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Heavy capital expenditure by major airports unlikely to impact credit quality: Crisil

LiveMint logoLiveMint 19-04-2017 Shally Seth Mohile

Mumbai: Airports in Delhi, Mumbai, Hyderabad and Bengaluru which are operating near full capacity and catering to nearly 55% of India’s air traffic will need to spend heavily on expansion through 2021, Crisil Ratings said. However, despite the expansion, their credit quality will remain healthy because of the strength of their business model backed by robust traffic growth and predictable cash flows under a regulated tariff framework, it said in a report. The agency estimates the four airports to invest a cumulative Rs27,000 crore over the next four years till 2021.

Air passenger traffic in India grew 20% in fiscal 2017, sharply higher than the 9% average seen since 2011. Bengaluru and Hyderabad airports have clocked even faster growth rates of over 24%. Rising private consumption and healthy economic growth would continue to provide tailwind to traffic growth at airports, the rating agency said.

Owing to surging footfalls and high capacity utilization of over 90%, the four airports would need to invest Rs27,000 crore for expansion, said Gurpreet Chhatwal, president, Crisil Ratings. “Yet, their credit quality will not suffer because of low implementation risk – such expansions are brownfield and modular in nature – and conducive tariff regulation,” he said.

Tariffs such as passenger user fee levied by airports is calculated in blocks of five years (called ‘control periods’) based on a fixed return on capex and base traffic growth assumption. This not only compensates for the risks taken, but also provides for adjustment in user fee on account of any large variation in traffic, and/or capex plan in a control period. Regulations also have had a balanced approach. For instance, a ‘hybrid-till’ mechanism encourages airport developers to increase their non-aeronautical revenues through retail, advertising, and parking. At the same time, it also benefits passengers because the passenger user fee is subsidized by a portion of non-aeronautical revenue.

As traffic increases rapidly, aeronautical revenue streams from passenger user fees and landing and parking charges would also increase in the ongoing control period.

“While aeronautical revenues may moderate in the next control period due to adjustment in passenger user fee, increasing footfalls can offset this through higher non-aeronautical revenue; so it’s unlikely to curb the earnings’ momentum of these airports. The contribution from non-aeronautical revenue is expected to increase to 50% over the next four years from 35% now,” said Manish Gupta, director, Crisil Ratings.

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