AIRPORTS AUTHORITY INDIAaera.gov.in/documents/pdf/SBI-CAPS-Report-FROR.pdf · Airports Authority of India ("AAl" or the "Authority") has appointed SBI Capital Markets Limited ("SBI

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AIRPORTS AUTHORITY .O ·F INDIA

REPORT ONFAIR RATE OF RETURN ONEQUITY,

FOR INDiANAIRPORT SECTOR

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SBI -Capital Markets Limited

Strictly Private & Confidential

(A Subsidiary ofSta te B ank ofIn dia)

New D elhi Office: 6'HFloor; World Trade Tower, B arakham b a Lane, New D elhi - 110001 H~ad Office: 202J Maker T ower 'E~ 2(JhFlo01; Cuffe Parade, M~bai - 400005

February 2012 .

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IMPORTANT NOTICE

Tbis Report contai,iis. proprietary and strictlY confidential i!!f01771ation, wbicb has been prepared l!J SBI Capital Mark ets

Limited (' 'SBICAP'') as per the scope if services under the engagement .letter no ; AAI/CHQ / REV/20 10-11 dated

January 27, 20 12. By acceptinga copy if this Report, the recipient agrees to keep its contents and atry other information, which

is disclosed to such recipiept, co'!fide ntialp~ d shall no!divulge, distribute or disseminate atry information containedherein, inpart

or infull, without theprior written approval qfSBICAP. This Report and information containedherein or atry part qf it does

not constitute or purport to constitute investment advice in publiclY accessible media and should not be printed, reproduced,

transmitted, sold, distributedorpublished ry or on behalfqfthe recipientwithout theprior written approvalfrom SBICAP. The

recipient also agrees to indemnify SBICAR against atry claims. that mqy arise as a result cf a breach qf atry cotifidentialiry

arrangement; u(hich governs the contents qfthis Report.

T his Reporlqnd opinions.c;nta,ined therein have been prepared ry SBICAP, inter alia,- on the basis qf irformation and

documents available in ihepublic domain, data available on internet including datafrom Bloomberg, websites of Bombqy Stock

Exchange, National Stock Exchange, etc.. SBICAP has not carried out atry independent verification f or the accurary ~r

truthfulness or completeness cf the same and.hence, no representation or warranty, express or implied is madethat it is accurate,

authentic, f air, correct or complete. SBICAP or its affiliates or such persons do not accept atry responsibility or liabilityf or atry

such irformation or opinions and therifore, atry liabiliry orresponsibiliry is express(y disclaimed

This Report is for general information purposes onlY, without regard to specific objectives, suitability, fi nancial situations and

needs of atry partioular person and does not constitute atry recommendation, and should not be construedas an offer to sellor tbe

solicitation of an offtr. to buy, purchase or subscribe to atry ~ecu rities mentioned therein, and-neither this Report nor atrything

contained herein sh~/1 f01771 the basts of or berelied uponin connection with atry contract or commitmentwhatsoever. This Repor:

does not solicit any action based on the material contained herein. N othing in these materials is intended ry SBICAP to be

construedas legal, accounting, technical or tax advice. This Report and opinions, if any, contained therein shall in no wqy cast

any responsibility onit a; regard; compliance.with rel;vant statutory rules, regulations andguidelines, etc.

This R'eport constitutes an opinion expressed ry SBICAP and each party concerned bas to draw its own conclusions on making

independent enquiries and verifications and SBICAP cannot be heldliablefor atryfinancial loss incurred l!J anyone based on this

report. Neither SBICA P and its affiliates, nor its directors, emplryees, agents or representatives shall be liablefor atry damages

~hether dirett 'or indirect, incidental, special or consequential including lost revenue or lost pro/its that mt[Y arise from or in

connection with the use of tpis R..eport. Further, ry accepting a copy this Report, the recipient accepts the terms qf this N otice,

tubicb f01771S an integralpart qf this Report and the recipient shall be deemed to have agreed to indemnify SBICAP against atry

claims that mqy be raisedagainN SBICAP asa result qfor in connection with the data and opinionspresentedin this Report.

I?e delivery qfthis Report at any time does not implY that the itiformationin it is correct as qfany time after the date set out on

the cover page hereof, orJhat there has been no change in the status of the suqject or atiJone else since that date. .Analysis and

results under tbis Reportare specific to theparpose of this Reporl. It mqy not be validfor any other purpose or as at atry other

(late. A lso, it mqy not bevalid if done on beha![of any otherentity. SBlCAP, however, has no obligation to update this Report

f or events, trends or transactions relating to themarket/ economy ingeneral and occurring subsequent to the date qfthisReport.

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'--.. : .... Further, risk free T rate if return, risk premium, leveraging if business and betaare subject to uncertainties concerning the iffects

\ .... ' that changes in legisiation or economic orfinancialmark'et or'other circumstances mqy baue on1uture events, and different people

mqy have a different view infuture..

There will usuallY be differences ~etween estimated and actual results because events and circumstances mqy not occur as expected,

and those differences mqy-bematerial. U~der the circumstances, no assurance can beprovided that the assumptions or data upon

w~ich a'!Y estimates have been based are accurate orwhether these estimates will actuallY materialize.

< ,

Neither SBICAP, norState Bank if India or a'!Y if its associates, nora'!Y if theirrespective directors, employees or advisors or

controlling-persons make a'!Y expressedor i~plied representation' or warranty and no responsibility or liabiliry whether direct or

indirect, express or implied, contractual, tortuous, statutory or otherwise, is accepted by a'!Y if shem with respect to the accuracy,

~ompleteness or reasonableness of thefacts, opinions, estimates, forecasts, or other information setforth in this Report or the

. underlYing assumptions'on which thcy are based'or the at'Curacy if a'!Y computer model used orfor any errors, omissions or

misstatements orfor a'!Y loss / damage be it ttmgible or intangible, howsoever arising, from the use if this Report and nothi~g

contained herein is, orshallbe relied upon as"a promise orrepresentation regarding the historic or current position orpeiformance

ofthe airport sector ora'!Y specific company oranyfuture events.

This Repo;tis divided into sections & sub-sections onlYfor thepurpose if reading convenience. A'!Y partial reading 0/this Report

mqy leadto irferences, which mqy beat divergence with the conclusions and opinions based on the entirety of this Report. Neither

this Report; nor the irformation contained herein, mqy be reproduced orpassed-on to a'!Y person or usedfor anypurpose other

than statedabove.

This Reportis issued by SBI CapitalMarkets Limited without a'!Y liabiliry./ undertaking / commitment on thepart of itse!f

or State Bank of India or any other entity in the State Bank Group, except where it is explicitlY stated Further, in case ofany

commitment on beha!f of-State B"ank if India orany-other entity in the State Bank Group, such commitment is validonlY when

separatelY confirmed by that enti(y.

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Table of Contents

Background :: ~ :.: : 6

Airport Sector - an In fras tructure play 7

2.1 Rangarajan Co mmission's notion of Infrastructure (2001) 7

2.2 - Reserve Bank of India (RBI) circular on definition of Infrastruct ure 7

2.3 Income Tax D epartment :.. ~ 9

2.4 \'(forld Bank 9

Methods for computing Rate o f Return on E quity 1b

3.1 Capital As+s et Pri cing Model ("CAPM") _ : : 10 ,'A . '

3.2 Multifact or Model 12

-r-3.3 Build-Up Model 12

4. Determi nati0n of Rate of Return on Equity ~ 14

4.1 Risk Free Rate : 14 .

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4.2 Equity Risk Prerniurri jfi.RP) , 15 "

4.3 . Beta 18

5: Risk Analysis 24

6. Computation of Rate of Re turn on Equity 26 \,

7. Rate of Return pr evalent in other Infrastructure Secto rs 7 28

7.1 Roads & Highways 28

7.2 Power ~ 28

7.3 Por ts :: : 28 , .'

7.4 Oil and G as 28

8. Determination of Rate of Return on Quasi E quity 30 ',-, '

9. Conclusion .: : 31

Annexure 32 ,_ . '

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. . l.ist of Tables '

Ta ble 1: .In frastru cture definition by various committees : 9 .

