GMR Group, which invested R25,000 crore to build airports, power plants and roads until now, will choose an asset light strategy to earn revenues from service income with minimal investments. ?So far, we have been growing with an asset heavy model, but now going to an asset light model,? Subbarao Amarthaluru told FE in an interaction on Wednesday.
?The growth will come from service income but, with minimal capital exposure.? The push to an asset light model stems on fears of high cost of debt and equity to build heavy assets. The average borrowing cost is 14% and expected return on capital is anywhere between 20% for retail investors and 25% for private equity investors. ?A strategic partner will seek more rights,? says Rao. Higher prices and delay in acquiring land add to the woes.
One such initiative the Bangalore-based group is looking to monetise is its skills in building airports both in India and overseas. GMR Infrastructure, the listed company, which built the Hyderabad airport and is rebuilding the Delhi airport, will now partner with private equity or sovereign funds to build and manage airports. The group is changing its growth model in airports.
?We can take minimum equity stake in those projects say 10%-15% but, provide those services partnering with some sovereign or private equity funds,? says Rao.
?We have built various skill sets in the last few years right from bidding, financial closure, project management and operations management. Now we are moving to a phase where we can monetise these skills to other developers.?
?It is a good strategy to diversify the business portfolio and balance the risks in the existing business,? says Sunny Banerjea, executive director, organisational restructuring, at consulting firm KPMG India. His comments are not specific to the story.
GMR’s strategy is to capitalise on its construction and operational skills. ?The fund will provide the capital and GMR will give all these services and then we will come up with the project,? says Rao who have been with the company for more than a decade. ?The fund will be 90% partner and we will bid for projects together, with 10% equity from our side.?
The strategy overcomes the limitations of bidding for many projects and insulate parent’s balance sheet. ?By exposure of 10% you can get equity income, and your balance sheet is not at risk, says Rao. ?It is the same airport holding company which can keep bidding in partnership with others and they will be special purpose vehicles for each projects.
?The asset light strategy is five years overdue,? says Raj Nair, chairman, Avalon Global Research. ?More and more companies will chose asset light strategy as the returns on capital employed will be higher.? Many telecom companies do not own their assets, but only own brand, he added.
Building airports have given GMR understanding of healthcare, education, and hospitality sectors. The group will offer medical tourism in a three-way venture with an American and Indian partner, signed an agreement with Novotel to build hotels and have leased land to hotels chains Hyatt and Lemon Tree.
?Companies that have invested heavily in infrastructure projects can utilise the underlying construction capability of managing large projects and ability to access large capital to new sectors,? says Banerjea of KPMG.? The challenge is to bring in the right talent and have to understand the local nuances.