ADF abolition: Short-term impact for GMR, GVK

Analysts say the additional costs due to abolition of ADF will be eventually recovered from rationalising tariffs across airport business

The share price of GMR Infra and GVK Power tanked as high as 5 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 into 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% each in both airports, to increase stakes in the airports and infuse Rs 102 crore and Rs 288 crore, respectively while the balance needs 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 form of equity investment back then. However, AAI is now cash surplus and hence the move.

 

However, this may not necessarily reduce ticket cost for passengers and make air travelling 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. Airport Economic Regulatory Authority (AERA) will calculate revised tariffs 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 tariffs in order to make the projects viable, say analysts. This is the reason why the two stocks recovered later and closed withf hike will be minor as it needs to be spread out over the life of the project unlike ADF which was to be monetised over next three years, says an analyst, who also goes on adding 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 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, companies also have done significant commitment towards ramping up their power business (29% and 45% of revenues respectively).

On the other hand, another analyst feels that there is little possibility of the abolition of ADF. Says he, “Except privatised airports namely Mumbai, Delhi, Bangalore and Hyderabad, all other airports are run by AAI and there is lot of capex requirement lined up to modernise these airports even though the airports 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 are assessing the impact on their project and get back after consulting their partners and lenders.

But, till the time clarity emerges, the stocks may remain volatile and see some pressure.