Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1’ rating to the commercial paper programme of WAISL Limited (WAISL).

 

The rating reflects WAISL’s healthy business risk profile supported by long-term revenue visibility, seasoned presence in the information and communication technology (ICT) infrastructure industry, strong operating efficiency and healthy liquidity. These strengths are partially offset by the limited albeit improving scale of operation, modest financial risk profile along with debt-funded expansion risk owing to modest equity base, rising interest rates and vulnerability to fluctuation in passenger traffic.

 

The rating mirrors WAISL’s established position as the exclusive ICT infrastructure service provider for the Delhi International Airport Ltd (DIAL; CRISIL A+ / Stable), GMR Hyderabad International Airport Ltd (GHIAL; CRISIL AA / Negative), and the upcoming GMR Goa International Airport Ltd (GGIAL; CRISIL BBB-/Stable). The same is supported by the long-term Concession Agreements (CAs) entered into by WAISL with these airport operators. The rating also considers the critical nature of ICT services for the functioning of the overall airport eco-system as it includes design, procurement, management, support and maintenance of IT infrastructure for all the passenger terminals at these airports.

 

The rating factors in the healthy revenue potential for WAISL as it collects revenue per departing passenger from the airlines operating at these airports (forming ~ 80% of its top line) and service fee from retail and commercial establishments at the venue for providing ICT services. While revenue is dependent on passenger traffic, the same has improved significantly over the past few quarters as the industry is witnessing post Covid-19 recovery. Further, the rating also factors in the healthy operating margins of 40-45% maintained by WAISL over the past years, along with an expectation of further improvement in the margins with increasing air passenger traffic.

 

The rating also takes into account the counterparty risk on account of moderate financial risk profile of airlines, impacted by Covid-19 induced disruptions over the past fiscals and high operating cost due to increased jet fuel prices. However, the risk is partially mitigated by the bank guarantees and security deposits provided by these airlines to WAISL and track record of timely collection of its receivables over the past years. CRISIL Ratings also factors in the moderate financial risk profile of the company reflected in high gearing levels of more than 6 times and leverage of 5 times as on March 31, 2022, respectively (4 and 2 times, respectively, a year earlier). The same has been on account of debt-funded capital expenditure (capex) and lower passenger volume over the past two fiscals. WAISL is currently undertaking significant capex (of over Rs 700 crore till fiscal 2026) to support increase in the passenger handling capacity at the said airports. While debt for the said capex has been tied-up, its timely execution without any material cost overrun will remain a key rating monitorable.

 

The business and financial risk profiles are likely to improve over the medium term on the back of expected recovery in air-passenger traffic to pre-Covid levels this fiscal and healthy operating margins, supporting improved cash accruals. This will remain a key rating sensitivity factor.

 

CRISIL Ratings also notes the healthy liquidity of around Rs 132 crore as of August 2022 including debt service reserve account (DSRA) of 3-4 months, which is expected to be sufficient to cover repayment obligations over the next 12 months.

Analytical Approach

CRISIL Ratings has taken a standalone view on WAISL as cashflows are ring-fenced by lenders through a waterfall mechanism and creation of DSRA.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy revenue visibility backed by long-term CAs: WAISL derives its exclusive ICT infrastructure service provider status from the long-term CAs executed with DIAL, GHIAL, and GGIAL. These CAs are co-terminus with the operations, management, and development agreement (OMDA) of these airport operators with Airports Authority of India (DIAL valid till May 2036, GHIAL till March 2038 and GGIAL till March 2059), which provides revenue visibility. ICT services are inherently critical for the functioning of the overall airport eco-system as it covers all the infrastructure necessary for passengers from entry point to boarding including baggage claims, customs, and shopping at the airports.

 

These long-term CAs provide revenue visibility for an extended length of time and offer WAISL the exclusive right to collect revenues from airlines per departing passenger, under the revenue share arrangement with airport operators (DIAL: 9%, GHIAL: 3%, GGIAL: 3.25%). CAs also mandate WAISL to incur the pre-defined capex during the tenure of the respective CA. Any additional capex other than that pre-defined will be mutually decided or agreed upon as per the terms of the CAs.

 

• Long operational track record in the industry: WAISL has more than a decade of experience in implementing and operating ICT infrastructure for DIAL. While shareholding of WAISL was changed in fiscal 2022, the management team remains the same. CRISIL Ratings understands that there have been no breaches in the service levels required under the contracts so far. Both DIAL and GHIAL, handled over 40% of the passenger traffic in India during fiscal 2020 (pre-Covid year), which places WAISL among the largest ICT infrastructure service providers in the country (by total air passenger traffic serviced).

 

• Healthy receivable collection cycle: WAISL has demonstrated robust collections of over 90% during past 15 months, which is reflected in lower receivable position of 63 days as on March 31, 2022 as against 87 days a year earlier. Strong collection cycle is driven by the critical nature of services provided by WAISL to the overall airport eco-system, which places WAISL in the unique position to collect its receivables on a timely basis from counterparties. Any significant delay in collection of bills, impacting WAISL’s liquidity will remain a key monitorable.    