Table 2: Ay,

erage of D aily Annu alized Yield ; 15

Table 3: Average of D aily Annualized Yeild during different tim e period 15

Ta ble 4: Summary ofERP estimate: 17

T~ble 5: D e:ailed calcul ation of Adjusted Ass et Beta ~ 20 \" ....~

Table 6: Summary o f average Adjusted Asset Beta ~2

Table 7: Adjusted Asset Beta in other infras tructure sectors 23 j ....

Table 'S: Rate of Return on E quity ~ : ~ 27 '<,.. :

Table 9: Rate of Return on Equity - Scenario Analysis 27

Table 10: Return aliowed in oth er infrastructure sectors : 29

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List of Figures

Figur e 1: Annual Average of D aily Annualized yield ; 14.

Figure 2: Quasi Equity Instrumen ts and Expecte d Return 30

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1. Background

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Airports 'playa significant ro le in globalization, connecting cities and countries. Airports are a major

part of , a country's infrastructure and foster economic activities ' by encouraging international

~onunerc e and tourism and gen erating employmen t.

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In l ndia, tra ffic at airports have witnessed a robus t growth over last deca de and has also attracted

significant investment in capacity enhancement. Government of India (" G O I") has initiated several

policy mea~ures to. facilitate time -bound creation of world-class airports in- India. As on date,

airpor ts at Co chin, Bangalore, Hyderabad, Delhi and Murnbai airports have been developed und.er . ,

Public Private 'p ar tnership ("PPP" ) model. The GOI aims to attract more private sec tor investment

in airp or t infrastructure to ens ure development of airp ort with international quality standards.

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Airports Authority of India ("AAl" or the "Authority") has appointed SBI Capital Markets Limited

(" SBI CAP") vide ;heir Letter No: AAIicHQ/REV /2010-1'1 dated January 27, 2012 as Financial

Advisor ~or providing an opinion on the fair Rate of Return on 'Equ ity ' and 'Quasi E q u ity ' for

investor on its investment in airports under PPP model. The Scope of Work in ter-alia includes

following

a. Determinat:io~ of fair Rate of Return on Equity using the appropriate method available for

- computation.

b . Comparison o f the fair Rate of Return on Equity as computed in this Report with re turn as

considered in other in fras tructure sectors.

Co

d.

Review of risk involved in development of airports and its impact on fair Rate o f Return.

Determination of fair Rate of Return on Quasi Equity.

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The objective of this Report is to determine a fair Rate of Return on 'Equity' and 'Quasi Equity'

for investors on their investmen t in the airport sec tor in India based on the overall risk and return

profile of the sec tor- taki n~ into ~ccoun t the to tal revenue from various sources.

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~ I ' 2. Airport Sector - an Infrastructure play --:;--::-----------------_._---------------------

The significance of airports in-overall development of an economy is well established worldwide.

~overnment of India and other statutory authorities including the committees set up at different

IJmes have also acknowledged the contribution elf airp ort sector towards overall growth of economy

and have classified airport sector as an infrastructure item in the definition of Infrastructure. These

are discussed below:

2.1 Rangarajan Commission's notion of Infrastructure (2001) .\ ...,- , The RangarajaEJ. Commission indicated following six characteristics of infrastructure sectors:

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a.' Natural Monopoly;

b. High Sunk Cost;

c. Non Tradability of output;

d. Non rivalness in consumption;

e. Possibility of price exclusion; and

f: Bestowing externalities on society -

Based on' these features (except b, d and e), the commission recommended inclusion of the. ,

following in infrastruc,ture in the first stage:

• Railway tracks, signaling syste,m, station;

• Roads, bridges, runways and other airport facilities;

• T & D of electricity;

• Telephone lines, telecommunications network;

',.-.- • Pipelines for water, crude oil, slurry, waterways, port facilities; and

• Canal net:"0rks for irrigation, sanitation or sewerage

2.2 Reserve Bank ofJndia.(RBI) circular on definition of Infrastructure

As per the RBI master circular no. RBI/2011-12/58 DBOD. No. Dir. Be. 7/13.03.00/ 2011-12

dated 1st July, 2011 on exposure norms, a credit facility is treated as "infrastructure lending" to a

> borrower company which is engaged in developing, opera ting and maintaining, or developing,

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Rn'vate & confidential , iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiil...

operating and maintaining any infrastructure facility that is a project in any of the following sectors,

or any infrastructure facility of a similar nature; . ~

a) a road, incl~ding toll road, a bridge or a rail system;

b) ~ a highway project including other activities being an integral part of the highway project;

c) a port, airport, inland waterway or inland port;

d) a ~ater supply project, irrigation project, water treatment system, sanitation and sewerage

system or solid waste management system;

e) telecommunication 'services whether basic or cellular, including radio pagmg, domestic

satellite service (i.e., a satellite own~d and operated by an Indian company for providing

telecommunication service) , telecom towers, network of trunking, broadband network and

internet services;

£) an industrialpark or Special Economic Zone (SEZ) ;

g) , generation or generatio~ and distribution of power including power projects based on all the

renewable energy sources such as wind, biomass, small hydro, solar, etc;

h) transmission or distribution of power by laying a network of new transmission or

,disJ;tibution lines; .

i) projects involving agro-processing and supply of inputs to agriculture;

j) - projects for preservation and storage of processed agro-products, perishable goods such a~

fruits, vegetables ~nd flowers including testing facilities for quality;

k) e~ucational institutions and hospitals;

1) laying down and / or maintenance of pipelines for gas, crude oil, petroleum, minerals

including city gas distribution networks;

m) : any oth~i: jnfrastructure facility of similarnature

For raising external commercial borrowings funds, the RBI has defined infrastructure to include (i) ~

power, (ii) telecommunication, (ill) railways, (iv) road including bridges, (v) sea port and airport, (vi)

industrial parks and (vii) urban infrastructure (water supply, sanitation and sewage projects) (viii)

mining, exploration and refinin~ and (ix) cold stor~ge or cold room facility, including for farm level

pre-cooling. for preservation or storage of agricultural and allied produce, marine products and meat

Vide itscircular no. R1?f/2911 -12/ 9 Master Circular No.9 /2011-12 dated 1" July 2011.

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2.3 In-come Tax Department

',_. . Section 80 :-: IA of Income T ax Act, 1961 allows deduction of 100% of profit from income to a

compa.ny engaged in business of (i) developing; (ii) operating and maintaining; and (iii) developing,

operating and maintaining any infrastructure facility. D eduction is available for a period of 10

consecutive years (to be selected out of 15 years from date of commencement of op erations) . For

this purpose infrastructure facility amongst others includes airports , telecom, and.ports.

2.4 World .Bank

T he World Bank treats power, water supply, sewerage, communication, roads & bridges, ports,

airports, railways, housing, urban servi ces, oil/gas production and mining sectors as infrastructure.

