JSW Infrastructure coming up with IPO to raise upto Rs 2948.67 crore

JSW Infrastructure

• JSW Infrastructure is coming out with a 100% book building; initial public offering (IPO) of 24,77,87,610 shares of Rs 2 each in a price band Rs 113-119 per equity share.
• Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on September 25, 2023 and will close on September 27, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 2 and is priced 56.50 times of its face value on the lower side and 59.50 times on the higher side.
• Book running lead managers to the issue are JM Financial, Axis Capital, Credit Suisse Securities(India), DAM Capital Advisors, HSBC Securities and Capital Markets (India), ICICI Securities, Kotak Mahindra Capital Company and SBI Capital Markets.
• Compliance Officer for the issue is Gazal Qureshi.

Profile of the company

The company is the fastest growing port-related infrastructure company in terms of growth in installed cargo handling capacity and cargo volumes handled during Fiscal 2021 to Fiscal 2023, and the second largest commercial port operator in India in terms of cargo handling capacity in Fiscal 2023. Its operations have expanded from one Port Concession at Mormugao, Goa that was acquired by the JSW Group in 2002 and commenced operations in 2004, to nine Port Concessions as of June 30, 2023 across India, making it a diversified maritime ports company. It provides maritime related services including, cargo handling, storage solutions, logistics services and other value-added services to its customers, and is evolving into an end-to-end logistics solutions provider. It develops and operate ports and port terminals pursuant to Port Concessions. Its ports and port terminals typically have long concession periods ranging between 30 to 50 years, providing it with long-term visibility of revenue streams. 

The company has a diversified presence across India with Non-Major Ports located in Maharashtra and port terminals located at Major Ports across the industrial regions of Goa and Karnataka on the west coast, and Odisha and Tamil Nadu on the east coast. Its Port Concessions are strategically located in close proximity to its JSW Group Customers (Related Parties) and it well connected to cargo origination and consumption points. This enables it 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. In addition, it benefits from 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.

Proceed is being used for:

• Prepayment or repayment, in full or part, of all or a portion of certain outstanding borrowings through investment in wholly owned Subsidiaries, JSW Dharamtar Port and JSW Jaigarh Port.
• Financing capital expenditure requirements through investment in wholly owned Subsidiary, JSW Jaigarh Port, for proposed expansion/upgradation works at Jaigarh Port i.e., i) expansion of LPG terminal (LPG Terminal Project); ii) setting up an electric sub-station; and iii) purchase and installation of dredger.
• Financing capital expenditure requirements through investment in wholly owned Subsidiary, JSW Mangalore Container Terminal, for proposed expansion at Mangalore Container Terminal (Mangalore Container Project).
• General corporate purposes.

Industry overview

As per a report by Niti Aayog in 2021, India’s logistics cost as a % of GDP stood at around 14% compared to 10-11% for BRICS countries and 8-9% for developed countries. Going forward, the logistics cost as a % of GDP for India is expected to decline driven by initiatives such as implementation of GST, investments towards road infrastructure, development of inland waterways and coastal shipping, thrust towards dedicated freight corridors among others. The “Sagarmala” (port-led prosperity) initiative was rolled out in April 2016 by the GoI to reduce logistics costs for both domestic and export-import cargo with optimised infrastructure investment. The Sagarmala programme aims at enhancing India’s port capacity to over 3,300 MTPA by 2025. According to the Ministry of Shipping, this would include 2,219 MTPA of capacity at Major Ports and 1,132 MTPA at Non-Major Ports by 2024 - 2025. While the Government has announced and implemented several initiatives such as Gati Shakti Scheme, National Logistics Policy and Bharatmala Pariyojana to improve the transportation infrastructure in the country, improvement in such infrastructure will involve major capital expenditure and policy and administrative focus.

The Indian economy occupies a commercially enviable location on the global map, straddling Bay of Bengal, Indian Ocean, and Arabian Sea with a coastline of approximately 7,517 km. Ports in India handle 90% by volume and 70% by value of India’s external trade. The maritime route is used to import crude petroleum, iron ore, coal, and other critical goods. India also has an extensive network of inland waterways in the form of rivers, canals, backwaters, and creeks. The total length of national waterways is 20,275 km spread across 24 States in the country. The Indian Ocean encompasses about one-fifth of the world’s sea area and supports approximately 80% of global maritime oil trade. India’s central and strategic location in the Indian Ocean region provides an advantage to capitalize on the same as India’s maritime trade increases. According to the Chief Economic Advisor, India is poised to become a 5 trillion dollar economy and ports would play a significant role in the growth story. The Indian government plays a key support role in the development of the port industry. It has opened up the automated route to 100% FDI for port and harbour building and maintenance projects. It has also made it easier for businesses that create, maintain, and operate ports, inland waterways, and inland ports to take advantage of a 10 year tax break. The Indian port sector is divided into two segments: major ports and non-major ports. As on December 2022, the Indian coastline is dotted with 12 major and nearly 217 non-major ports. Major ports are administered directly by central government, whereas non-major ports fall under the jurisdiction of state governments. 

