JSW Infrastructure, a part of JSW Group, is the second largest commercial port operator in India in terms of cargo handling capacity. It develops and operates ports and port terminals pursuant to Port Concessions.

Currently it operates nine port concessions in India with an aggregate installed cargo handling capacity of 158.43 MTPA as of June 30, 2023 (up from 119.23 MTPA as of March 31, 2021) spread across spread across both west and east coast of India. Its nine concessions includes two non major ports located in Maharashtra and port terminals located at Major Ports located across the industrial regions of Goa and Karnataka on the west coast, and Odisha and Tamil Nadu on the east coast. With diverse maritime infrastructure the company meets its customers diverse cargo needs across key location. In addition to its operations in India, the company operates two port terminals under O&M agreements for a cargo handling capability of 41 MTPA in the UAE as of June 30, 2023. Majority of its assets have the natural advantage of a deep draft enabling direct berthing of larger vessels like cape size and post panamax vessels.

The company has strong evacuation infrastructure at its ports and port terminals that comprises of multi-modal evacuation techniques, such as coastal movement through a dedicated fleet of mini-bulk carriers, rail, road network and conveyor systems. Given its ports/terminals facilities and evacuation infrastructure it offers various maritime related services including, cargo handling, storage solutions, logistics services and other value-added services to its customers, and are evolving into an end-to-end logistics solutions provider.

Its portfolio of assets caters to both exports (outward movement of cargo) and imports (inward movement of cargo). For instance, its Dharamtar Port, South West Port, New Mangalore Coal Terminal and Ennore Coal Terminal all cater to raw-material import requirements and finished goods export requirements of JSW Group Customers (Related Parties) while Jaigarh Port, Paradip Iron Ore Terminal and Paradip Coal Exports Terminal predominantly handle outward cargo from the mineral rich belts of Odisha to the various consumption centers.

Operations of the company commenced in 2002 with acquisition of one one Port Concession at Mormugao Port (Goa) and commenced operations in 2004 has now evolved/expanded into a large maritime infrastructure company having developed/operate multi cargo ports/port terminals numbering about nine as end of June 30, 2023 across India. Its ports/port terminals are equipped to handle various categories of cargo, including dry bulk, break bulk, liquid bulk, LPG, LNG and containers.

It have developed two green-field Non-Major Ports, four port terminals at Major Ports including a container terminal project in New Mangalore (Karnataka), and have acquired three port terminals in India. Further it proposes to develop a port at Jatadhar (Odisha) to cater to JSW Steel’s (“JSW Steel”) upcoming steel facility in Odisha.

Ports and port terminals operated by the company typically have long concession periods ranging between 30 to 50 years, providing with long-term visibility of revenue streams. As of June 30, 2023, the capacity weighted average balance concession period of its operational ports and terminals is approximately 25 years with Jaigarh Port, one of its largest assets, having a balance concession period of 35 years.

Port Concessions of the company are strategically located in close proximity to JSW Group Customers (Related Parties) and are well connected to cargo origination and consumption points. This enables the company to serve the industrial hinterlands of Maharashtra, Goa, Karnataka, Tamil Nadu, Andhra Pradesh and Telangana, and mineral rich belts of Chhattisgarh, Jharkhand and Odisha, making its ports a preferred option for its customers.

The company has long-term contracts with JSW Group Customers (Related Parties) for tenure of 10 to 15 years on an arm’s length basis for cargo handling services, some of which have take-or-pay provisions which provide long-term visibility of cargo and revenue. Under the take-or-pay provisions, in the event the customer is unable to meet the minimum commitment for cargo handling, the customer is required to pay the shortfall amount between the tariff for the minimum commitment and the actual cargo handled. The shortfall amount can also be adjusted against any excess in the volume handled for the relevant customer in the future.

Additionally the company has diversified its customer base to include third-party customers across geographies and have expanded its cargo mix by leveraging its location advantage and maximizing asset utilization. Its contract with third-party customers are both long term (typically 5 years) and short term commercial contracts that are generally for a term of up to one year or until completion of evacuation of cargo, which may be renewed periodically.

Revenue stream (revenue from operations) of the company is diverse including revenue from (i) providing cargo handling, storage and related services such as evacuation, sorting, mixing and bagging to both JSW Group Customers as well as third-party customers, and (ii) vessel related charges such as berth hire charges, port dues, pilotage and towage billed levied to shipping agents.