Th~ tabular representation o f th~ definition of infrastructure by various authorities/ ins titu tions is as

under:

Table 1: Infi:astructure definition by various committees\ ........:

Sector . I ; , RBI Income Tax Worl~ Bank

Electricity Yes Yes Yes Wat er Supply & Sewerage - Yes Yes Ye s Telecommunications Yes Yes Yes Ro ads & Bridges . Yes - Yes Yes Ports - Yes Yes Yes

' 'Mr.R:9:t~s {:; ~;:' . , ',,'~~ f."; \; : :,:: ~\: ~"?':d~ :4~t" ~.; ~t, : (W~~9tV~~;;;.1~; ~ ~>\, ·!~{.ig~,i :~¥e~~~;it!:l};~~:~~~~/. j /;:~r! ·r:;~~:t~~,: · ~?f~~~~.l~lJ.:W{~~~~~~~ ({:r~}i1f WS!'·}l~;;~:~: :~.t~~;~~~§7t;W~~\~Y~(1i~?1 Yes Yes YesRailways

-Yes YesIrrigation ~

-Yes Yes (at ports) Storage -Yes YesIndustrial Park/ SEZ

- -YesEducational Institutions & H ospitals

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Private & corfidentia! iiiiiiiiiiiiiiiiiOiiiii~iiiiiiiii iiiiiiiii __iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii"tiiiiiiiiiijiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii ,~

3. Methods for computing Rate of Return on Equity

In finance, the cost of equity is the return (often expressed as Rate of Return) a fum theoretically

pays to its equity investors, i.e., shareholders, to compensate for the risk shareholders undertake by

investing. their capifal. Cost of equity represents the return that the market dem~nds in exchange for

owning the asset and bearing the risk of ownership.

There are various models to determine Rate of Return on Equity. Some of the models are as

1\......,: follows:

• Capital Asset Pricing Model

• Multifactor Model

e Build-up Model_o

3.1 .Capital Asset Pricing Model ("CAPM")

<:> , The CAPM is a method of calculating the return required on an investment, based on an assessment

of its risk. The CAPM method deri~es the rate by adding a risk premium to the risk-free rate. The

risk premium is derived by multiplying the Equity Risk Premium ("ERP") with "Beta". ERP is the

excess return that an individual stock or overall stock market -provides over a risk free rate. This

excess return compensates ,investor for taking on relatively higher risk of equity market. Beta is a

measure of stock price volatility. Beta is associated with the systematic risks of an investment.

The CAPM provides an economically grounded and relati:vely objective procedure for required

return estimation and thus is widely accepted and used for determination of Rate of Return on

Equity. This risk and return m;del has been in use the longes't and is stiU the standard in most real

world-analyses.

The risk-and return equation used under CAPM is as under:

..... eq-1

tubere

• r, is the Rate oj Retum on Equiry

• tris the _Risk Free Rate ojreturn ora notional rate of return 011 'rjskjree' asset

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• - r., - ri is thc Equi!y Risk Premium

• f m is the expectedmarkct rate ifreturn

• [3--(or ''Bctafis themeasure if systematic risk or non diversijiable risk ifparticular investment

CAP~ is generapy believed to be the most appropriate method for calcul: tion of Rate of Retu.rn on

Equity on account of following:

• It is an industry standard spccifi calfy in the context if estimating appropriate return benchmark s for

regulated industries; ~

. . ' It is cary to implcmcntand interpret;

• .If has the advantagc ifbeing, very simplc to use.

• .It is very o!?jective in natureand all the relevant inputs are casify available in !hepublic domain.

• It is a usiful methodas it is statisticalrepresentation ifpast risk.

• It is the oldest and mostused methodin the industry for calculatingthe Rate ifReturn onEqui!J

Further in following do cuments/ study/ approach , CAPM has been used or advised to

determine/es tima te Ra te ofReturn on Equity.

a.. "Economic Regulation if Heathrow and Gatwick A irports (2008-2013)" - UK Civil Aviation . . . Authority (CAA) decision dated March 11, 200S1

b . "Aeronautical Pricing Proposal" - Au stralian Competition and Consumer Commission's

decision for ·Sydn;y Airports Corporation Limited in May 2001 2

c. ' Auckland International. Airport Limited (FY'OS - FY'12 Price Setting Disclosure)

"Disclosure ifForecast Total Revenue Requirement and Demand Forecasts pursuant to clause 2. 10(3) if fhe Commerce Ad (Specificd A irport Scrvices Information Disclosure) Determination 2010" dated

.Octob er 27, 201.1

1 Source: http:/ / nJlvIP.caa.co.llk/ dim/ 5/ ergdocs/ healhrOlvgallvickdeclsion_llJaJ08,pdj

2 Source: http.:l/JpwIP.accc.gov.all! conlenl! ilellJ.phlll1/?ilemld= 918120 & nodeId= 47i21da3c023548abOd05d3j 8830b925&jn =

ACCC's%20Detisionp dj

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d. Airports Economic Regulatory Authority

. Airport Operators) Guidelines 20113

_ . e~ ' Department of Disinvestment in India

4''"Valuation Methodology"

- (Terms and Condition for Determination of Tarifffor

(Ministry o f Finance, G overnment of India)

<. . 3.2 Multifactor Model

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Multifactor Models estimate the Rat~ of Return on Equity ba sed on multiple factors. These models

are based on the principle of arbitrage pricing theory which adds a set of risk premiums to risk free

rate to find. the required return. Arbitrage pricing theory models express the required return on an

asset as follows:

I . ' . ~ - " (Equation - 2)

where

• rp" = (factor sensitivity) X (factor risk premium) wherefactor sensitiviry (orfactor beta) is the

asset; sensid7Jiry to·aparticula~'factor (holding all otberfactors constant).

The advantages of Multi/actor Model are that it allows investors to tailor the model to match their specific risk

exposure, a...nt! the inclusion of multiple risk factors may improve the model's explanatory power. However, the

MtiltiJactor Model does ,?ot i~dicat e the appropriate risk facto,!, may not be economical, and may not significantlY

/mprove upon the cAPM 's cost of equiry. Further it creates difficulry of using multiple f actors and assimilation of data related to it.

3.3 R~ild-Up Model

The Build-Up Model use s .building blocks to get to

commo nly use-d building blocks are :

• Risk FreeRate (Government Bond Rate) ; ", . ,, '

• Debt margin (what the Banks want in addition);

• Operating risk premiumi .

J Soun'e: http://aera.gov.in/writereaddata/~rder/ 188.pdf

, SOllm: bup.] / lVJVIII.divest.fIll·. in/ Valll(/tiotJ_iVlethodology.asp

the final Rate of Return on Equity. Some

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, .. Subordination or financial risk premium (how much m ore sh ould be attributed to the fact

that debt gets paid first) ;

• I:i9~dity premium (how easy or difficult it is to exit).

Soito det ermine the R-ate of Return on Equity, all the required r eturns allocated to each of the lo. • .... • .,

, identified fact ors are added. One p opular representation of build up m odel is:

re :::: rr + ERP + size premium + specific company premium ... (Equation - 3)

The k ey advantage of this model is that one can activelY identify the factors contrib",ting to the Rate of Return on

Equity and t'hargefor risks accordingto one'sperception. However, it is very suijective in nature as specifit'f actors viZ.

sizepremium and specific companypremium will vary according to theperception.

In view of the wide aPP!icatiq~ and its_ acceptability while calculating the Rate of Return on

Equity as also being followed by many authorities in India as well as other country, CAPM

method has been used for computation of Rate of Return on Equity for investor on its .

investment in Indian airport sector.

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4. Determination ofRate ofReturn on Equity

As discussed, CAPM method has been used for determination of Rate of Return on Equity. As

. explained in p revi~us 'chap ter, th e fact?rs considered in CAPM model are (a) Risk Free Rate; (b)

Equity Risk Premium; and (c) Beta. T he basis of calculation of these factors is discussed below:

1\.. _., 4.1 R~sk Free Rate

The Risk~Free Rat e is regarded as no minal rate.o f return expected fro m a risk free asset which has

no default risk and no reinvestment risk. To determine the Risk Free Rate in prac tice, ave rage yield "--_../

on safe and liquid instruments that have. negligible risks are considered. For the purpose of . . .

