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March, 2018

CFO Insights on Financial Services

CFO Insights speaks to Madhu Terdal, Group CFO, GMR Group on strengthening capital markets in India and GMR’s expansion plans.

The government has taken several steps to improve ease of doing business in India. Do you see an increasing interest from foreign investors in India?

Yes, we see an increasing interest from foreign investors in India as is evident from the data. FII’s net investment in Indian debt and equity stood at US$ 7.46 billion in 2016-17. India focused offshore funds and exchange traded funds have achieved growth of 10.2 per cent in their combined assets and have received inflows of US$ 2.6 billion in Q1 FY 18. The total FDI investments in India during April to Sept 2017 stood at US$33.75 billion.

However, if we look at the assets that have attracted FDI investments, most of these investments have been towards well-developed assets. FDI is still low in assets that are at an initial stage of development. The lower cost of capital for such investors enables them to compete better and acquire/invest in attractive assets that are already at an advanced stage and comparatively less risky and are now available at competitive pricing. However, their interest in developing assets is the true test of ease of doing business in India.

The other important factor that will drive greater interest from foreign investors in India is clarity on regulatory guidelines as well as stability of regulations.

With India’s air traffic growth estimated to be at 8-10% over the next two years and the country’s largest airports operating at over 70% of maximum capacity, what is needed to bridge the airports’ infrastructure gap?

Airports will continue to need large investments and private sector players should be allowed to play a real role in the development of these assets. Recently, few airports   have not been able to attract good bidders as the scope of work was not inspiring and there was no major role for the private sector players. Further, the regulatory guidelines should be clear and unambiguous to allow the airport assets to earn their true economic returns and encourage private sector participation. Bidding criteria must evolve, allowing airports to earn at least 15-16% return on equity.

What do you think are going to be the key growth areas for GMR Group going forward?

GMR Group shall be focusing on developing new airports in domestic and international markets. Domestically, we will look at either greenfield or brownfield assets, however, internationally, we will focus on only brownfield acquisitions. We do not look at inorganic growth through direct acquisitions, and only bid for assets where we can significantly add value by improving operational efficiencies or by generating adequate non airport related revenues.


Today, GMR group is one of the top five airport operators in the world with Delhi, Hyderabad, Goa, Cebu and Crete assets. We have been recently awarded the Clark airport in Philippines and are bidding for the Belgrade airport.

We distinguish ourselves as being an end to end airport solution provider, with presence across the airport value chain, from construction, financing, development to the operation and management of airports. We also have presence in the non-aero businesses, such as the duty free services, through subsidiaries, which distinguishes us from other leading international operators as well.  Growing the non-aero business is one of our key areas of focus.

In our energy vertical, we will focus on growing our renewable portfolio and the O&M business segment. Many stressed assets are now being acquired by financial institutions such as banks and ARCs, and we believe there is strong potential for growth in the O&M business for such assets. Accordingly, we recently tied up with Malaysia’s Tenaga Nasional Bhd(TNB) to set up an operations and maintenance (O&M) joint venture for the power sector. The O&M JV will provide operation and maintenance services, performance improvement services, testing and diagnostic services, repair and refurbishment services for power plants in India.

Within the energy vertical, we will look to enter into the T&D segment as well, which will likely be the focus of the next generation of reforms. We expect to play a big role in T&D, as it is overall less capital intensive. We will focus on areas where we have demonstrated our efficiency or have a competitive edge.

We believe that the Railways segment has a huge upside and is going to be the game changer in the country by creating the much-required rail transportation capacity. Accordingly we would also focus on railway projects involving design and construction of stations, structures and track works on EPC basis wherein group is not required to provide significant investment for the project

In your experience, do you see debt capital markets playing a significant role in future financing for India Inc.?

Debt capital markets shall play a very significant role in future financing in India especially for the infrastructure sector. Infrastructure sector requires long term finance with easy terms which are possible in case of debt capital markets but are a constraint in case of bank finance. Currently, the debt capital market is very shallow in India and support from regulators like SEBI and RBI will help in developing the market further.