The tariff charged by the company to the customers is typically governed by the concession agreement for the relevant port or port terminal. Under some of its concessions, tariff is escalated annually and is linked to the WPI and for other concessions, the tariff may be determined by it based on prevailing market conditions.

Of the total cargo handled in Q1FY24, about 33.55% is iron ore, 32.22% is thermal coal, 23.25% coking/steam coal, 0.59% is liquid/gas cargo, 2.52% is container cargo, 7.87% is other bulk & break bulk cargo. Moreover the cargo evacuation infrastructure mix is also diverse with 34.03% of the total cargo handled in Q1FY24 moved by rail, 21.64% by road, 16.47% by waterways and 27.87% by conveyor. In terms of revenue mix of the Q1FY24 revenue from operations cargo handling accounted for 84.7% [JSW Group 51.02%; 3^rd Parties 33.68%] and vessel related charges about 15.3%. Revenue under O&M agreement is about 0.95% in Q1FY24.

The Issue & Objects of the Issue

The offer comprises Fresh Issue of equity share aggregating to Rs 2800 crore.

Of the net proceeds of fresh issue, the company will be using Rs 880 crore towards Re/pre-payment (in full or part of all/portion) of certain borrowings through investment in wholly owned subsidiaries i.e. JSW Dharmatar Port (JDPPL) and JSW Jaigarh Port (JJPL); Rs 1029.035 crore towards financing capital expenditure requirements through investments in JJPL for proposed expansion/upgradation works i.e. expansion of LPG terminal (Rs 865.751 crore), setting up of electric substation (Rs 59.40 crore) and purchase & installation of dredger (Rs 103.884 crore) at Jaigarh Port; Rs 151.049 crore towards financing capital expenditure requirements through investments in JSW Mangalore Containter Terminal (JMCTPL), a WoS for proposed expansion at Mangalore Container Terminal and balance towards general corporate purposes.

Gross consolidated debt of the company as of end June 30, 2023, was Rs 4228.387 crore and the net debt was Rs 1873.778 crore.

Strength

Demonstrated project development, execution and operational capabilities in maritime infrastructure industry that is capital intensive with long gestation periods and several entry barriers due to significant regulatory requirements.

Strategically located assets both in West and East coast of the country at close proximity to industrial clusters (Including JSW Group Customers who provide sticky cargo) supported by a multi-modal evacuation infrastructure.

Strong multimodal evacuation infrastructure allows the company to customized supply chain solutions to its customers.

Benefit from strong corporate lineage of the JSW Group. Apart from strong managerial support, as a member of JSW Group, the company gets initial cargo from JSW Group Customers (related parties) which facilitated ramp-up of its assets and improved utilization of capacities. JSW Group companies accounts for 63.4% of the total cargo handled by the company in India in Q1FY24 and 66.63% in FY23.

Predictable revenues driven by long-term concessions, committed long-term cargo contracts and stable tariffs. Contracts with its JSW Customers are typically long term in nature with a tenure ranging between 10-15 years. Some of the contracts have take-or-pay provisions which provide long-term visibility of cargo and revenue at its ports. Contracts with take or pay provisions provides a minimum annual cargo volume commitment of 25.40 MMT that represents about 27.36% of the volume cargo handled in India in FY23.

Barring South West Port (SWPL) at Marmagoa Port Trust the remaining concession period of all others were more than 15 years and upto 35 years.

East Coast port/port terminal assets of the company contributed about 35% of the total volume in Q1FY24 and FY23 with balance 65% coming from west-coast port/port terminal assets.

Weakness

Rely on concession and license agreements under PPP models from government and quasi-governmental organizations to develop/operate its ports/port terminals with a typical tenure of 30-50 years. O&M agreements are typically granted for limited periods of up to five years. Typically concession/license agreements do not provide for renewals. Inability to win or extend/renew concessions tenure on equally favorable terms, failure to comply with obligations/terms set out by these concession agreements or win any new concession could affect the operations or growth of the company.

Environmental clearance for capacity enhancement (at the existing berths operated by South West Port (SWPL), a subsidiary company at the Mormugao Port in Goa) to SWPL has been challenged before the National Green Tribunal. Any adverse outcome in these litigations may impact the growth of SWPL.