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calculation herein, yield on 10-year G overnment of India ~on ds which is most liquid and most

traded long tenor Government of India security has been consider ed .

~ . . I • _The Annual Average of D aily Annualized Yield on 10-Year Government ofIndia Bonds for last 13

years-(data in Bloomberg is available on!? after November 1998) is plo tted in th e graph below.

Figure 1: AnnualAverage ofDaily Annualized Yield

-- - - - - ---'-- - - --'-- - - - - - - ------"---- - --- - ---- --------,

10 Yr Gol Bond Annual Average of Daily AnnualizedYeild

14.00 J. 12.00\ ...

10 .00

8.00 I ~~.~:

~ ~L . I6.00

4.0 0

2.00

0 .00 ()) o .--l N cY) "'" Ll) to r- co ()) o .--l N ()) o o o o o o o o o o .--l .--l .--l ()) o o O. o o o o o o o o o o .--l N N N N N N N N N N N N N

-- - - - - _._-- - ----- - - - - - - - - - - - - - - - - _ ._- - - - - - - - - -----'

(Sonrie: Bloomberg andSBlCAP's.Anatysis) •

As can be ob served, the,Annual Average of Daily Annualized Yield decr e ~sed continuously till 2002 , .

before it showed an upward trend. Also, it is observed tha t movement of yield between 2002 - 20'11

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\ •.... reflects a ~ange bound movement. Further, Average of Daily Annualized Yield calculated for

diferrent time period is given in table below: . ' . Table 2: Average ofDaily Annualized Yield

Period From Period to . ' No.ofYrs Avcrage of DailyAnnualize d Yield' I· ",". ' ... , • :I. .

"" I 1-Feb-07 31-Jan-i 2 5 . 7.80% . f-Peb-02 7.19% 31-Jan-12 10

1-Feb-99 8.02% 31-Jan-12 13

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The average of Daily Annualized Yields for different time period (1 year - 13 year) is given below:

" _ : Table 3..A verage ofDaily Annuelized Yeild during different time period

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Period From Period to No.ofYrs Avg. Yield for period 1-Feb-11 31 ~J an-12 1

2

3

4

8.34%

1-Feb-10 3 1 ~ Ja n- 1 2 8.11%

1-Feb-09 31~Jan-12 7.74%

1-Feb-0.8 31-Jan-12 7.7 6%

7.80% , ' 1~~eb :'07 . 31-Jan-12 5 -

1-Feb-06 31-hn-12 6

7

8

9

10

11

12

7.78%

7.65% 1-Feb-05 31-Jan-12 1-F eb-04' 3 1 ~Ja n- 12 7.42%

. 7.20% 1-F~b -03 31-Jan-12

1-Feb-0 2 31-Jan-12 7.19%

7.41%

7.72%

1-Feb-01 31-Jan-12 . 1-Feb-00 31-Jan-12

1~Feb -99 31..Jan-12 13 8.02%

7.70 % Average

.... ..

As can be see n, the Ave rage o f D aily Annualized Yield for different time period is in the range o f

- , -/

7.19% - 8.02% . A scenario analysis has been undertaken considering risk free return for different

. time period in or der to analyse th e Rate of Return on Equity.

4.2 Equity Risk Premium (ERP)

E quity 'Risk Premium mea sure s the "extra return" that wo uld be expected by an equity inve stor . ' . ~ ...

over and above the risk free rate to compensate for additional risk associated with investment in

'c, . "

Page 15

Private & confidential iiiii ;;i;;;!iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii'iiiiiiiiiiiiiiiiiii iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii iiiiiiiiii ~"""","

equity instead of im;es~g in risk free assets . The j Equity Risk Premium is

difference between' market return on stocks and Risk Free Rate of return.

expressed as the

There are three broad approaches used to estimate ERP. One is to survey subsets of investors and

managers -to get a sense of their expectations about equity renirns in the future . The second is to

assess the returns earned in the past on equities relative to riskless investments and use this

historical premium as the expectation. The third is to attempt to estimate a forward-looking

premium based,on the market rates or prices,which is categorized as implied premiums.

,'-,

However, for the purpose of analysis herein, following two approaches have been considered:

a. Historical Estimates

b. Implied Premiums

a. Historical estimates: The -historical estimate of ERP is the difference between the hi storical

rnean return for an equity-market index arid a .risk-free rate over a given time period. The

.strength of this estimate is its objectivity, simplicity and the same being unbiased. . ~

'. .

" ,

- In order to estimate ERP usmg this approach, total market return earned on an equity

market index over a long term period is estimated and compared with risk free rate.

q-enerally, it; is agreed that longer period should be considered to mitigate the impacts of

volatilities of equity market.

(,-

In India,.Sensex index of Bombay Stock Exchange ("BSE") is the_oldest equity index which

was first compiled in 1986 and the year 1978-79 wa s considered as the base year. However,

the returns during 1978 1991 do not represent the fair scenario the capital market was in

nascent stage, In order to estimate the market return using this approach; the return (CAGR)

, on Sensex index during. different time period viz. 10 year, 13 year and 21 years have been

analyzed based on information available for period starting February 1991 being the period

consequent to announc~me'nt of economic reforms. Market return has also been calculated

.using the data of return on Nifty index of National Stock Exc~ange for 10 years and 13

years . Nifty' index came into existence only in 1994.

Page 16

981' Cnpll"r MOlkotu LImited

\ 1 ~

31 f-


The Summary is as under:

Table 4: Summary ofE RP estimate

BSE - SensexIndex" .

~, _ I Start ', , ' End Yc~~r~ " ' · , ppcnit~g .tC~ositlg <'cAdit Date Date Value I ' Value. . . : ,

o' , 1-Feb-91 1,022 14.39% 21 17,19431"-]an-12

1-Feb-99 3,266 13.63% 31-Jan-12 13 '17,194

1-Feb-02 10 3,334 17,194 17.83% 31-Jan-12 ~.;

NSE - Nifty Index , -, ..

'- --'

.,Div.

f m. Yield ',

,I

1.42% 15.81%

1.53% 15.15 %

1.55% 19.37%

·1 '.... I rf .'

I 7.19 %

8.02%

7.19%

ERP

8.62%

7.13%

12.18%

1-Feb-99 31-Jan-12 13 940 5,199 14:06% 1.48% 15.54% 8.02% 7.52%

1~F eb-02 31-Jan-12 10 1,082 5,199 17.00% 1.55% 18.55% 7.19 % 11.36%

I .

\ ... ' ..

".-.

\ '" .

'<, •• ..

f m (market return) IS calculated by analyzing change in market index value during

differen~ time period (price escalation) and by adding average dividend yield as

computed for such period.

Market return for 10 and 13 year period is calculated to have comparable period as

available for r f data .

Data for Nifty index is available only from 1994 and as such 21 year comparison is n?t

Rossible .

1.

u.

Notes:

iii.

Source:Datafr om uebsite ofBombcry Stock Exchange, National Stock Exchange and SBlCAP anafyszr.

, \ .. . . 1 As can be seen the ERP calculated based on the 13 and 21 year are comparable and

that of10 year is ebnormally high.

b. Implied Premiums: These estimates use current information and expecta tions concerning

the economic and financial variables to estimate the forward looking ERP. Professor Aswath

Damodaran'', professor-of finance at the Stern School of Business at New York University

has estima ted ERP for variou s economies using implied risk premium.

5 Professor Damodaran is widefy quoted on the suo/ect of valuation. H e is best k nown as a..uthor ofseveral Ill/defy used academic and

practitioner t;c~ts on valuation, corporatefinance and investment management .

