Despite the credit crunch & high interest rates, GMR Infra’s group CFO A Subbarao believes now is the best time to invest in infrastructure
Being an infrastructure player, are you not feeling the pinch of the credit crisis and rising interest rates?
The majority of our projects are no longer in the investment phase and are nearing their revenue-generation phase, and this is helping us. For example, in the roads sector, out of the four ongoing projects, one has already been commissioned and the other three will be commissioned over the next three months. The pending capex on these projects is just Rs 300 crore by February ’09. In the power sector, all our three projects with 800 mw installed capacity are currently in operation.
There are several new power projects in the pipeline, but most of them are only in the preliminary development phase, where we are seeking land clearance, environmental clearance, fuel security etc. Only two projects — the 300-mw hydel plant at Badrinath and 1,050-mw coal-based project in Orissa — are nearing financial closure, where the total capex required will be Rs 6,000 crore.
In the case of airports, the Hyderabad airport is already operational and we won’t incur any more significant capex on it in the near future, as we still have spare capacity. At Delhi airport, we have already achieved financial closure with Rs 5,000 crore of debt. Both the airports are now generating strong cash flows. Thus, most of our projects are well-funded and the revenue streams have started.
But wouldn’t high interest costs affect the viability of your existing or new projects?
Not really. For all our projects in the construction phase, we borrow at fixed rates, which will be reset only after 3-5 years. So currently, the average cost of debt comes to only 9.6% for the group. For our new projects, we will have to borrow at some 300 bps higher, but now we will go for floating rates. Again, that will not significantly affect our return on investment. For example, for our 1,050-mw Orissa power plant, we need to borrow Rs 3,500 crore. The debt will be drawn gradually over the three years of project execution, so the average debt comes to around Rs 1,750 crore. Hence, with 300 bps higher interest, our project cost will go up by Rs 150 crore, which is just 3.3% of the total project cost of Rs 4,500 crore. Another important factor that many people are ignoring is that although interest costs are going up, the cost of construction is coming down sharply. Prices of cement and steel, or margins of EPC contractors are all very low, which can save 20-25% of the project costs. This will far outweigh the loss on account of higher interest. Again, interest costs are cyclical; they will decline soon. In fact, I think this is the best time to start new projects to create a low-cost infrastructure for the future.
What future plans do you have for the Hyderabad and Delhi airports?
Since we have taken both these airports and adjoining land on a 60-year lease, we are working on significant long-term plans. We plan to develop these airports as regional hubs and international transit points. The available land — nearly 6,500 acres in Hyderabad and around 250 acres in Delhi — will be used to develop aero-related businesses, which will help in attracting more traffic. In the immediate future, we plan to set up a maintenance, repair and overhaul (MRO) business at Hyderabad airport with around Rs 200 crore investment by March ’10. We have tied up with Malaysian Airways as the technical support partner, and we are looking for a domestic airline as the anchor customer to join as a partner. This will be the first MRO service in India and considering that today, nearly 500 aircraft in India visit overseas destinations for these services, we expect to do well. On the rest of the land in Hyderabad, we plan to develop an international city with all facilities such as hospitals, hotels, office complexes, etc. We are currently going slow on this due to the economic slowdown.
What is the revenue generation capacity of your airports?
If we look globally, airports such as Singapore or Hong Kong earn $17-18 per passenger, which can be as high as $50 per passenger in Europe, taking both aero and non-aero revenues together. So, we have set $20 per passenger as a target for generating revenues from our airport business. The user development fee (UDF) is a special and temporary charge and is not considered for this purpose. We are assured of 17% return on investment for the Hyderabad airport, and 11.33% in the case of Delhi airport, considering only the aero revenues. Non-aero revenues such as retail, commercial, advertising, parking and cargo — which comprise over 60% of an airport’s total revenues — are not part of these calculations. Only in the case of Delhi airport, which is a brownfield project, 30% of the non-aero revenues are added to the aero revenues for this purpose.
Which of your verticals will drive the future growth of GMR group?
Our power business will continue to drive future growth. This business will perform very well over the next three quarters, with all our 800-mw capacity running continuously, which can generate Rs 2,000 crore in revenue annually.
Further, the European company, InterGen, in which we picked up a 50% stake earlier this year, has a 8,000-mw running capacity with projects of 4,000 mw in the pipeline. We are not consolidating these revenues right now, as the investment is held through convertible debentures. Once we convert these bonds into equity shares, we will be able to consolidate the revenues. That will boost the power segment’s revenues substantially. Besides, the 1,050-mw Orissa power plant is scheduled to be commissioned in March ’10. We also want to add another coal-based 1,000-1,500 mw power plant, probably on the west coast of India, by mid-’11, for which we are trying to acquire stake in some coal mines in Indonesia.