Raised USD 400 million in January 2022 through 4.95% sustainability-linked senior secured notes due in 2029, secured by pledging its shareholding in the Subsidiaries i.e. Paradip East Quay Coal Terminal Private Limited, JSWJPL, JSW Paradip Terminal Private Limited, SWPL and DPPL. In case of an event of default under Secured Notes, the security trustee may invoke the pledge which would result in the security trustee acquiring equity and management control over the Subsidiaries.

Do not own the JSW trademark/brand and it was used under Brand Equity Agreement between the company and JSWIPL and entails non refundable royalty payment equivalent to 0.25% of its quarterly net turnover/revenue.

Inability to complete both ongoing brownfield (Expansions at Jaigarh Port and MTPL which are proposed to be partly funded by net proceeds from the IPO) as wells as green-field expansion projects on time may result in cost overrun.

Revenue from operations from top 5/10 customers accounts for 54.21% and 61.94% respectively.

Exchange rate fluctuations could materially and adversely impact the business, financial condition and results of operations with revenue received in foreign currency for the company being 15.85% of total revenue from operations in Q1FY24.

Lack of PPP opportunities in port sector or its inability to effectively bid for projects in the future could impact the operations and financial condition.

Capacity utilization of its port/port terminal capacity stood at 62.64% and 56.88% in Q1FY24 and FY23 respectively.

Port services as well as logistics operations may be disturbed/impacted by natural disasters/ force majeure.

The lack of an efficient transportation network and reliable transportation infrastructure in India or inadequacies in the connectivity of its ports/ port terminals to the Indian road and rail network may have an adverse effect on its business and results of operations.

Iron Ore and coal makes up about 89% of the total cargo volume of the company with iron ore accounting about 33.55% in Q1FY24, 33.22% thermal coal and 23.25% coking/steam coal. So slowdown in demand for electricity or steel in the country or increase in domestic supply of coal through rail may impact the cargo volume.

Valuation

Consolidated revenue for fiscal ended March 2023 was up 41% to Rs 3194.74 crore driven largely by 49.81%YoY jump in volume of cargo handled in India by the company to 92.83 MMT and of which about 45.09% (or 13.92 MMT) of the overall absolute volume increase come from newly commenced entities. However growth rate in value terms lower than volume terms for the period is largely due to lower rate of revenue in case of newly commenced entities. With operating profit margin (OPM) expand by 190 bps to 50.7%, the operating profit (OP) was up 46% to Rs 1620.19 crore. The net profit after MI was up 126% to RS 739.86 crore.

Consolidated revenue for quarter ended Jun 2023 was up 7% to Rs 878.10 crore. With OPM stand contract by 120 bps to 51.4%, the growth at OP moderated to stand at 5% to Rs 451.34 crore. After accounting for lower other income the PBIDT was up 4% to Rs 491.48 crore. The interest cost (net) was an income of Rs 15.75 crore (against an expense of Rs 139.84 crore). The interest cost is net of foreign exchange gain or loss. The forex gain for the period was a gain of Rs 87.182 crore against a loss of Rs 69.139 crore. The forex gain for the period was escalated-by/ includes Rs 77.975 crore attributable to reclassification of earlier forex loss from the P&L accounts to OCI on account of increase in effectiveness of cash flow hedge against in corresponding previous period. Interest cost excluding forex gain/loss was up by 1% to Rs 71.43 crore. Thus powered the PBDT was up 53% to Rs 507.23 crore. The depreciation was up 3% to Rs 94.74 crore. Thus the PBT was up 71% to Rs 412.49 crore. Eventually the net profit after MI was up 69% to Rs 320.89 crore.

For TTM period ended Jun 2023, the consolidated net profit after MI was Rs 870.89 crore on a sales of Rs 3253.14 crore.

The TTM EPS was Rs 4.1 and the PE on upper price band of offer price works out to 29 times. In comparison the Adani Ports Special Economic Zone (APSEZ) and Gujarat Pipavav Port quotes at a PE of 24.1 times and 17.8 times of their EPS for TTM period ended Jun 2023. The price/BV of the company stood at 3.5 times compared to 3.9 times and 2.6 times of APSEZ and Gujarat Pipavav. While the EV/EBITDA of the company was 15.7 times it was 20.2 times and 11.3 times for APSEZ and Gujarat Pipavav Port.