-

Page 17


' _. J

As per Professor"Aswath Damodaran paper on "Estimating Equity Risk Premiums", ERP

can be calct;;lated adding adju sted country risk premium for ' India to eRP estim ates for a

country having matured equity market (United States) .

The equation used by Professor Damodaran is as follows :

I •

v..

s..

\..-;

\...' ~

ERP =ERP of matured equity market + adjusted COU?try risk premium ... eq - 4)

i . Base Premium for Mature Equity Market - "Professor Damodaran has estimated an

equity risk premium ~f 6% for matured equity market of United States, obtained from

implied premium for"S&P 500 index of United States. Implied premium is calculated by

determining discounting factor to equate closing valu e of S&P index at a date with future .,... ' .

~e.xpected returns (assuming a dividend yield based on historical data and expected growth

rate).

11. Adjusted Country Premiu~ - Professor Damodaran has estimated an adjusted country

premium of 300 bp s for .India, derived by multiplying the adjusted default spread of 200

bps of India (linked to India rating of Baa3 by Moody) with 1.5 (a factor representing

- equity market volatility against country bond market),

Atwrdingjy, the ERP has been estimated at 90// '?Y Professor Damodaran Ivhit·h is close to ERP estimates 'as

derived in Approcuh 1. This estimate has also been usedas a scenario for analysis.

4.3 Beta

Beta is the measurement, of sy.s,tematic risk or non diversifi~ble risk of particular investment. In

sim ple words it is a measure of performance of an asset in comparison to the performance o f " .

- marlc ~t as a whole . I t is expressed as under:

... eq - 5)

Where

•

•

ra measures the rate of return o f the asset; and

r m me asures the rate of return of the equity market

~ SOIlTfl: : Updated datafor [anuary 20.12from h ttp://pagcs.stcm.nyll. cdll / ~adalllod{/1jNcw_Homc_Page / datajile/ctrypmn.html

Page 18

'01 Cnplt.oll Ma,kolH lIm l ~Od

--'"-,,.." ~ , ~ 9-'"~ -

Private & cOfifidentia/_.

\. As there are no listed airports in India, proxy Asset Beta based on the average of Adjusted Asset

• Beta of listed airports globally has been considered. The following steps have been carried out to

estimate _the value of proxy Asset Beta for airport sector in India:

<:... • ·A data set of 24 listed airports as mentioned in Table 5 with a history of 5 years or more • I ' . ,..

around the 'world is formed based on the information available from Bloomberg (hereinafter

referred to as the 'D ata Set'). A brief snapshot of these airports is mentioned in Annexure.

The Airport operators in the sample are further categorized under two categories: .(a) mature

m.~rket; and(b) emerging market.

-,

• Adjusted Equity Beta estimates are sourced from Bloomberg using 5 year weekly return data

as considered generally.

\.,

Adjusted Equity Beta is unlevered using average Debt to Equity rati o ("DER") based on

information- available ,during last- five years (February 2007 to January 2012) to estimate

Adjusted Asset Beta. Following equation is used to uri-lever Adjusted Equity Beta.

\ ,

Adjusted Equity Bc!a =f Adjusted Ass~t Beta * [1+ (1- tax rate) Debt/Equity] ... eq-6)

.An 'attemp t has. also been made to calculate Average Adjusted Asset Beta using Adjusted . .

Equity Beta based' on 10 years return data unl evered using Average DER computed based

~ on data available for such period. There were some limitations in sourcing DER at different

point of time in 10 year period and also few of the airports in D ata set have history of less

than 10 year.s, However, using the data of DER to the extent available and including airports

with history of less than 10 years, the Average Adjusted Asset Beta as estimated is

app ro~mately same '(when rounded off to two decimal place) as estimated based on 5 year

data.

Page 19

• t " (- .: I" I .

Private & confidential , : J t • ". ~ t ~

J,q£.n=z ,

Table5: , Detailedcalculation oj/f r!JustedAssetBeta.

1.196 1.050 0.67 25%

0.842 0.142 0.76 I 25%

China I ~ ..~.l~l.~ L"'~L••~~~•• _ L~~~~"~~' ~ .- . I 0.961 0.235 0.82 . 25%

0.784 0.003 . 0.78 25%

0.854 0.027 0.84 25%

0.805 0.033 0.79 25%

0,819 0.131 0.75 30%

Mexico I l,.mono Aeroriortuario del Pacifico SAB I 0.783 0.042 0.76 30%

0.643 0.047 0.132 30%

Malaysia Malaysia Airport Holdings Berhad 0.891 0.284 0.74 30%

Thailand Airports of Thailand PCl, 1.111 0.832 0.70 30%

TAV Havalimanlari Holding AS .

Turkey 0.893 2.765 0.28 20%

0.71 ~~'¥~1~~.." ~~.•. .. 0

0.825 0.835 0.507 25%

0.761 0;826 0.463 22%

0.891 1..173 1 0.499 33%

0.992 0.923 0.6071 31%

Italy I L.~L-JJJL-L'~ ~ . _.L~~._ •.•~-~ • _.- JJJ•• I 0.687 0.396 0.540 31% I • ,, ' r-0 0

~ . I 0.412 0.289 0.344 31%

0.498 0.193 0.440 31%

i

W .--l.l .s:

Page 20 • ~~

~~, ~ ,

J( .. ,I"' " ( ,/ •

Privafe & confidential _

1.038 0.536 0.755

France Aeroport de Faris 0.916 . 0.878 0.577

I Denmark ,

] a,pan

Australia

K obenhavn s Lu fthavne (Co penhage n Airport)

[ap an Airp ort T erminal Co. Ltd.

Sydney Airpor t Corporation Ltd.

I

0.531

0.766

0.989

1.012

0.447

'1.114

0.302

0.605

0.556

0.52 I .

Averaze - Overall (Source: Bloomberg and JBlCAP analYsis)

I vv· -J

, \ -

Page21 o • :'il ~A~

. ,


• Summary of average Adjusted Asset Beta estimates is .shown below:

. Table 6:.~u:mmaty of average Adjusted Asset Beta

Particulars I

Emerging Mar~et

Mature Market

Overall Market

, I 5 Year Adjusted Asset Beta I _ I

0.71

0.52 ', .0.61-

-''--- '• Considering the limitations in sourcing data for 10 year Beta analysis, estimates as derived

using 5 year ~ata is assumed. for analysis herein.

Since, India is an emerging economy; proxy Asset Beta estimate for Indian Airport Sector

has been arrivec! based on the average ofAdjusted Asset Beta oflisted airports in emerging

market.

\ ,

. ,


,'

'-. .:

.'-..-.'

I ''-.,.-"

i........ ' "

' _. '

'.........

• An attempt has also been m ade to compa re the above estimated proxy Asset Beta for allport

sector in I ndia with asset beta (based on 5 year period) of other infrastructure companies listed

in India.

Table 7: Adjusted Asset Beta in other infrastructure sectors

Particulars I

I

I.\

I Adjusted Asset Beta I

Power Ta ta'Power Company Limited - ~ 0.51 NTPC Limited 0.54 .Gujarat Industries Power Company Limited 0.62 Jaiprakash Power V.en ture Limi ted 0.59 T orren t Power Limited 0.63 NHPC Limited - 0.55 CE SC Limited 0.69 Average 0.59

Telecom Bharati Air tel Limited 0.61

' Idea Cellular Limited 0.56 Relian ce Communication Limited 0.81 Tata Teleservices Maharashtra Limited 0.98 MTNL Limi ted 0.84

-Average ~ ~

0.76 Roads

N oida Toll Bridge Company Limited 0.84 . Ports

Adani Por ts and Special Economic Z one Limited 0.60

"As can be observed from th e above table, the proxy As set Beta estimated- for airport sector in India

can be considered compa rable with th e ad justed asset bet a of th e other listed infrastructure players

in India.

