Friday, April 03, 2020

Airports are no longer attractive assets

Investor interest in Indian airports has seen peaks and valleys. From heightened interest, and several privatisations between 1997 and 2006, there was a lull from 2007 through 2014. The sector once again attracted interest from 2015 onwards, including from airport operators, sovereign wealth funds, and pension funds keen to gain a foothold in the sector. This interest was driven by a host of factors, including market returns, liquidity, market potential, market access, and privatisation parameters.

Most investors in India’s airports have come via equity positions in the country’s two large airport operators, namely GMR, and GVK. Overall, these investors have fared well, the returns have been great. Consider these statistics: Malaysia Airports sold its 10% stake in Delhi Airport for a 2x multiple; Bidvest sold its 23.5% stake in Mumbai airport for a 7.7x multiple; Zurich Airport sold its 12% stake in Bengaluru airport for a 10.5x multiple; and Siemens sold its 6% stake in Bengaluru airport for a 19.1x multiple.

Over the last 20 years, investor interest in airports has only grown stronger. Fairfax group paid around $466 mn to gradually increase its stake to 54% ownership of Bengaluru International Airport Limited. Earlier in the year, Zurich Airports (Flughafen Z├╝rich AG) won the bid to build and develop the greenfield airport at Jewar (the project’s estimated value is north of $3.1 bn); and, very recently, Groupe ADP (a French conglomerate) bought a 49% stake in GMR airports for $1.5 bn.
Until recently, airports, as an asset class, were on a stable ascent path. One might ask why this was so.
Airports’ success as an asset class is linked to several factors, the primary being the explosive traffic growth. This, when coupled with the monopoly status often enshrined in the master agreements, long-term concession periods, low competition risk, favourable till-structures, stable cash-flows, commercial property development rights, a captive consumer base, and guaranteed return on large portions of the asset base (currently PPP airports are guaranteed a return on the regulated asset base of up to 16%), is the perfect recipe for strong and growing cash-flows. Thus, while gestation periods are long, for investors looking at long-term assets, the elements align and make for a compelling case for investment. Consequently, airports carry immense market power. Coupled with the Indian market’s growth in double digits, the profit potential, until very recently, was immense.
03/04/20 Satyendra Pandey/Financial Express
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