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Moody's assigns first-time Ba1 rating to GMR Hyderabad International Airport Limited

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Investors Service has assigned a first-time corporate family rating of Ba1 to International Airport Limited (HIAL).

The outlook for the rating is stable.

HIAL has a long term concession to operate airport, which is one of the leading airports in India.


"The Ba1 corporate family rating primarily reflects HIAL's strong market position and its strategic location in the city of Hyderabad, which is India's fourth most populous city and a major economic center", says Abhishek Tyagi, a Vice President and Senior Analyst.

These factors position HIAL well to benefit from continued growth in travel over the next 2-3 years.

"HIAL's credit profile is also underpinned by its low business risk due to low concession revenue share payment to the government", Tyagi says, adding "The airport's core aeronautical revenue stream is regulated on a price cap basis and, as such, is not exposed to the risk of fluctuations in passenger volumes, thereby providing key rating support".

However, the rating is challenged by 1) the limited track record of India's regulatory framework and 2) HIAL's significant capital expenditure to expand its capacity, which will elevate financial leverage and raise execution challenges.

"Reflecting its strong market position, we expect the airport to benefit from increased travel demand in the country as income grows, particularly because an increasing proportion of the airport's revenues - being non-aeronautical revenues -- will be driven by rising passenger volumes", adds Tyagi.

HIAL's credit profile benefits from its location in the city of Hyderabad, which is the fifth most populous city of India with a population of 6.7 million. is also a major economic center and is one of the key information technology (IT) and information technology enabled services (ITeS) hubs of India -- with nearly all global and local majors present in the country. The city is also one of the biggest pharmaceutical and biotechnology hubs.

HIAL has exhibited solid operating performance relative to its key performance targets, as stipulated by the concession. The Airports Authority of India has the right to terminate the concession if HIAL fails to meet its operating performance targets for a sustained period. However, we see the risk of termination as being remote, given HIAL's solid operating track record, which we expect to continue, notwithstanding its upcoming expansion program.

HIAL has one of the lowest concession fees in India, at 4% of the gross revenues -- which can be passed on as a part of operating expenses as per the regulations. This compares with 45.99% and 38.7% revenue share for Delhi and Mumbai airports respectively

The regulatory regime for the airport sector is still quite new and is yet to establish a stable and predictable framework.

Further track record of consistent application of regulated settings will provide support for HIAL's credit profile.

HIAL has a significant expansion programme (in the range of INR22-25 billion) which will be implemented over the next four years. While the project is indicative of the passenger growth experienced by HIAL, the expansion will challenge its financial metrics, although from a solid base. We expect financial leverage -- as measured by funds from operations to gross adjusted debt-- to worsen to 9-10% over FY2019-FY2020 (fiscal year ending 31 March) as the company executes its capex plans to increase its terminal capacity to 20 million passengers annually.

The rating factors in the effectiveness of the ring fence between HIAL and its shareholders under the transaction documents which insulates HIAL's credit profile from that of its shareholders.

The Ba1 rating also factors in expectation that HIAL will be issuing bonds shortly, the proceeds of which will be used to refinance the existing foreign and domestic currency bank term loan facilities.

The stable outlook reflects HIAL's strong liquidity and Moody's view that the company's financial profile over the next 12-18 months is manageable at the Ba1 rating level.

Upward rating movement in the near term is unlikely, given the planned expansion program and the uncertainty associated with the regulatory process. Over time, the ratings can be upgraded if HIAL demonstrates an ability to maintain robust financial metrics, including funds from operations /gross adjusted debt above 18-20% and debt service coverage exceeding (DSCR) 2x on a consistent basis.

The ratings could be downgraded if there is a deterioration in financial leverage that is beyond our base case expectation, and which could be due to a larger expansion program, or missteps in implementing the expansion project, or a reduction in aeronautical and/or non-aeronautical revenues relative to our base case expectation. The financial metrics that could indicate a downward pressure on the ratings include funds from operations to gross adjusted debt declining below 8% and/or the DSCR below 1.4x on a consistent basis.

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First Published: Tue, October 10 2017. 11:14 IST