Airports: why ADP is banking on the Indian Eldorado, even if it means waiting

Growth is elsewhere. For some time now, when asked about the environmental transition of air transport, Augustin de Romanet, CEO of the ADP group, has been saying that Westerners will probably have to travel a little less, but that this is not "a tragedy" in view of the growing demand for travel in developing countries. Even if it makes some airlines jump. But if the boss of the Paris airports says this so calmly, it is because he has already positioned himself in the said developing countries. After acquiring a stake in the Turkish group TAV Airports - with the disappointment that we know about the construction of the new Istanbul airport - ADP acquired 49% of the Indian group GMR Airports in 2020.

This investment is not without risks in a country that has already experienced the emergence and collapse of its air traffic several times, leading to the bankruptcy of several major companies. Added to this is the uncertainty of having to deal with the Indian administration, whose excessive constraints have clearly not helped the sustainable growth of air transport in the country. Finally, there is the family of founding chairman Grandhi Mallikarjuna Rao, which owns 63% of GMR Infrastructure, which in turn owns 51% of GMR Airports, although the deal has not been a major problem so far. It could be more complicated if the ADP group ever pushes for a majority stake, while the family does not intend to relinquish control at this time. This is quite different from the partnership model with TAV Airports, where ADP has control and developments tend to be joint. Finally, this transaction, valued at 1.2 billion euros, was finalized in 2020 at the height of the health crisis. It is therefore still too early to know whether the ADP group has made the right choice in setting up in India, but the prospects are undeniable.

A middle class that will triple

India is overtaking China to become the world's largest population with 1.4 billion inhabitants. Although the middle class is still small, it is beginning to emerge, which immediately creates a mass effect. Driven by an average annual GDP growth estimated at more than 7%, it should triple by 2030 and reach 61 million people, which is more than in the United States, even if it is still far from China. The conversion of these populations to airplanes is not automatically acquired, but the size of the country and the slowness of the rail connections play for it. India is set to become the world's third largest market behind China and the United States, followed by Indonesia.

These prospects are illustrated by the giant orders for several hundred aircraft recently placed by IndiGo and Air India. By 2030, the local fleet is expected to double to 1,200 to 1,300 aircraft. This offers significant growth prospects for Indian airports, including the three for which GMR has won the concession. The group already claims a quarter of India's traffic, which reached 227 million passengers in 2022, with the ambition to increase its share of the cake.

There is the airport in Delhi, the capital, IndiGo's main base and Air India's hub, as well as the international gateway to the country. It is 64% owned until 2066 and has a capacity of 70 million passengers a year. But an expansion to 100 million passengers in 2 to 3 years is underway, with a final target of 120 million. In view of these prospects, the current construction of a new airport by Flughafen Zürich AG (operator of Zurich airport) does not worry ADP.

Next comes Hyderabad, 63% owned until 2068, mainly domestic but with international growth potential. The airport manager claims 850,000 American passengers per year without having direct flights to the United States. Too small until recently, it is in the process of tripling its capacity in four years (including a year's delay due to Covid) to reach 34 or even 40 million passengers. By 2027-2028, a new extension is planned to reach 80 to 100 million passengers. The group has also strengthened its position with the opening of the new airport in Goa, one of India's main tourist cities, in January. With a capacity of just under 8 million passengers, it should double by the end of the decade. After launching it on its own with a concession until 2060, GMR Airports is starting to sell shares in the new airport. Finally, the group has also won the concession for the Indonesian airport of Medan, in July 2022.

Industrialists on the lookout

In addition to demographic and economic growth, there is also an industrial dimension to these prospects. For many years, India has been striving to develop local skills. This includes champions such as the Tata Group and the state-owned Hindustan Aeronautics Limited (HAL) in the aeronautics industry, as well as collaborations with Western manufacturers and technology transfers under the "Make in India" strategy. Hyderabad has significant capacities in pharmaceuticals - with a third of Covid vaccine production -, tech, IT and aeronautics. Safran, Pratt & Whitney and Schneider Electric are all based here. In fact, the traffic in Hyderabad is essentially business.

Against the backdrop of geopolitical tensions with China and, above all, the "zero Covid" policy that was drastic to the point of excess until a few weeks ago, manufacturers are currently rethinking the location and dependencies of their supply chains. While relocation to Europe or North America is out of the question for a number of low-value-added products and components, India is emerging as a compelling alternative.

The recovery is accelerating and value is rising

In fact, the first results are already in. The recovery in India is faster than in Paris airports. Last year, Delhi and Hyderabad had already recovered 86.5% of their 2019 traffic, compared with 80% for Roissy and Orly. And the movement is accelerating, with a full recovery in January.

According to Augustin de Romanet, the valuation of the Indian group is already double that established with the acquisition by ADP in 2020. Based on the quotation of GMR Infrastructures, which is listed on the stock exchange, it would reach today about 2.6 billion euros. And if the French group has decided to hold on to its shares for the time being rather than pocketing the loot, it is because it is convinced that this amount can grow further in the coming years.

However, ADP will have to be patient. For despite these fine promises, GMR Airports is not yet the golden goose. With the major works launched at the new Goa airport, and the extensions to Hyderabad and Delhi, the Indian group is engaged in major capital expenditure and is assuming this at the cost of high debt. This effect has been exacerbated by Covid, as the slowdown in traffic has led to a drop in revenues. After losing €28 million in the fiscal year ending March 31, 2021, GMR Airports reduced its losses by three the following year. But in the first nine months of fiscal 2022-2023, the loss exceeds €10 million.

After the desert, dividends

But internally at ADP, they are convinced that this "desert crossing" will come to an end in 2027-2028 with a slowdown in major capital expenditure, or even earlier depending on traffic growth. From then on, dividends are expected, with an exponential growth that could increase the amounts to several tens of millions of euros, even if no amount is officially communicated.

The acquisition of GMR Airports was originally intended to help finance the major investments needed to build terminal 4 at Paris-CDG, a project that was abandoned during Covid. It will also help the company expand into new regions, as it did with Medan in Indonesia. The partnership also includes industrial and technological cooperation. This is also the case for route development, where ADP claims real expertise, which is now being looked at on a group-wide basis with ADP, TAV Airports and GMR Airports. As G.M. Rao says, "there is a lot of exchange and a lot to learn on both sides".

Source : https://www.latribune.fr/entreprises-finance/services/transport-logistique/aeroports-pourquoi-adp-mise-sur-l-eldorado-indien-quitte-a-patienter-952761.html