GMR Airports Limited (GMRAIRPORT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to GMR Infrastructure Limited conference call to discuss equity capital raise and strategic partnership with Groupe ADP for airports business. [Operator Instructions] Please note that this conference is being recorded. We have with us today, Mr. Saurabh Chawla, Executive Director, Finance and Strategy. Before we begin, I would like to state that some of the statements made in today's discussion may be forward-looking in nature and may involve risk and uncertainties that are difficult. Also, recording or transcribing of the call without prior permission of the management is strictly prohibited. I now hand the conference over to Mr. Saurabh Chawla for the opening remarks. Thank you, and over to you, sir.

Thank you, and good afternoon, friends. We are delighted to share with you a landmark milestone for GMR Group as well as for the Indian airport sector. We have entered into a strategic partnership with Groupe ADP for the airports business and accordingly have signed a share purchase agreement, pursuant to which Groupe ADP will hold 49% stake in GMR Airports for an equity consideration of INR 10,780 crores. It's our pleasure to share the good news that we have received the first tranche of INR 5,248 crores yesterday night post the requisite approval from the Competition Commission of India. Broadly, the transaction is based on the base post-money equity value of INR 22,000 crores. ADP has pegged earnouts at INR 4,475 crores linked to achievement of certain agreed milestones over the next 5 years. Thereby, total valuation, assuming all earnouts are successful, it will be about INR 26,475 crores on a post-money basis. We expect the deal to close in the next quarter, hopefully well before June 2020. ADP, as you're aware, is the second largest airport group in Europe based out of France. It operates 24 international airports around the globe, handling more than 234 million passengers as on 2019. Together, ADP and GMR will be one of the largest airport players handling a significant portion of the global airport traffic volume. A partnership with ADP will lay a new road map for the company as it has manifold merits. Firstly, it creates a world-class airport development and management platform. The partnership with Groupe ADP is in line with GMR's business direction to become a global airport developer and operator. We had been on a journey of defining airports of the future, with key focus on passenger experience by leveraging enhanced technology and offering superior amenities. With Groupe ADP, GMR will have a smoother access to global markets, opening up newer avenues of business growth. The deal will unveil a first-of-its-kind airport development and operations platform. It will combine unmatched trends in the airport development and higher standards of passenger experience. This will also open up new opportunities for route development, enhanced expertise in operations, retail, IT, innovation, engineering and many more. Together, we will continue to strive towards creating a world-class portfolio of smart airport assets. Secondly, this whole partnership is built on a very strong industrial and strategic backdrop. ADP and GMR are both in the airport business. The partnership between the 2 is being structured as a strategic partnership to be built on 2-way exchange of expertise, personnel, knowledge and market access. Passengers and other stakeholders will also benefit immensely and hereby setting new industry-defining benchmarks. Thirdly, and of course an important aspect for GMR Infrastructure, it will lead to significant deleveraging of the corporate balance sheet of the company. The equity raise will mainly address the debt at the corporate level and eventually will lead to improved profitability and cash flow for GMR Infrastructure. Lastly, in this partnership piece, way for restructuring of the business by way of demerger. The plan is for mirror demerger of the airport and nonairport businesses, which will be, of course, subject to the Board approvals. A committee of the Board has already been appointed. And now that we have completed the first tranche, the process will go forward and we will be filing for demerger post the closing -- the second closing whenever we receive the second tranche. The exercise would bring clear focus on 2 businesses, which are unrelated to each other and we believe shall unlock substantial value for all shareholders. At this stage, I'll close my remarks, and we are open to any questions that the participants may have with respect to this partnership that we have entered into of ADP.

[Operator Instructions] The first question is from the line of Aditya Mongia from Kotak Securities.

I had a few questions from my side. Sir, the first question I had was, wanted to check with you whether, as part of the deal, is there any guaranteed return that you would have promised to the buyer over here in the airports business?

No, Aditya, it's a pure equity transaction. There are no guaranteed returns of any time. And it's a very long-term partnership that we are envisaging with them. So both the ups and downs, we shall ride it together.

Sure. The second question on the deal was that, is there any agreement or contract that has been signed off in Groupe ADP increasing share in the JV over time -- in the airports business over time?

No, Aditya. The whole principle behind it is that, Groupe ADP is looking at GMR Airports as a platform for the -- primarily the Asia plays. So if you look at the concentration of their business, it's primarily in Europe. They have some North Africa and Middle East business, but that is in partnership, mainly with the TAV, which is the Turkish airport operator. And in their strategic vision, GMR is a perfect fit for the whole Asia play. And hence, they want to leverage our management strengths and our reach in Asia. As you are aware, we have 2 airport plays in Philippines, 1 in Cebu where we operate, and the other one which is Clark where we have our ATC. So that is what their focus is. There is no enhanced equity allotment to them envisaged at this particular stage.