(For the complete interview, log on to www.etintelligence.com)
Being an infrastructure player, are you not feeling the pinch of the credit crisis and rising interest rates?
The majority of our projects are no longer in the investment phase and are nearing their revenue-generation phase, and this is helping us. For example, in the roads sector, out of the four ongoing projects, one has already been commissioned and the other three will be commissioned over the next three months. The pending capex on these projects is just Rs 300 crore by February ’09. In the power sector, all our three projects with 800 mw installed capacity are currently in operation.
There are several new power projects in the pipeline, but most of them are only in the preliminary development phase, where we are seeking land clearance, environmental clearance, fuel security etc. Only two projects — the 300-mw hydel plant at Badrinath and 1,050-mw coal-based project in Orissa — are nearing financial closure, where the total capex required will be Rs 6,000 crore.
In the case of airports, the Hyderabad airport is already operational and we won’t incur any more significant capex on it in the near future, as we still have spare capacity. At Delhi airport, we have already achieved financial closure with Rs 5,000 crore of debt. Both the airports are now generating strong cash flows. Thus, most of our projects are well-funded and the revenue streams have started.
But wouldn’t high interest costs affect the viability of your existing or new projects?
Not really. For all our projects in the construction phase, we borrow at fixed rates, which will be reset only after 3-5 years. So currently, the average cost of debt comes to only 9.6% for the group. For our new projects, we will have to borrow at some 300 bps higher, but now we will go for floating rates. Again, that will not significantly affect our return on investment. For example, for our 1,050-mw Orissa power plant, we need to borrow Rs 3,500 crore. The debt will be drawn gradually over the three years of project execution, so the average debt comes to around Rs 1,750 crore. Hence, with 300 bps higher interest, our project cost will go up by Rs 150 crore, which is just 3.3% of the total project cost of Rs 4,500 crore. Another important factor that many people are ignoring is that although interest costs are going up, the cost of construction is coming down sharply. Prices of cement and steel, or margins of EPC contractors are all very low, which can save 20-25% of the project costs. This will far outweigh the loss on account of higher interest. Again, interest costs are cyclical; they will decline soon. In fact, I think this is the best time to start new projects to create a low-cost infrastructure for the future.
What future plans do you have for the Hyderabad and Delhi airports?
Since we have taken both these airports and adjoining land on a 60-year lease, we are working on significant long-term plans. We plan to develop these airports as regional hubs and international transit points. The available land — nearly 6,500 acres in Hyderabad and around 250 acres in Delhi — will be used to develop aero-related businesses, which will help in attracting more traffic. In the immediate future, we plan to set up a maintenance, repair and overhaul (MRO) business at Hyderabad airport with around Rs 200 crore investment by March ’10. We have tied up with Malaysian Airways as the technical support partner, and we are looking for a domestic airline as the anchor customer to join as a partner. This will be the first MRO service in India and considering that today, nearly 500 aircraft in India visit overseas destinations for these services, we expect to do well. On the rest of the land in Hyderabad, we plan to develop an international city with all facilities such as hospitals, hotels, office complexes, etc. We are currently going slow on this due to the economic slowdown.
What is the revenue generation capacity of your airports?
If we look globally, airports such as Singapore or Hong Kong earn $17-18 per passenger, which can be as high as $50 per passenger in Europe, taking both aero and non-aero revenues together. So, we have set $20 per passenger as a target for generating revenues from our airport business. The user development fee (UDF) is a special and temporary charge and is not considered for this purpose. We are assured of 17% return on investment for the Hyderabad airport, and 11.33% in the case of Delhi airport, considering only the aero revenues. Non-aero revenues such as retail, commercial, advertising, parking and cargo — which comprise over 60% of an airport’s total revenues — are not part of these calculations. Only in the case of Delhi airport, which is a brownfield project, 30% of the non-aero revenues are added to the aero revenues for this purpose.
Which of your verticals will drive the future growth of GMR group?
Our power business will continue to drive future growth. This business will perform very well over the next three quarters, with all our 800-mw capacity running continuously, which can generate Rs 2,000 crore in revenue annually.
Further, the European company, InterGen, in which we picked up a 50% stake earlier this year, has a 8,000-mw running capacity with projects of 4,000 mw in the pipeline. We are not consolidating these revenues right now, as the investment is held through convertible debentures. Once we convert these bonds into equity shares, we will be able to consolidate the revenues. That will boost the power segment’s revenues substantially. Besides, the 1,050-mw Orissa power plant is scheduled to be commissioned in March ’10. We also want to add another coal-based 1,000-1,500 mw power plant, probably on the west coast of India, by mid-’11, for which we are trying to acquire stake in some coal mines in Indonesia.
(For the complete interview, log on to www.etintelligence.com)
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