Bengaluru International Airport (BIAL) is set to invest around $2 billion for creating infrastructure to cater to 65 million passengers against 20 million now.
India-born Canadian billionaire Prem Watsa, who is chairman of Fairfax, which owns majority stake in BIAL, wrote in a letter to shareholders that the airport’s second runway would be completed in 2019 and construction of the second terminal is likely to be over in 2021.
BIAL’s total equity value is estimated to be around $1.2 billion.
A syndicate of Indian banks has approved the debt-to-equity ratio of 80:20 at attractive interest rates, he said.
BIAL has had an outstanding year, said Watsa. While the revenue grew six per cent to $234 million in 2018, profit declined one per cent to $99 million. The second-fastest growing airport in the world handled 32 million passengers, up by 29.1 per cent, and cargo grew 12.9 per cent.
BIAL’s aero revenue went up at a compound annual growth rate (CAGR) of 21 per cent from 2009 to 2018. Revenue has also been generated through landing, parking and other services charged as user development fees (UDF) to airlines and passengers. The non-aero revenue has grown at a CAGR of 17 per cent from 2009 to 2018 and is expected to go up substantially due to an increase in passenger growth rate.
Watsa said the Airport Economic Regulatory Authority (AERA) has finalised the tariff order for the second control period (from April 2016 to March 2021) in August 2018. The tariffs that the airport can charge have a very significant impact on the cash flow generated and on the financing for the planned expansion of the airport. In the tariff order, AERA also approves the projected capital expenditure for the planned expansion of the airport.
The tariff order resulted in higher revenue by about $100 million. This was important to secure sufficient cash flow to complete capital projects.
BIAL’s aero revenue and total profits will be significantly lower because tariffs have been reduced to compensate for the higher tariff achieved in the first control period and part of the second control period. This situation, which was anticipated in BIAL’s financial plans, will persist until the end of the second control period in March 2021. BIAL is estimated to generate a total return on equity (RoE) of 17.8 per cent for the second control period, said Watsa.
In May 2018, Fairfax acquired six per cent more of BIAL from Siemens for $67 million, taking its ownership to 54 per cent. In total, Fairfax has invested $653 million in BIAL, implying an equity value of approximately $1.2 billion for the whole company.