Currently in India, the investment norms for majority of investors whether in the private sector or insurance companies, banks and pension funds are heavily skewed towards investment in A+ or higher rated bonds. As a result, companies in initial stages of development, which are inherently riskier, are being funded through bank finance whereas corporate bonds markets are funding primarily top rated companies.

For instance, most of the infrastructure companies do not generate positive cash flows in the first 3-4 years and as a result do not get an investment grade in their initial stages, thus limiting their ability to raise capital from debt capital markets at this stage. This needs to change – corporate bond holders should be encouraged to finance, say around 50% of the overall funding requirements even at initial stages with the remaining being funded through bank financing. Potential methods to encourage such investments could entail a differential pricing methodology and stringent methods of apprising the project in case of a below investment grade fund-raise. We believe in this context, LIC and other major insurance companies can play a major role in developing debt capital markets further. To protect interests of retail investors, this can be limited to “qualified institutional investors” and potentially high net-worth investors, who can understand and price the associated risks and also track relevant interest rate movements.

Another factor that needs to evolve is the external credit rating methodology. Currently, credit rating agencies usually adopt a distinct methodology of rating an infrastructure company, wherein even a single default can lead to a downgrade in the rating. Even operational infrastructure projects which are fundamentally viable but face short term liquidity mismatches would have constrained credit ratings on the conventional rating scale. For instance, short term cash flow mismatches may arise due to delayed payments from counterparties, however, such cash flow mismatches may not translate into sizeable losses to the investors eventually. Banks and investors should be encouraged to move from this traditional methodology to an “Expected Loss” rating methodology, to facilitate greater participation from long term investors and lenders, as it focuses on recovery of dues over the life cycle of an infrastructure project, takes into account refinancing/restructuring and any in-built safeguards such as termination payments or contractual protections.

What are your capital expenditure plans across the GMR Group’s businesses for the next 12-24 months? What sources of funding do you plan to consider?

We are expanding our airport business in next 12 to 24 months’ time period. Projects in pipeline are Goa airport with a capex requirement of INR 1,900 crs with debt portion being INR 1,330 crs, Cebu airport which is a brownfield expansion funding shall be done through internal accruals and another is Crete airport wherein we would be investing approx. Euro 15 MN for a 10% stake and which shall be funded through internal accrual.

For our existing airports, we would be investing around INR 5,000-6,000 Cr in the Delhi airport and INR 2,500-3,000 Cr in Hyderabad airport, all such investments would be funded through internal accruals as well.

Under our energy vertical Bajoli Holi project which is a Hydro Power Project shall be operationalized.


How do you evaluate various sources of funding: Debt (domestic and offshore), equity and offshore?

Although, the equity markets in India are quite active, there is a dearth of true long term investors. There should be some incentives to inculcate long term investing in equity markets. Further, investment bankers, currently, do not have any financial commitments towards the IPOs they manage. There should be some mechanism by which they have some skin in the game.

Debt from domestic markets was more or less available until now. However, given the banking system is undergoing some stress on account of increasing proportion of non-performing assets, there could be a strain on the availability of this source of funding in the future and therefore unless the bond markets step in, fund raising will be a big challenge.

ECB comes with some regulatory restriction in terms of tenor, pricing and hedging requirements which needs to be carefully evaluated for the project. ECB norms in infrastructure should be relaxed so as to enable easier and enhanced borrowings given the cost differential between domestic and global markets. Shortening the minimum average maturity of the ECB loan will help infrastructure companies to refinance costlier debt, as loans with shorter maturity are cheaper than long-term borrowings.

Raising Equity raised through ADR/GDR is difficult in terms of compliance but have fewer end use restriction.

What are the specific reforms needed to further strengthen India’s capital markets?

  1. Rationalizing the Securities Transaction Tax – STT for cash delivery transaction is about 730 times than that of options which should be rationalized

  2. Increase domestic institutional investor participation – by allowing higher investments by pension funds in equities – current regulations allow only 10% of the fund corpus to be invested in equities directly or through mutual funds as compared to 50% in other international markets. Having said that, I also believe that our equity capital markets are not yet as mature as other developed markets such as the US, and we need to be more stringent while investing pension funds in current Indian equity markets.