Pros and strengths

Fastest growing port-related infrastructure company and second largest commercial port operator in India: The company is the fastest growing port-related infrastructure company in terms of growth in installed cargo handling capacity and cargo volumes handled from Fiscal 2021 to Fiscal 2023. Its installed cargo handling capacity in India grew at a CAGR of 15.27% between March 31, 2021 and March 31, 2023, and the volume of cargo handled in India also grew at a CAGR of 42.76% from Fiscal 2021 to Fiscal 2023. It has grown by catering to the growing demand for its services that it has been able to meet efficiently through assets located in close proximity to industrial and mineral rich hinterlands. It is also the second largest commercial port operator in India (in terms of cargo handling capacity in Fiscal 2023) in an industry that has several entry barriers. The maritime infrastructure industry is capital intensive with long gestation periods and significant regulatory requirements. Ports in India also require substantial investments in evacuation infrastructure and skilled resources, resulting in a small number of new industry entrants in recent years.

Predictable revenues driven by long-term concessions, committed long-term cargo and stable tariffs: The company has long-term contracts with its JSW Group Customers (Related Parties) for cargo handling services at its Port Concessions, some of which have take-or-pay provisions which provides long-term visibility of cargo and revenue at its ports. The majority of its take-or-pay contracts are extendable on an arm’s length basis as may be mutually agreed. The tariff it is able to charge its 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. For its other concessions, the tariff may be determined by it based on prevailing market conditions. Its long-term take-or-pay contracts (with JSW Group Customers (Related Parties) and Long-Term Third-Party Customers) are similarly subject to WPI-linked escalations. As a result, the tariff it charges its customers across all its Port Concessions is escalated annually in line with the WPI thereby providing strong visibility of revenue streams.

Diversified operations in terms of cargo profile, geography and assets: The company has evolved into a large maritime infrastructure company and has developed and operate multi-cargo ports and port terminals that are equipped to handle various categories of cargo, including dry bulk, break bulk, liquid bulk, LPG, LNG and containers. It currently handles various types of cargo including coal, fluxes and iron ore, sugar, urea, steel products, rock phosphate, molasses, gypsum, barites, laterites, and edible oil. Coal comprises of (i) thermal coal; and (ii) other than thermal coal (which includes coking coal, steam coal and others). It has expanded its operations geographically from having a limited presence along the west coast of India for its JSW Group Customers (Related Parties) to handling diverse cargo types along the east and west coasts of India for both JSW Group Customers (Related Parties) as well as third-party customers. Its Non-Major Ports are located in Maharashtra along the west coast. Its terminals are located at Major Ports across Goa and Karnataka in the west coast, and Odisha and Tamil Nadu along the east coast.

Demonstrated project development, execution and operational capabilities: The company has a demonstrated track record of developing, acquiring and operating nine Port Concessions, as of June 30, 2023. Its installed cargo handling capacity in India has grown at a CAGR of 15.27% from March 31, 2021 to March 31, 2023, and the volume of cargo handled by it in India has grown at a CAGR of 42.76% between Fiscal 2021 and Fiscal 2023. Further, its installed cargo handling capacity in India grew from 153.43 MTPA as of June 30, 2022 to 158.43 MTPA as of June 30, 2023, and the volume of cargo handled by it in India grew from 23.33 MMT for the three month period ended June 30, 2022 to 25.42 MMT for the three month period ended June 30, 2023. The application of its operational expertise in running large ports and port terminals has contributed significantly towards this growth. It has won numerous bids for developing and operating terminals at Major Ports, such as Paradip Coal Exports Terminal, Paradip Iron Ore Terminal and New Mangalore Container Terminal; developed greenfield ports such as Jaigarh Port and Dharamtar Port; and successfully acquired three terminals in 2020, i.e., Ennore Bulk Terminal, Ennore Coal Terminal and New Mangalore Coal Terminal.

Risks and concerns

Rely on concession and license agreements from government: The company operates and manage its ports and port terminals under nine concession and license agreements, and lease deeds with state maritime boards and/or major port trusts/authorities in India and under two O&M agreements in the UAE. These concessions are granted by the relevant government agencies and concessioning authorities. It is required to obtain the concessioning authority’s consent for various operational aspects of its business that may delay the execution of its growth strategies or constrain its ability to operate and grow the business in the event such consents are not forthcoming. For instance, it requires prior consent for making changes in management and shareholding beyond specified thresholds, changes to the purpose of port and services, encumbering its assets, changes in the pre-approved specifications of the designs and drawings, and development or improvements of new facilities. While consent for such actions has not been denied by the concessioning authorities in the past, there can be no assurance that it will be able to obtain all requisite consents in the future. An inability or failure to obtain such consents may have an adverse impact on its business and operations.

