BIAL capacity to treble, expansion to cost $2 bn

Fairfax-owned Bangalore International Airport (BIAL) is expected to expand its capacity with an investment of around $2 billion to handle 65 million passengers in 2028, from the current figure of 20 million passengers daily.

In a letter to the shareholders, which was enclosed along with Fairfax India’s annual report and shared recently, Prem Watsa, chairman, and chief executive of Fairfax Financial Holding, said “this (BIAL) is indeed a very exciting investment for Fairfax India”.

A second runway is under development with an aim to complete it in 2019. A second terminal is scheduled to be completed in 2021, for which the phase 1 schematic design has been completed and detailed planning is ongoing.

“The investment required to complete the expansion projects is approximately $2 billion and will be funded through internally generated funds and debt. The financing plan, based on a debt to equity ratio of 80:20, and negotiations with banks are well underway,” he said.

In March 2017, Fairfax India had acquired 38 per cent of BIAL for $385 million (including 33 per cent from GVK Group, BIAL’s promoter), implying an equity value of around $1 billion for the whole company. Based on BIAL’s March 2017 financial statements, the purchase price valued BIAL at a price earnings ratio of 14.5 times, price to book value of 4.7 times and price to free cash flow of 8.7 times, without considering the value of the real estate that can be monetised.

In July 2017, Fairfax India acquired the final 10 per cent of BIAL owned by GVK for $200 million.

“The higher price is being justified by this purchase enabling Fairfax India and the other remaining shareholders to reconstitute BIAL’s Board, to appoint the best qualified person as BIAL’s CEO, and generally to allow it to be managed according to Fairfax India’s standards of corporate governance and guiding principles,” said the Indo- Canadian businessman.

Watsa said that aero revenue has grown at a CAGR of 22 per cent from 2009 to 2017. This is the revenue earned for providing services such as landing, take-off, parking, ground handling, ground safety, facilities, amenities and services to airlines and passengers.

The tariffs for these services are set for five-year periods and are fixed so as to yield a regulated 16 per cent ROE. The regulatory authority treats 30 per cent of non-aero revenue as aero revenue.

All revenue other than aero revenue, including cargo handling, fuel sales, food and beverage sales and duty free shops, grew at a CAGR of 19 per cent from 2009 to 2017 and is expected to grow substantially due to an increase in passenger growth rates.