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Singapore: Fitch Ratings has affirmed GMR Hyderabad International Airport Limited’s (GHIAL) Long-Term Issuer Default Rating (IDR) and outstanding senior secured notes at ‘BB+’. The Outlook is Stable.

Rating rationale
The rating affirmation reflects the recovery in traffic from the Covid-19 pandemic in Hyderabad’s growing catchment area, GHIAL’s ability to reach near completion of its expansion capex and a steadily improving regulatory environment with the implementation of third control period (CP3) tariffs from the financial year ended March 2022 (FY22) onwards. The Outlook reflects adequate headroom at the current rating level with rating case leverage declining to about 5.5x in FY26 from 10.4x in FY23.

Furthermore, GHIAL’s partial refinance of its senior secured note due in 2024 and 2026 with domestic non-convertible debentures (NCD) of equivalent value at a lower rate of interest, with a tenor of 10 years and amortisation starting in the sixth year, is an improvement to its debt maturity profile.

Key rating drivers
Strong Passenger Growth Expectations – Revenue Risk – Volume – High Midrange

Fitch expects total passenger traffic at GHIAL to reach 24 million in FY24, against 21 million in FY23. Total passenger traffic in FY23 was 97% of the FY20 level on a strong rebound in domestic passengers. Domestic passengers were about 80% of the total mix in FY18-FY20. Total passenger traffic in 5MFY23 stood at 10.3 million, surpassing the pre-pandemic high of 9.2 million in 5MFY20. International passenger traffic in FY23 reached 87% of the pre-Covid high, and continued to improve in 5MFY24.

GHIAL is exposed to significant carrier concentration risk with IndiGo dominating the Indian domestic market. Still, the airport is a major international airport for the states of Telangana and Andhra Pradesh with limited competition from other cities and other modes of traffic. The airport had CAGR of 12.8% in passengers from its first year of commercial operations in 2009 until the pandemic.

Approved Increase in Regulated Tariffs – Revenue Risk – Price – Midrange

Tariffs under CP3 (FY22-FY26) were approved on 31 August 2021 under GHIAL’s hybrid till regulatory framework, with 30% non-aeronautical revenue used for cross-subsidisation with effect from FY22. The user development fee, which is majority of the aeronautical revenue, was increased by around 100%, further supporting the increased capacity expansion. A number of pending legal and regulatory issues were also dealt with under CP3, thereby reducing future uncertainty.

However, INR7 billion of aeronautical revenue out of a total of INR48 billion has been deferred to the fourth control period (CP4) for recovery along with the carrying cost. At the same time, INR67 billion out of the INR75 billion of expansion capex has been allowed in CP3 with the rest to be considered in CP4, based on actual spend.

Major Expansion Capex Near Final Completion – Infrastructure Dev. & Renewal – Midrange

Our rating case does not expect any significant expansion in capex in the medium term, following the completion of the current expansionary capex cycle. The ratings reflect the implementation of the capex plan by FY24 without any significant time and cost overruns. More than 90% of the physical work is completed and the remaining work should be completed within FY24, according to GHIAL’s management. The airport was operating above design capacity before Covid, with a utilisation ratio above 170%. Management’s current expansion plan can handle a capacity of 34 million passengers.

Protection for Debtholders, Manageable Refinance Risk – Debt Structure – Senior – Midrange

GHIAL’s total debt comprises three US dollar senior secured notes and two rupee non-convertible debentures that all share security on pari passu basis. The US dollar bonds have protective structural covenants including a defined cash waterfall, restrictions on dividends and a fixed-charge cover ratio test for additional debt. The proceeds from the two rupee debentures were used to partially prepay the two US dollar bonds due in 2024 and 2026. A long concession tenor until 2068, well-spread maturity profile and healthy financial profile mitigate refinancing risk.

Financial Profile
The base case assumes traffic will reach pre-pandemic levels before end-2023 and GHIAL will reach its maximum capacity of 34 million passengers by FY26. The traffic assumptions are broadly in line with management estimates. Only contracted revenue from commercial property development has been considered. The net debt/EBITDA ratio is around 10.4x in FY23, before it declines to 6.5x by FY24 and 5.0x by FY25.

The rating case also assumes traffic will reach pre-pandemic levels before end-2023. However, growth beyond 2023 will be slower and GHIAL will reach its maximum capacity by FY28. Only contracted revenue from commercial property development has been considered. The net debt/EBITDA ratio declines to 7.5x by FY24 and about 6.0x by FY25.

Peer Group
Mumbai International Airport Limited (MIAL, senior secured rating: BB+/Stable) is one of GHIAL’s closest Indian peer. MIAL has a larger catchment area than GHIAL, as Mumbai is a bigger city than Hyderabad. We assess the price risk for both airport operators as ‘Midrange’. GHIAL’s sustained leverage is estimated to be a turn higher than that of MIAL. However, the sharp deleveraging beyond capex expansion justifies similar credit assessment despite GHIAL’s lower volume risk assessment. GHIAL’s leverage in FY25 after capex expansion is 6.1x, similar to MIAL’s leverage of 6.3x in the same year.

GHIAL can also be compared with Delhi International Airport Limited (DIAL, BB-/Stable) DIAL has a ‘High Stronger’ volume risk assessment due to its strategic location and being the largest airport in the country. Both airports have a ‘Midrange’ price risk assessment. GHIAL has received the CP3 order, effective from FY22, while DIAL’s next control period is due soon, however, the base airport charges mitigate any downside risk to the aeronautical tariff determination.

DIAL’s leverage will remain high in the short term, before easing to around 9.0x by FY27, relative to GHIAL’s leverage of 10.4x in FY23, which declines to about 5.5x in FY26. The high leverage along with uncertainty in revenue share deferment has resulted in a two-notch differential. DIAL’s higher leverage is compensated partially by its larger catchment area and its volume risk assessment. The debt structure is similar for both airports, mainly consisting of US dollar bullet notes with cash waterfall mechanisms.

Rating sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

  • Fitch forecast net debt/EBITDA above 7.0x for a sustained period;
  • Fitch forecast EBITDA/net interest materially below 2.0x.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

  • Fitch forecast net debt/EBITDA below 5.0x for a sustained period;
  • Fitch forecast EBITDA/net interest sustained above 2.0x.

CREDIT UPDATE
Traffic Performance: Total passenger traffic for 5MFY23 stood at 10.3 million, surpassing the pre-pandemic high of 9.2 million in 5MFY20. The growth is led by domestic passengers, which have historically accounted for about 80% (FY18-FY20) of the total passenger mix.

Financial Performance: All of GHIAL’s business segments improved significantly after the pandemic.

  • Revenue increased by around 60% to INR19.1 billion in FY23 on the strong traffic recovery, against INR11.7 billion in FY22. In 1QFY24, revenue increased by 44% yoy to INR6 billion.
  • EBITDA increased by 111% in FY23 to INR6.7 billion. In 1QFY24, EBITDA increased by 67% yoy to INR3.8 billion.

Liquidity Position: GHIAL had cash and cash equivalents (including financial investments) of around INR19 billion as of July 2023.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision.

For more information on Fitch’s ESG Relevance Scores, visit