Sure. And is there a specific territory defined through which all contracts that either of the 2 parties bidding will happen through this platform?

So yes, we have carved out exclusivity. GMR is exclusive for South Asia, whereas ADP is exclusive for Western Europe. GMR also is exclusive for Greece. So as you are aware, that we have recently signed the agreement for development of the Crete airport. So any other airport that may come, GMR will have exclusive rights to bid for that. However, in Asia -- on other parts of Asia or Africa or Middle East or even Central Asia, both the companies will actually coordinate with each other. And depending upon the strength of each, we will be bidding in those airports. As you are aware, we have great strengths in project implementation, project management, whereas Groupe ADP has huge strengths in design. They have access to very, very cheap capital. So the whole vision is that how we can combine these 2 in a full industrial and strategic partnership, which we have actually highlighted in our presentation also, whereby we can increase equity returns for our shareholders. So that's the vision which we both are taking forward.

Yes. So again, just clarifying what you essentially meant to say on the territory part was that, if, let's say, tomorrow an airport comes in Sri Lanka, then it will not be bid through this GMR Airports because that's a combination of 2 parties, that will be bid by GMR Infrastructure. Am I getting it right or…

No, you're getting it absolutely wrong. If it is in Sri Lanka, it will be bid by GMR Airports Limited, which is a 51-49 joint venture. If it is -- if it comes, let's say, in Thailand, then both the parties will sit together, whether it is ADP to bid for it or GMR Airports to bid for it. It is not GIL which is bidding for it -- or together -- or bid together for it.

The next question is from the line of Rakesh Tripathi from Franklin Templeton Investments.

My question was regarding the stake sales. So is there -- are the PE investors also selling their stake as part of the transaction? And if so, how much of the cash from the deal would GMR Infrastructure be receiving?

Yes. So the existing piece, till yesterday, of course, now they have exited, they have been bought over by Groupe ADP and they have exited out. So the likes of Macquarie and Affirma Capital, they have -- and JM, they have exited their investment in GMR Airports Limited. Out of the INR 5,248 crores that has been received in the entity, about INR 1,230 crores, if I'm correct, is the amount that has gone to the PE investors. The balance has gone to reduce the debt of the group.

Okay. And the entire INR 107 billion transaction includes INR 10 billion that will go towards the capital -- towards the CapEx spending for the Delhi airport, is that correct?

No, no, no. There's no connection between the 2. So out of the INR 10,700-odd crores that we have to receive for this divestment, about INR 1,000-odd crores will go into GMR Airports Limited, for its own balance sheet to deleverage and create a capacity for future growth. That is the platform entity in which Groupe ADP will come as 49% player. The balance INR 9700-odd crores is moneys available for GMR Group for its own corporate balance sheet deleveraging exercise. So these are 2 different buckets you have to view. With respect to DIAL, DIAL has its own business plan, own balance sheet. There is no equity infusion happening in DIAL, which is the Delhi International Airport. DIAL is -- has raised bonds for its CapEx plan. So the INR 10,500-odd crores that is being spent to increase the capacity from current about 60-odd million passengers to more than 100 million passengers. That is where that money will be spent. Currently, the cash on the books of DIAL is about INR 3,200-odd crores. Over the next 3 years, there will be internal accruals. That will also add on to it, and some real estate monetization and payments that will add on to it, which will complete the full CapEx plan of Delhi International Airport. So just to summarize, this transaction is primarily for GMR Infrastructure Limited to deleverage its own corporate balance sheet, which, upon the completion of the transaction, will delever by about INR 9,700 crores. INR 1,000-odd crores will go as primary infusion into GAL for GAL's own balance sheet capacity creation.

The next question is from the line of Kirthi Jain from Sundaram Mutual Fund.

Sir, this full INR 9,750 crores would be available for debt reduction, right, sir? Corporate debt reduction?

Yes, it is -- the target utilization is the corporate debt reduction.

Okay. Sir, some states need not buy from Malaysia Airlines to -- for Hyderabad, right, sir?

So again, if you look at the corporate structure of the airport platform, we have the listco, which is GIL. Underneath GIL is the airport platform, which is GAL, which is GMR Airports Limited, where Groupe ADP is coming in as 49% partner. And underneath that is entities like Hyderabad International Airport or Delhi International Airport. So any buyout of equity of Malaysian Airports or Fraport or whatever happens, that will be done by GAL, and it will be done in partnership with Groupe ADP. It has no impact on GIL.