 

• Healthy operating profit margin despite regulated pricing mechanism: Around 80% of WAISL’s revenue is linked to passenger traffic at the airports, while the remaining 20% is mainly fixed in nature. The annual pricing for passenger-based revenue is created post negotiations with airline operator committee (at DIAL) and by Airport Economic Regulatory Authority (AERA; for GHIAL). The current price notification for DIAL, received in October 2021, is valid through fiscal 2024 and has annual price escalations, which provides comfort. For GHIAL, prices charged are fixed by AERA, which has notified a charge of USD 1.25 per departing passenger for fiscals 2022 to 2026. While GHIAL has switched to revenue share arrangements from March 2022 from the earlier managed service fee period, GGIAL’s revenue share will commence only on reaching a minimum traffic level; and till then, the return on capex incurred model will apply. Further, WAISL has witnessed healthy operating margins over the past years. The earnings before interest, tax, depreciation and amortisation (Ebitda) margins were 40-45% during the past two fiscals, despite moderation in passenger revenue. The same has been supported by healthy passenger realisations and strong operating efficiencies. Operating margin may  increase to more than 50% going ahead with expected improvement in passenger volume and will remain a key monitorable.

 

Weaknesses:

• Moderate scale of operation; though expected to improve going ahead: Scale of operation is moderate currently with revenue of ~ Rs 156 crore and Ebitda of ~ Rs 59 crore in fiscal 2022 (Rs 143 crore and Rs 58 crore, respectively, in fiscal 2021). However, air passenger traffic has been witnessing healthy recovery over the few quarters, with the first quarter of fiscal 2023 passenger traffic at DIAL and GHIAL recovering to over 90% of the first quarter of fiscal 2020 levels and GGIAL is expected to commence operations in the third quarter of fiscal 2023. CRISIL Ratings expects domestic passenger traffic to return to pre-Covid levels during fiscal 2023 and international passenger traffic by fiscal 2024. Further, DIAL and GHIAL are currently undertaking capacity expansion to 100 million and 34 million passengers, respectively. CRISIL Ratings understands that WAISL will benefit from the expected improvement in scale coupled with diversified portfolio of airports. Slower-than-expected recovery in passenger volume impacting revenue growth will remain a key rating sensitivity factor.

 

• Vulnerability to fluctuations in traffic and related counterparty credit risk: Business operations of WAISL are primarily dependent on passenger traffic at the airports, which exposes the company to variations in passenger traffic as well as the moderate financial risk profile of airline operators. With the onset of Covid-19 pandemic, the aviation industry witnessed significant challenges and relied upon the support extended through various government schemes. Passenger traffic has been improving since last fiscal and any variation in the same will impact WAISL’s revenues and may also adversely impact the moderate credit risk profiles of airline operators. However, counterparty risk is mitigated by the bank guarantees and security deposits provided by these airlines / users and WAISL’s proven track record of consistent collection of its receivables on a timely basis.

 

• Moderate financial risk profile due to fall in earnings and increased capex over the past two fiscals; albeit expected to improve over the medium term: Owing to the pandemic , WAISL’s financial risk profile was impacted due to fall in earnings from over Rs 230 crore in fiscal 2020 to Rs 150 crore in fiscal 2022. At the same time, it incurred significant committed capex of around Rs 300 crore as per CAs. Accordingly, the company’s debt increased to Rs 301 crore as of March 2022 from Rs 134 crore as of March 2021. However, WAISL’s operating performance has reasonably improved in the first quarter of fiscal 2023 on the back of increased passenger traffic, which is expected to sustain over the medium term.

 

• Execution and stabilisation risk on account of large debt-funded capex: WAISL is undertaking a large capex of ~ Rs 700 crore (till fiscal 2026). The same is mainly towards setting up ICT infrastructure for increasing passenger capacity at DIAL and GHIAL, ICT infrastructure at new Goa airport and other technology upgradation. The same is in line with existing CA terms and conditions. The capex is to be funded in 75:25 debt-equity mix. While debt has been tied-up, the equity share is to be funded by internal accruals. Debt structure remains moderate with presence of escrow and waterfall mechanisms and restricted payment conditions, which include financial covenants of minimum debt service coverage ratio (DSCR) of 1.2 times and maximum Debt to Ebitda of 3 times. Timely completion of the said capex with no material cost overruns and increase in passenger volumes for the same, shall be monitorables.

Liquidity: Strong

As on August 28, 2022, WAISL had a cash balance of around Rs 132 crore, including DSRA of 3-4 months maintained with lenders and unencumbered cash of Rs 98 crore. This is sufficient to cover the next 12 months repayment obligations. Further, net cash accrual is expected to be at Rs 200 – 300 crore each for fiscals 2023 and 2024, which should be sufficient to meet repayment obligations and support the equity portion of the capex to be incurred.

Rating Sensitivity factors

Upward factors

• Continued improvement in passenger volume along with healthy operating margins of more than 50-60% on sustained basis
• Stronger than expected cash accruals with timely collection of receivables supporting improved financial profile and healthy liquidity
• Timely execution of capex without any cost overruns.

 

Downward factors

• Slower than expected increase in passenger volumes along with lower operating margins resulting in reduced operating accruals
• Higher than expected debt funded capex or material delays/ cost over-runs in ongoing capex impacting capital structure of the company
• Significant built-up of receivables with debtor days increasing beyond 70-90 days on sustainable basis

About the Company

WAISL has exclusive right to provide ICT services at DIAL, GHIAL and GGIAL; under a long-term CA. Utthishta Virat Fund, an aviation and hospitality focused fund (Category I alternate investment fund registered with the Securities and Exchange Board of India), holds 100% shares of WAISL.

Key Financial Indicators(Crisil Ratings’ sensitized numbers)

As on/for the period ended March 31		2022*	2021
Revenue	Rs crore	156	143
Profit after tax	Rs crore	35	-64
Operating margin	%	38.1	40.4
Adjusted debt/Adjusted networth	Times	6.28	4.39
Interest coverage	Times	5.02	5.13

*Provisional

Any other information: Not applicable