore and Rs 4,200 crore, respectively. In lieu of abolition of ADF, it has asked the Airport Authority of India (AAI), which holds 26 per cent each in both airports, to increase stakes in the airports and infuse Rs 102 crore and Rs 288 crore, respectively, while the balance needs are to be met by the airport operators (GVK and GMR). The government has argued that ADF was imposed to compensate for lack of funds with AAI to commit more money in the form of equity investment back then. However, AAI is now cash surplus and hence the move.

However, this might not necessarily reduce ticket costs for passengers and make air travel relatively more affordable, as intended by the government. This is because it will require the companies to infuse additional funds as equity and raise further debt. The Airport Economic Regulatory Authority (AERA) will calculate revised ratess for the airports after the operators file revised means of finance. Additional debt will lead to increase in interest costs, which will eventually need to get factored into the revised rates in order to make the projects viable, say analysts. This is the reason why the two stocks recovered later and closed with a decline of only 2.6 per cent (GMR) and 3.6 per cent (GVK) compared to their close on Tuesday.

The rate rise will be minor as it needs to be spread over the life of the project unlike ADF, which was to be monetised over the next three years, says an analyst, who goes on to add that there will be no change in valuation, as the companies will continue to get a return on the extra money being pumped in.

However, fund raising would be difficult as companies’ balance sheets are already stressed, given the consolidated net debt to equity ratio of 2.2 times and 2.7 times, respectively, as on March 2012. Secondly, besides airports, which form 41 per cent and 45 per cent of consolidated revenues for GMR and GVK, respectively, the companies also have made significant commitment towards ramping up their power business (29 per cent and 45 per cent of revenues, respectively).

On the other hand, another analyst feels there is little possibility of the abolition of ADF. He says, “Except privatised airports, namely Mumbai, Delhi, Bangalore and Hyderabad, all other airports are run by AAI and there is a lot of capex requirement lined up to modernise these airports even though these are profit-making. Hence, it may be difficult for AAI to chip in fresh equity, resulting in continuing of the existing system.”

Meanwhile, both companies told Business Standard on Tuesday that they were assessing the impact on their project and would get back after consulting their partners and lenders. Till clarity emerges, the stocks could remain volatile and see some pressure.