Jtmi:r:: "Mn017 "rr

Page 23

,


5. Risk Analysis '--"

The major risks as could be associated with airport sector have been presented in the table below:

.--.,.....-.

\ _....

Risl<: Facto1' I 0' I ' ,. Description " I' , I

Construction • Appropriate development planning is critical to ensure following: . .,/ Timely completion of construction;

~ . .,/ Mitigate chances of costescalation; • . .,/ Development of asset in accordance with applicable standards; .,/ Ensure optimum utilisation of assets;¥

Land Acquisition • Availability of total land as required is utmost critical to avoid delays in completion

. • Since construction period in infrastructure is generally long, any delay in . acquisition of land has a significant impact on implementation

. Environmental • , Delay in procuring envirorunent clearance and other approvals cause ' Clearances and delays in achieving financial closure and starting of construction works other approvals Funding Risk . • Unprecedented growth ill au traffic has necessita ted huge capital

investment in creation of additional capacities.

• Debt funding in India is generally available for a tenor of 10 - 15 years

- · as -agai~st long concession period Of 30 years or more. Traffic Risk • The airport industry in India operates in a very dynamic envirorunent.

• Traffic at airport comprises of passengers, cargo and air traffic

- movements.

- • In- India, passenger traffic comprises of majority of domestic traffic and is mainly confined to six major airports .

- . • Demand is very volatile ar;d highly sensitive jo prices of tickets. . .

Any economic slowdown, increase in air ticket prices, increase in fuel- • .. charges -is likely to affect the traffic growth significantly thereby

impacting the airport revenue and profitabili~

Airlines financial • Current financial performance/ status of airlines will have an impact on condition the overall airport sector. .. Regulatory Risk • India Airport sector is in initial stage of re~ation.

. Political Risk e . In the current political scenario, a high risk is generally perceived' in . relation to policy framework, coordination between centre and state

administration., . Competition Risk • Airport development requires huge capital investment upfront with

returns accruing over a long period.

• Development of new airport around an existing airport without proper - -

dl{e diligence is likely to impact the existing airport and may jeopardize the profitability or returns for the investor

- ._---'--,-- "

Page24

':


, ,

Infrastructure sector and / or various companies within a particular sector are generally exposed to

. ~ rnany.risks relating to development, construction, funding, operations and management, demand/'-.. ./

traffit/ ~arket, regulatory risk,. te\mination paym~nt, competition and political risks etc. However,

the weight ~s could be allocated to a specific risk based on its possible impact on sector or company

varies acras.s, sectors arid a;nongst different companies .)-Vithin a sector. . .

• Asset "Beta as can be computed for an individual company or a sector as whole is a fair

representative of risk and return relationship as exist in any company or sector. The Beta for airport

sector as arrived when compared to other infrastructure sub" sectors brings "out the comparable

degree of risk.

\.. .,

..

'\._..

<; ...

Page2S

, ,",,~. ..,-~\~~ O

- 3g I)

Private & corfidentia!

6. Computation of Rate ofReturn on Equity ·

t •

'. In order-t o estimate the Rate of Return on Equity, the Adjusted Asset Beta is requited to be re. . levered,using a target QER for the sector to arrive at the Adjusted Equity Beta. Higher debt in a

, ~

oapital structure incre~ses the expected Rate of Return .on Equity which is reflected in increase in the

value of Adjusted Equity Beta.

'-- . .

I ,-

Average I?ER of listed airport in emerging markets in the Data Set over a period of 5 years 1S

estimated at 0.47:1. However, the same may not reflect the target DER for India, as infrastructure

projects in India are generally financed at a much higher DER. In this context a comparable could

be brought out by taking into account the fa,ct that a notional DER of 1.5~;l has been considered by

regulators? of Sy~ey airport and Heathrow airpor t for determination of cost of equity.

In Indian context, projec! fina~cing is h.appening normally i.n the range of 1:1 to 2:1 taking into

account various risk associated with the project, sector, sponsor, financing structure with inclusions

- of instruments other than pure debt or equity. Considering the nature of investments and risk profile

of airport sector a target DERpf 1.5 :1 has been assumed to arrive at the estimated Rate of Return

on Equity for investment in Indian airport sector. Accordingly, the proxy Asset Beta of 0.71 for

airports as ' arrived .in earlier chapter is levered by D Ell of 1.5:1 to arrive at adjusted levered Beta

(Adjus.ted Equity Beta) for Indian Airports at 1.43.

Considering gen erally accepted principles that market return and risk free rate be based on ave rage

of long period to ensure mitigation of volatilities attached to such data, risk free rate as estimated

based on average of daily annualized yield of 10 year GOI bond over a period of 10 years (period

reflecting a range bound movement) and market return as calculated during a period of 21 years post

refor~s for Sensex index could be considered reasonable for estimation of Rate of Return on

\' . Equity. Accordingly the same works out to 19.52% (say 19.5%) as shown below:

7 "Economic R egulation 0/H eathrow and Gatwide Airports (2Q08-20 13))} UK Civil Aviation Authoriry (CAA) decision

dt. 11 Marc'h 2 008 and "Aeronautical Pricing Proposal" Australian Competition and Consumer Commission's decision f or

. fldnry .Airporzs Corpo~ation Limited in M qy 200 1.

Page26

I .... , - 1 SI -

Private & confi dential .

-I'able 8: Rate ofReturn on Equity

'''-. '

: . ' ' .

, ....~

\ ' ''' '., ~ . '

15.81%

8.62%

0.71

1.50

1.43

19.52% *fJa - At/fllslcd'Asset Beta # fJe- Adjllslcd E qllily Beta

H owever, taking into accoun t the va ria tion in th e airports across th e vas t co untry like India in terms

\~ . of capacity, size , lo cati on, classification , capital structure, risk~ p erception etc. , it may be prudent

_that concerned authorities have. flexibility of fixing Rate ofReturn on Equity investments,

for the airportproject as a whole, within a range. For the presentpurpose, a range of (:1:) 5% .... .... . , ~

i:e. 18.5%. to 20.5% could be considered reasonable.

\ ..' , ,A scenario analysis 'has been done through a spectrum of variables to calculate the Rat e of Return on

Equi ty: T he sce na rio analysis is given below: "Table 9: Rate ofReturn on Equity - Scenario Analysis

.... .... >

~ .. .,!..."

18.72%

18.58%

18.36%

18.22%

19.07% 19.52% 19.79% 20.15%

18.94% 19 .38% 19.66% 20.01 %

18.72% 19 .16% 19.43% 19.79%

J 8.58% 19.02% 19.29% 19 .65%

t Note: E RP movement between 6.91% to 9.25% ' .¥,'

- As can be seen from the abov ~ scenario analysis, using different variables as discussed in previous

cha pter, !he Rate o f Return is r~ngi.ng between 1 8 . ~2% to 20.23% and th e same is comparable to the .... .. .

range as recommended ab ove.

Page 27

Priuate & confidential

.. ;...._,

, \\~-

'I I

.7: .'Rate of Return prevalent in other Infrastru~t.\J~e Sectors .,

T he ret urn in other infras tr ucture sectors In India as allowed / recommended by respec tive

regulators / committees 'are summarized below:

7.1 Roads & Highways

B.K . Chaturvedi Com mittee on National Highway D evelopment Pro gramme as consti tuted by -

Prime .Minister of India on A ugus t 8, 2009 ~ad recommende d equity InteEnal Ra te of Return (IRR)

o f 18% in respect of projects undertaken on Bcild, Operate, Transfer (Annuity) basis. Furth er in

case of difficult areas a higher IRR of 21% is recommended

7.2 Power

_Centr~l E lectricity Regulatory Commission (Terms an d Co nditions o f T ariff) Regulations, 2009

dated J anuary 19, 2009 provide regul ations for tariffs de termi nation for a power ge n erating statio n - .~

(Other than those based on non-conventional energy sources) and the tra nsmission sys tem in India.