Okay. Okay. Sir, again, on this funding, sir, like ADP -- as you highlighted, ADP, one of the strength is, they are able to raise at 1.2 percentage rates and all. So will they help us? Or how will it function, sir, to raise cost at such funds at which ADP also -- ADP is currently raising? You are raising at 5.8%, 5.9% roughly.

Yes. So that's a good question. In our conversations with them, this is one area of focus for them because they are able to deploy their capital, which today is not earning enough returns in the debt capital markets. Their intention is to actually deploy that debt capital in some of the greenfield or brownfield projects, which are in pipeline for us. And, however, detailing of that will happen as we go forward. They have demonstrated this intention of theirs in their joint venture with TAV, the Turkish Airport Venture. So in those projects, they have deployed by giving shareholder loan at very, very attractive rates, which benefited the Turkish airport platform because they got cheaper debt, and it benefited, of course, ADP's own balance sheet because they earned much better than what the market returns were offering. So it's mutually beneficial. That will play out also in the case of GMR Airports Limited.

Okay. Sir, last question. Sir, in this -- given that the ADP has low-cost funds and also strong balance sheet, will we leverage it to do capital development of hotels and other allied infrastructure within the DIAL and Hyderabad airport, sir? Anything plans like that?

No. I mean, they have -- see DIAL and HIAL have their own business plans. And the whole strategy going forward, honestly, is to actually create free cash flow. So the decision will be made at the appropriate time once the free cash flow starts to get generated, whether do you want to invest in an asset class like, let's say, real estate like hotels or anything like that, which gives better than what the returns are being offered by the airport platform. So at this stage, there is no self-development plan that is envisaged at either HIAL or DIAL. We are doing a little bit of that self-development in the real estate side at HIAL, but nothing more than that, nothing meaningful, nothing which I would guide you to factor in your analysis, not at this particular stage. Maybe 3, 4 years down the road, once the CapEx plan is fully completed and we believe that there is an opportunity to capture and we need to invest those surpluses instead of dividend out to shareholders, we rather invest those surpluses for real estate development and those verticals we could look at, at that particular point of time. Nothing right now.

The next question is from the line of Ajinkya Bhat from Macquarie.

Sir, I have 2 questions. First question is, what is the time line of the -- of getting the second tranche, which will have INR 1,000 crores primary infusion in GMR Airports?

So we should be looking at the first quarter of next fiscal year to complete the second phase of the transaction. That is the current time line.

Okay. And the second question is that, in the presentation that you have sent out, you have hinted at the -- at basically a potential demerger of GMR Airports eventually whenever it may happen. Now my question is that, if you are able to demerge and list it separately, so then it will be like a spin off. So the existing shareholding of GMR Infrastructure will essentially get mirrored into the 51% stake into the GMR Airports Limited. Then in that case, what will happen is that the foreign player, ADP, essentially becomes the single largest shareholder of the demerged GMR Airports business. Do you think that this might actually create regulatory hurdles given that airports is a strategic sector and you are essentially operating the national capital airport? How do you look at this process, with ADP becoming -- potentially becoming the single largest shareholder after the demerger?

So one, it is going to be a mirror demerger and not spinning off. So GIL will split itself into 2. So hence, the GIL shareholders will get exactly the same number of shares in GMR Airports vertical and also in GMR in nonairports vertical. So it's a vertical split, it's a mirror split, and it's not a spin off. So hence, the family will continue to own 64%, which is the current shareholding they have in GIL, let's say, theoretically, they will continue to hold 64% in GIL 1. So that's just to...

No, I'm not talking -- I'm not saying this from the perspective of GMR Infra. What I'm saying is, once you demerge GMR Airports, right now...

I'm not demerging GMR Airports at some point...

Not right now. Not right now. What I'm saying is that after this deal, GMR Infrastructure will hold 51% stake in GMR Airports, right? Now whenever GMR Airports is to be listed separately, essentially, that 51% holding in GMR Airports will get divided among the current shareholders of GMR Infra, whereas Groupe ADP will have 49% stake -- will retain 49% stake in GMR Airports. And then it essentially becomes the single largest shareholder, whenever that demerger happens, if and when.

So again, your understanding on that is wrong. I can explain to you separately off-line. There is no dilution that will happen from that 51%, number one. Number two, assuming that also, today, international players can invest 100% FDI into airport sector. The recent bid by Zurich at Jewar airport is a classic example. The existing Bangalore airport owned 100% by Fairfax is -- and its associate entities is one other example. So owning majority -- owning 100% is not an issue from a regulatory perspective. But coming back to your earlier point of majority being owned by ADP and minority by GIL investors, that's a wrong notion. But we can tell you off-line how the maths work in a mirror demerger.

