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BB+ rating for GMR Hyderabad Airport

GHAIL has good location and market position, says S&P

S&P Global Ratings has assigned its ‘BB+’ long-term corporate credit rating to India-based airport operator GMR Hyderabad International Airport Ltd (GHIAL) despite regulatory uncertainty.

The outlook is positive for the company which was also assigned ‘BB+’ issue rating to the company’s senior unsecured notes.

The rating reflects S&P’s expectation that GHIAL will maintain its financial strength over the next 12-24 months despite a delay in the resetting of tariffs and the company’s high spending plans.

“We view India’s regulatory regime for airports to be still evolving, resulting in higher regulatory risks for airport operators than in other countries in Asia-Pacific,” said S&P.

“However, we expect GHIAL’s regulatory uncertainty to decrease over the next six to 12 months following the implementation of revised tariffs and the resolution of some disputed items.”

Furthermore, S&P said it believes that the company’s strong domestic passenger growth will offset the impact of these regulatory delays.

This is despite Hyderabad airport’s relatively weak market position and small size.

GHIAL has a good geographic location and market position, which allows the company to benefit from India’s strong growth in the aviation sector, particularly as domestic travel continues to rise, according to S&P.

GHIAL is exposed to regulatory uncertainty because the Airports Economic Regulatory Authority of India (AERA) continues to delay the implementation of the second control-period tariff (2016-2022) even as GHIAL’s plans to spend Indian rupee (INR) 15 billion-INR20 billion over the next three years, noted S&P.

S&P expects the second control-period tariff to be implemented by March 2018.

It anticipate that the new tariff will encompass “true-up”, which recovers GHIAL’s loss of earnings as a result of past regulatory disputes.

Moreover, S&P expect the revised tariff to account for the recovery of capital expenditure for GHIAL’s next phase of terminal expansion.

If approved, S&P believe that the new tariff will support increased predictability and stability in earnings for the next control period, because the uncertainty over how much capital spending the company can recover will be largely removed.

The recent delays in implementing the second tariff order reflect the less-established and evolving regulatory framework for airports in India, opined S&P.

This is demonstrated by the number of disputes and delays in passing regulatory orders by AERA.

However, the tariff mechanism provides assured returns on a regulated asset base including the true up mechanism if traffic volume is lower than anticipated.

Regulatory risk is much lower for airports in countries such as Australia. Southern Cross Airport, for example, benefits from a regulatory regime that is well-established and light-handed.

S&P believes the impact of regulatory risks for GHIAL is limited because the size of its regulatory contentions are smaller and its disputes are less complex than what we have observed with average private airports in India.

GHIAL’s airport’s largest regulatory contention was in relation to the implementation of its hybrid till, which was resolved in November 2015.

Under the hybrid till, airport charges are cross-subsidized by 30% of non-aeronautical revenues.

In contrast, under GHIAL’s previous single till, airport charges were subsidized by all non-aeronautical charges.

This change in till resulted in a strong financial performance in fiscal year ended March 31, 2017, where the ratio of funds from operations (FFO) to debt increased to 23%, from just 7% in the previous year.

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