As per clause 15 of the ;egulation return on equity shall be computed on equity base on pre tax basis

at the base rate of 16% to be grossed ,up for normal applicable tax rate.

7.3 Ports

G uidelines for upfro n t tariff setting for port projects (undertaken on PPP basis) at Major P ort

T ru sts, 2008 as provided by Tariff Authority for Major Ports provide for allowan ce of fair ra te <;> f

return on capital em ployed on capital cost. A t present, the norm for de termining the quan tu m of

re turnon capitalemployed is 16%.

7.4 Oil and Gas

Petroleum and N atural Gas Regulatory Board (Determina tion of Network Tariff [or City or Local

Natural Gas Distribution Net;vork an d Co mpression Charge for CNG) Regulatio ns 2008, its

. schedule A poin t no. 3 provides for a reasonable rate of re turn on capital employed equal to 14% .

Page 28

SBI . C"pll al Mo.kottl l.lmhod

"


The tabular 'pre s entati~n o'f above provisions is given below:

Table 10: Return allowed in other intrastructure sectors

Sector '''' Return on Eq~ity ....:...: I '" ',.:' .: . v- '.'i'-·Source·' ~.. ,<'; >~ ' II,", '.:' .: . , '1 I ,.," . I: .

' .,..,

v.

t

' --0':,

, ~ .. '

Roads & Highways

18% ,

I I ,

,

B. K Chaturvedi Committee's .recommendsclans. (November OS, 2009):

• Acceptable Equity Internal Rate of Return ("IRR") of 18% in annuity.projects

• Higher Equity 1RR of 21% acceptable in difficult areas

Power . "160/;8 • Central Electricity Regulatory Commission Regulations dated January 19, 2009 (No. L-7/145 (160)/2008 CERC)

Port s Tariff Authority for Major Ports dated February 26, 2008 '

. Oil & .Gas RQCE] =14% N6tification by Petroleum ane! N atural Gas Regulatory Board dated March 19, 2008 in relation to city gas distribution network

.• ,....'

Notes:

1. RDCE is return on capital (debt +equiry) emplqyed. Rate of Return on E quity is htgher than ROCE

depending upon efficienryifcapital structure.(' . .

2. The returns indicated above are normallY the max imum returns allowed in a sector and are not reflective of " . .J

actual return achieved ry an equity investor which is discoveredthrough biddingprocessfor eachprojec:

"-'

8 Forprojeds commissioned onoraftcr 1" April, 2009 and arc completed nathin speczJied £ime. Othmvisc return onequity is 15.50%. . . '

.. Page 29

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.,'

8. Determination of Rate ofReturn on Quasi Eql1itr ( . '

Quasi equity is defined as "a form of finance taken on by a company that has some traits of

equity, such as having flexible repayment options or being unsecured".

. \ ,'

E xamples of quasi-equity include mezzarune deb t and subordinated debt. Quasi equi ty IS also /

sometimes known as mezzanine finance. There are different instruments which are under the

purview of mezzanine finance , though. the common characteristics of all mezzanine finance

i~s tlU!lle n ts are that they offer,a risk/ return profile that lies above that of debt and bel ow that o f

equity. It Tills the gap between the senior debt and equi ty in the capital structure of th e company.

,""-- , Fif{ure.2: Quasi Equity Instrume1}ts and Expected;Return

~'A._'_'.'_'_' ~. ~ ~._._._"• •_ ••• ••.• • _._ ...

~ j ;

; Equity : ,- -.~ .- . . ,• . - .• .•. • .- .- '1"· ' - ' . .• .• , •.•. ",

Senior Subordinate Debt a ' i . ;.• '1, ', \ ..... 'I.

Quasi :' . . ! f Qnafi E i.. ty..·t··········..··.. !Bquityor' "

' ..~; Convertible SUbordinate Debt ! iIMezzanine ' !! i . .. . .. . ' Finance ,\ ...... nebi·· 'j·J

Redeemable Preferred stock .. .. " .. r, , " (

Leverage

The s=ost of a 'Quasi Equity' instrument would vary fro m each o ther because o f difference in risk

being shared , security o ffered, pay~ent terms etc. 'Therefore in order to determine cost of a particular quasi . .

£quiry instrument, it wouldpe necessary to analYze the details oftransaction and under~ing agreements.

\ "

'- ,.

Page 30

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Private & confidsntiai

"-. , ,. 9. ConclusionI ' Airports 'play a significant role in globaliza tion, connecting cities and countries, Airports are a major

'- ' part of a country's infrastructure and foster economic activities by encouraging international

commerce, tourism and generating employment.

Airports Authority of India has appointed SBI Capital Markets Limited for providing an opinion on

the Fair Rate of Return on 'Equity' and 'Quasi Equity' for investor on its investment in airports. - -~

SBICAP has estimated the Fair'Rate of Return on 'Equity' based on the Capital Asset Pricing

• _Model (CAPM). SBICAP has also analyzed the return considered by various Government

authorities in other infrastructure ~ector while estimating the Rate of Return on equity for Indian ~

airport sector . The rate of return on 'Quasi Equity' would depend on the type and features of

ln struments.being used fo~ such form of finance .

The Rate of Return on Equity based on the estimates of various factors as detailed in earlier chapter

works out to about 19.5%. However, taking into account the variation in the airports in terms of

' , ,, J

capacity, size, loca~on, classification, capital structure, risks perception etc ., ~t mcry be prudent that

concerned ;/Uthotitics have jlexibiliryoffixing Rate ofReturn on Equity imestments, for thc airport project as a whole}

\.~ / Within a range. For tbeprescnt purpose} a range of (±) 5% i.e. 18.5% to 20,5% could be considered reasonable. It may be mentioned that the rate of return ofrered by Government agency}s normally the maximum

rate it would co~sider to allow for a sector and or a project in particular with actual return thereafter \'..... '

arrived through competitive price discovery mechanism.

A Rate of Return on Equity to an investor on its original investment in airport project may be

• considered taking into account the aggregate returns from the project and efficiencies of the

finanCing structures in the ord~r of range as abo','e. The sp ecific return for any particular airport

project may,be considered taking into account the following factors :

"" ...

-, ' ,/ 'Micro level scenarios in relation to risks and capital structure of any airport; ,/ Need to attract private investment considering the limited budgetary resources of

• Government to finance the development of airport infrastructure; ,/ User fee / airp ort charges which could be passed on to user; and ,/ Overall viability of airport;

SBI Capital Markets Limited

February 2012

Page 31

sm Ca p Ut" Mo rkolu UmlUlCl

I


... -

~_ .-.

';......

" . ...

-, .• .!

<::

Annexure

Brief Profile of Airports considered in Data set

1. Beijing Capital International Airport Co Ltd (China) ,

Beijing Capi tal International Airpor t Co._Limi ted operates b? th aero nautical an d non-aeronautical

busin~s s in the Beijing airport" The Company provides aircraft movement and passen ger service

~ facilities, safe ty and security services, fire- fighting servi ces, an d ground handling services. In

addi tic n . jt ope ra tes duty free and other retail shops and leases properties . . ,

, ~. Guangzhou Baiyun International Airport Co Lfd (China)

Guangzhou Baiyun International Airport Co. Limi ted op erates the Guangzhou Baiyun International

Airport and provid es related transportation services, including gro und, pa ssenger , storage, airp lane

main tenanc e an d rryair, and o ther services, T he Company also provides food, space rental, and

advertising servic es.