The next question is from the line of Puneet Gulati from HSBC.

Just trying to understand here, so after this INR 1,230 crores that has been paid out to PE, is there anything else which is due to them?

No. They have exited fully.

So whatever out of some INR 10,700 crores, you received INR 5,200 crores. So the balance will entirely accrue to GMR Infra?

Has already accrued and debt has already been paid down.

Okay. So you received the entire cash. I thought you received only INR 5,248 crores.

Yes. Yes. So out of the INR 5,250 crores, which we have received right now, INR 1,230-odd crores has gone towards the PE, about INR 4,000 crores of cash in the first tranche has gone towards debt repayment. When we -- when you're talking about, you're talking about the second now?

So second tranche, yes.

Okay. In the second tranche, INR 1,000-odd crores will go to GAL, which is the airport platform to create its own capacity. So that entity will delever. There are certain -- there are certain bondholders over there who will get paid at that particular point of time. And the balance INR 4,000-odd crores will still come to GMR Infra for GMR Infra to further pay down its corporate debt. So in total, I would say, out of the INR 10,700 crores, INR 9,700 crores will come to GMR Infra for its debt to be paid down and INR 1,000 crores will go to GMR Airports for its debt to be paid down.

Okay. And no more payments to be made to the PE guys?

And no more payments to the PE guys, yes.

Okay, that's good. Secondly, can you also elucidate a bit more on the terms of the earn-outs that you will get?

The terms in what sense? I mean, there are certain milestones on various parameters in which -- which have been agreed with them, for example -- and in the case of, for example, the real estate monetization at what value, at what run rate. These are some of the performance parameters that we have to achieve over the next 5 years is what we have agreed. And upon achievement of that, at the fifth year anniversary is when it will be determined as to how many milestones have been achieved and what relative, what we call, value should accrue to GMR Infra.

Okay. So if you achieve all milestones, then the implied valuation goes up to INR 26,400 crores. Does that mean your shareholding will go up from 51% to whatever the higher number?

You are absolutely correct. It will go up to almost 58%, 59%.

The next question is from the line of Atul Tiwari from Citigroup.

Sir, just wanted to find out, after the paydown of this INR 4,000 crores of debt at the corporate level yesterday, how much debt is pending?

Sorry. Sorry. Please, can you repeat your question? Sorry.

So sir, I was just trying to ask, this INR 4,000-odd crores debt has been paid down yesterday, right? At the GIL level, GIL parent level. So after this paydown, as of today, how much debt is remaining?

So it will be about between INR 6,000 crores to INR 6,500 crores that would be still left over there. It will, of course, have some accrual interest because by the time 3 months, 2 months down the road, whenever the payment happens, that is -- that will get accrued to it.

Okay. So sir, does that mean that the debt at the GIL level was about INR 10,000 crores because I remember in some of the previous conference calls, a number of about INR 6,000 crore being discussed.

The corporate debt as of December was INR 9,000 crores. Of this INR 9,000 crores, the INR 5,200 crore, what we have got, INR 1,200 crores has gone to PE investors, INR 4,000 crores is used to pay this debt along with the accrued interest. So net-net, that's the PE situation for this INR 4,000 crores. And once we receive the remaining amount, that will also be used for corporate reduction. So the amount is INR 9,000 crores as of 30th December.

Okay. So sir, if you take.

Just to add...

Yes?

And just to add, when we have incorporated, it includes the stand-alone debt plus all the other entities debt, so which -- that's the way to look at it, and wherever corporate supports the entities, so all debt put together. It is not only the stand-alone debt. It includes all the...

Okay. Great. And so just to be clear, I mean, roughly about INR 4,500-odd more -- INR 4,500 crore more will be received by the parent company. But the corporate debt is about INR 6,500 crores. So another INR 2,000 crores will be left at the parent company. So what is the plan to kind of tackle that debt?

It won't be INR 2,000 crores. It will be in the slightly lesser range. And that also, you have to understand that there are other assets which are available with us.

And are being divested as we speak.

Yes. So there are road assets, highways are there, then we have got this land parcels. We have got energy assets, coal mines we have in Indonesia. So those assets are also -- we are actively looking at divestments. So our aim, which we have already indicated earlier, is to delever and make our balance sheet stronger. And our endeavor is to make it as soon as possible as low as possible corporate debt.

And the equity from the Kamalanga asset sales will also come to the GIL? Or it will go to the GMR Energy, just to clarify?

It will go to GMR Energy. It will not come to GMR Infra.