  3. The time taken between idea generation and actual implementation is quite high for a capital market transaction in India. For instance, large corporates needs 45-60 days to finalize accounts, which leaves a very small window to obtain SEBI approvals and launch an IPO, given the regulatory and investment norms around validity of financials in the prospectus. Some developed markets have the concept of a pre-approved shell like document which can be updated in a short time frame and allows issuers to plan their listings better. Similarly, for a rights issue, the time period between issuing the notice to the Board to approve a rights issue and the actual launch of the rights issue – is a 2-3 month window, which allows investors to potentially play the stock and drive down the stock price - adversely impacting the overall transaction. For a listed company, regulations need to evolve to allow announcements regarding the rights issue to be kept confidential, until the regulatory approvals are in place, thus narrowing the scope of playing the stock.

  4. Another aspect that is prevalent today – liquidity is driving markets, which is not ideal. Saving deposits are the backbone of the banking system as well as the economy. However, today, savings are being channeled to mutual funds and capital markets, on account of the tax efficiency of these products. The impact of slowing deposits is evidenced by the fact that a major bank decided to raise its interest rate on bulk deposits by 1% recently. Although it is important to promote capital markets, there should be incentives to encourage people to put money into banks as well. Promoting capital markets at the cost of the banking system will impact the overall economy. Capital markets can be promoted by introducing more financial intermediaries, increasing rural reach and inculcating the culture of investing in markets as well.

  5. Deepen the Corporate Debt Market –Currently the Corporate Debt Market is very illiquid due to lack of participation. Exempting corporate bond repos from CRR/SLR is a necessary step.

  6. Create an integrated trading and settlement system for Corporate Bonds

  7. Streamline securities lending and borrowing mechanism


Your recommendation as a CFO: what are the aspects that a corporate should consider while making a divestment or M&A?

  1. For the success of any M&A strategy, detachment from the asset is critical. The divestment decision must be based on two criteria (i) if it is a good performing asset, evaluate if the asset has reached a steady state of growth- this is a good time to exit, (ii) if the asset is not performing well, evaluate if the asset can be turned around. If it cannot be revived, it is time to exit the asset. However, if the asset has a potential to be turned around, then the optimal strategy would be to unlock capital from your good assets and use the capital to turnaround your other assets.

  2. M&A should be an integral, regular and ongoing function of the finance department.  Especially for a growing conglomerate, it is important to keep churning its portfolio (similar to fund managers) and find your own capital within your businesses instead of growing through leverage.

  3. Today, one of the major reasons that GMR Group have been fairly successful in tiding over our crisis is that our promoters are very proactive in divesting our assets. A separate M&A division was established for this purpose.

  4. Another proactive approach by GMR group has been establishing the GPAC (Group Performance Advisory Council), a think tank of seven luminaries led by global management guru and consultant Ram Charan. This advisory council meets at least quarterly, and advises on various strategies, including our M&A strategy.

  5. Synergy arising out of any M&A transaction. Other than capital, M&A transactions enable the organization to become more accountable and disciplined. Usually, the M&A partner would also bring in value add in the form of technology or technical expertise such as O&M abilities.

What has been GMR’s experience in infrastructure?

  1. Capital is the real raw material for an infrastructure company- a company that is able to manage its capital well, will be successful

  2. Growth only by leveraging is not ideal, this has been one of our biggest lessons.

  3. There is no substitution for professionalizing a corporate. It is very important to have appropriate systems and processes in place. Today, our Chairman takes pride in the fact that the Company can run without his presence and there is proper succession planning in place. Very few companies have created such strong large teams, at the same time, managing to remain agile, quick in decisions and reflexes. 

  4. GMR is a very humane organization, our promoters believe in the principle – “Run the business like a family, and the family like a business”.

Opinions expressed in the article are the author’s own.