Dependent on few types of cargo: A substantial portion of the total volume of cargo handled by it comprises coal and iron ore. Coal comprises of (i) thermal coal; and (ii) other than thermal coal (which includes coking coal, steam coal and others). It is therefore susceptible to a significant downturn in the trade or transportation of coking coal, iron ore and thermal coal. Its Subsidiary, SWPL is currently the subject of a public interest litigation that is petitioning for closure of coal/ coke handling operations at the Mormugao Port in Goa due to the pollution caused by handling of coal/ coke at the port. If the petition is not decided in its favour, its coal/ coke handling operations at the Mormugao Port could be subject to closure which could have an adverse effect on its business, cash flows, and results of operations. The Government of India (GoI) is also increasingly introducing legislations to restrict emissions and incentivize adoption of renewable energy, further reducing the demand for coal for industrial use. Any other similar actions involving its other coal handling terminals or any corresponding reduction in coal traffic at its ports will therefore adversely impact its results of operations and profitability.

Derive substantial portion of revenue from top five customers: The company’s arrangements with its customers are primarily based on long-term arrangements (tenure of 10 to 15 years with JSW Group Customers (Related Parties) and up to five years with third-party customers), some of which have take-or-pay provisions. Its other arrangements with its customers are based on short-term commercial contracts (that are generally for a term of one to three years with JSW Group Customers (Related Parties) and up to one year or until completion of evacuation of cargo for third-party customers), which may be renewed periodically. If its customers are unwilling to renew such agreements or impose terms less favourable to it than existing terms, it may adversely affect its business operations and its future financial performance. While it has the opportunity to earn minimum revenue based on its take-or-pay arrangements, there can be no assurance that its customers will extend or renew their arrangements with it on comparable terms or at all.  

Operate in capital-intensive industry: The company operates in a capital-intensive industry which requires substantial levels of funding. In addition to its existing projects, it is in the process of undertaking additional greenfield or brownfield port projects, all of which would require substantial capital expenditure. It has funded its capital expenditure requirements in the last three Fiscals and three month period ended June 30, 2023 and June 30, 2022, primarily through a combination of internal accruals and borrowings from banks, a portion of which was refinanced through its Secured Notes. However, it cannot assure that it will have sufficient capital resources for its existing expansion plans or any other expansion plans that it may have in the future. Its ability to arrange financing in the form of long-term borrowings or working capital facilities, and the costs of capital of such financing are dependent on numerous factors, including general economic and capital market conditions, credit availability from banks, investor confidence, credit ratings, the continued success of its operations, and other laws that are conducive to its raising capital in this manner. Furthermore, if it decides to raise additional funds through the issuance of equity or equity-linked instruments, the interests of its shareholders may be diluted. If it decides to meet its capital requirements through debt financing, its interest obligations will increase and it may be subject to additional restrictive covenants.

Outlook

JSW Infrastructure is part of the JSW Group, a multinational conglomerate with an international portfolio of diversified assets across various sectors, including steel, energy, infrastructure, cement, paints, venture capital, and sports. JSW Infrastructure is the 2nd largest commercial port operator in the country in terms of cargo handling capacity in Fiscal 2022. Its environment friendly, port facilities are flanked across the East and West coasts of the country. It provides 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. It develops and operate ports and port terminals pursuant to Port Concessions. It has a diversified presence across India with Non-Major Ports located in Maharashtra and port terminals located at Major Ports across the industrial regions of Goa and Karnataka on the west coast, and Odisha and Tamil Nadu on the east coast. Its Port Concessions are strategically located in close proximity to its Anchor Customers and are well connected to cargo origination and consumption points. On the concern side, the company’s business and operations are subject to various environmental risks such as oil spills and disposal of hazardous waste and chemicals. It, like other port operators and manufacturers in India, is subject to various central, state and local environmental, health and safety laws and regulations concerning issues such as damage caused by air emissions, wastewater discharges, and solid and hazardous waste handling and disposal.

The issue has been offered in a price band of Rs 113-119 per equity share. The aggregate size of the offer is Rs 2799.99 crore to Rs 2948.67 crore based on lower and upper price band respectively. On the financial front, the company’s total income increased by 41.79% to Rs 33,728.53 million in Fiscal 2023 from Rs 23,787.38 million in Fiscal 2022. Its restated profit for the year increased by 126.82% to Rs 7,495.13 million in Fiscal 2023 from a net profit of Rs 3,304.37 million in Fiscal 2022. Meanwhile, the company intends to increase capacity at the Jaigarh Port by developing a terminal with a proposed capacity of up to 2 MTPA for handling LPG, propane, butane and similar products. The proximity of the LPG terminal to the industrial hinterlands and bottling plants of LPG, propane and butane in Maharashtra will provide it the opportunity to increase its proportion of “sticky cargo” with repeat customer orders. It plans to further expand its asset portfolio and grow its operations by evaluating acquisition opportunities to strengthen its presence in handling container and liquid cargo, with a focus on increasing its third-party customer base.