3. Shanghai Jnternational Airport Co Lt~ (China)

Shanghai International Airpor t Co , Ltd, opera tes Pudong. Airport in Shanghai. T he Company

provides a full range of services including air traffi c control, terminal management, cargo handling,

advertising, space rental, ;nd o ther relateef services .

4. Xiamen International Airport Co Ltd (China)

Xiarnen "International Airport - Co . Ltd. opera tes' and maintains Gaocp Airport. The Company

provides terminal transportation service, ma in tains airport waiting halls,_operates airport shopping . . ,

malls, as well as offers adver tising and airpor t mec ha nical engine ering servic es,

5. Shenzhen Airport Co. Ltd.

Shenzhen Airport Co. Ltd. is pri ncipally engaged in the operation of Shenzhen' Airport, China. T h e

Com pa ny opera tes its bu sine sses through aviation gua rantee and airport services, avia tion logistics

busin ess and avia tion value -adde d services.

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6. Hainan Meilan International Airport Co Ltd (China)

Hainan Meilan International Airport Company Limi ted provides airfield 'servi ces, terminal facilities,

gro und handling services, pas senger and cargo handling services. The Compan y also leas es

commercial and retail space at the Meilan Airport , op erates airp ort-related bu sin ess franchising,

advertising, car parking, tourisrrr'services , and sells du ty-free and consumable go ods .

7. Grupo Aeroportuario del Centro Norte SAB de CV (Mexico) \',,_.. • q-rupo A-eroportuario del Centro N orte, S.A.B. de C.V. (OMA) op erates in ternational airports in th e . .

north ern and central regions of Mexico . The airports serve Monterrey, Acapulco , Mazatlan,

' . , :6ihuatanejo' and several other regional cen ters and border cities.

8. Grupo Aeroportuario del Pacifico SAB de CV (Mexico)

G rupo Aeroportuario del Pacifico SAB de CV operates and maintains airports in the Pacific and

central regions o f Mexico.

\ . . .' 9. Grupo Aer?p.ortuario del Sureste SABde ~V (Mexico)

G rupo Ae roportuario del Sureste S.A.B. de C.Y. operates airports in Mexico. The Company holds

50 year concessions, beginning in 1998, to manage airports in Cancun, Cozumel, Merida, O axaca,......'

Veracruz, H ua tulco, T apachula, Minatitlan, and Villahermosa.

10. Malaysia Airports Holdings ~hd (Malaysia) '....... " :

Malaysia Airports Holdings Berhad is an investment holding company. The Company, through it s

subsi dia ries~ provides . tii.ar:agement, maintenance, and, operation of designated airports . Malaysia -.

Airports also op erates du ty-free an~ non-duty free stores as well as provides food and beverage

outle ts at the airp or ts.

11. Airp<,?rts of Thailand PCL (Thailand)

Airports of Thailand Public Company L td. operates the Bangkok In tern ational Airpor t (Don

Muang). T he .Cornpany also operates provincial airports in Chiang Mai, Chiang Rai, H at Yai, and

Phu ket. It is developing the New Bangkok Interna tional Airport (Suvarnabhumi).

'., . .

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" -'

12. TAV Havalimanlari Holding AS (Turkey)

TAV Havalimanla rr I-Iolding A-s operates terminals at airp orts in Turkey and Georgia. Through

subsidiaries, the Company offers terminal, duty-free, group handling, catering, and other services.

! , '-"--,

"

~3.Fltighafen Wien AG (Austria)

FlughafenWien AG manages, m aintains, and operates the Vienna Int~rnational Airport and the

. Voslau Airfield. The Com pany offers te rminal services, air-sid e and land-side cargo handling, and

the leasing o f sto re, restaurant, and hotel airport building space to third party operators and

businesses.

\

~4. Flughafen Zuerich A~ (Switzerland)

Flughafen Zuerich AG operates the Zw:i ch Airport. The Company constructs, leases, and maintains

airport structure ~ 'and equipm ent.

15. Fraport AG Fr~nkfu!t AifJ.?ort Services Worldwide (Germany)

Fraport AG Frankfurt Airport Services Worldwide (Fraport) o ffers airpor t services. The Company

- operates the Frankfurt-Main , F'rankfurt-Hahn and other airports in Germany, the airport in Lima,

Peru, an-? th e international terminal in Antalya, Turkey, Fraport also provides 'services to domestic

and international carriers including traffic and terminal management, groWld handling, securi ty, and

~eal estate and facility -management.

16. Gemina S.p.A (Italy)

Gemina S.p .A. is a holding company. The Company's subsidiaries -are ac tive. in the operation of

airports, •du ty fre e shops , helicopter rescue servi ces, parking facilities, advertising, catering, and

subletting in Italy. G emina's aviation activities include airport rights, handling, security and other

services ,

,'_ ..

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17. Aeroporto di Venezia Marco Polo S.p.A - SAVE (Italy)

SAVE S.p.A operates the Marco Polo Airport in Venice, Italy. The Company operates through a

concession from Italy's Ministry"of Transport. ........ .

18. Aeroporto di Firenze SpA (Italy) . .

Aeroporfo, di Firenze S.p.A. manages the Amerigo Vespucci Airport in Florence, Italy. The

Company derives revenues from fees from airlines, renting retail spaces, soncessionaires such as car

.rental firms and shuttle bus operators, and advertising.

'" ..-'

19. Societa Aeroporto Toscano Galileo Galilei SpA (Italy)

Societa Aeroporto Toscano S.p .A . manages the Galileo Galilei Airport inPisa, Italy. The Company

manages and finances the to~al development of the airport.

20. Auckland International Airport Ltd (New.Zealand) \ ' Auckland International Airport Limited owns and operates the Auckland International Airport. The

Airport includes a sipgle r~nway...' an interr:ational terminal and, two domestic terminals. The Airport

also has commercial facilities which include airfreight operations, car rental services, commercial

- banking center and office buildings.

21. Aeroports de Paris~(France)

" . ' A erop orts de Paris (ADI') manages all the civil airports 10 the Paris area. The Company also

develops and operates light aircraft' aerodromes. ADP offers air transport related services, and

business services such as office rental.

22. Kobenhavns Lufthavne (Denmark)

Kobenhavns Lufthavne A/S (Copenhagen Airports A/S - CPH) owns and operates Kastrup, the

international airport in Copenhagen, and Roskilde airport. The Company provides traffic

management, maintenance, and security services, as well as manages the airport shopping Center and

allport projects. Kebenhavns Lufthavne.also has investments in airports in Mexico, England, and

China,

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Private & confidential ....

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23. Japan Airport Terminal Co Ltd (japan) '..... ..,.!

Japan.Airport Terminal Company Limited constructs, manages and maintains passenger terminals

and airpor t facilitie s at H aneda and N arita airports. The Company operates parking-lots, souvenir

shops, and duty-free stores. Japal} Airport T erminal, through its subsidiaries, manages restaurants

and in-fligJ::t m eal services,

24. Sydney Airport Corporation Limited (Australia)

Srdney Airport Corporations Limited operates the Sydney airport 111 Australia. T he Company

develops_and maintains the airport in frastructure and lease s terminal space to airlines and retailers. ; .

..... _....

.........

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Documents

AIRPORTS AUTHORITY INDIAaera.gov.in/documents/pdf/SBI-CAPS-Report-FROR.pdf · Airports Authority of India ("AAl" or the "Authority") has appointed SBI Capital Markets Limited ("SBI