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JM Financial initiates coverage on JSW Infrastructure with ‘buy’ rating; here’s why



The brokerage expects the current valuation multiple to sustain given JSWIL’s robust growth, new port developments and acquisitions in the medium term, and the possibility of upward revision in tariffs at its major port terminal (new policy allows such revisions, subject to regulatory approvals).

JSW Infrastructure, part of the $23 billion JSW Group, is the fastest-growing port-related infrastructure company, with a 15% CAGR and a 43% CAGR in installed cargo handling capacity and cargo volume handled, respectively, in FY21–23.

Also Read: JSW Infra stock soars 8.4% to all-time high on 4,119 crore order win

The company is also the second-largest commercial port operator in India (in terms of cargo handling capacity) in FY23, expanding from one port concession at Mormugao, Goa (acquired by JSW Group in 2002 and commenced operations in 2004) to nine port concessions across India, thus making it a diversified maritime ports company.

Growing 3rd party cargo mix

JM Financial underscores JSW Infrastructure Limited’s (JSWIL) commitment to broadening its customer base and enhancing relationships with third-party clients. The brokerage points out that JSWIL has successfully obtained concessions for two terminals in FY16 (iron ore) and FY17 (coal), respectively, by the Paradip Port Authority, and was awarded the New Mangalore Container Terminal in FY20 by the New Mangalore Port Authority. Notably, these terminals predominantly cater to third-party customers.

Also Read: US-Adani deal for Sri Lanka port heats up race with China

JM Financial notes a substantial 66% CAGR growth in JSWIL’s third-party cargo from FY21 to FY23, with a noteworthy 32% YoY increase in 1HFY24. This segment constituted 33% of the total cargo in FY23, boosted by strategic acquisitions (Ennore terminals) and increased utilisation of Paradip terminals (coal and iron ore). The brokerage also pointed out a robust 34% CAGR rise in cargo handled for group customers during FY21–23, contributing 67% in FY23 and 64% in 1HFY24.

JSWIL can potentially be a big beneficiary of ongoing policy changes in major ports

The company currently operates seven major port terminals (two each at Paradip, Ennore, and one each at Goa, Mangalore, and New Mangalore ports) that are under the previous tariff regime policy, which limits the flexibility in fixing tariffs.

However, the new policy offers an avenue for port trusts and terminal operators, including JSWIL, to transition to a more flexible mechanism, providing greater autonomy in pricing.

The brokerage emphasises that the company will continue to pay the royalty on a revenue-sharing basis, and hence, it will be evaluated on a case-to-case basis, considering the economics on competition and the ability of the customers.

Also Read: Market cap of BSE-listed firms hit $4 trillion mark for the first time ever

Moreover, JM Financial anticipates JSWIL to be a major beneficiary of the government’s proactive port privatisation initiatives. These efforts include divesting existing terminals owned by port authorities/port trusts to private players and establishing new terminals under private ownership, transforming port authority/port trust into landlord ports.

JM Financial believes JSWIL is extremely well placed to participate in this, and its recent indication of bidding for three terminals clearly establishes its intent to diversify the cargo and port mix as well as improve its third-party mix.

Strong cash flow generation and balance sheet management

The company’s cash flow from operations was 39.6 billion in FY21–23, and the brokerage expects it to be 61.2 billion in FY23–26 on the back of strong profitability and excellent working capital management (net working capital days declined from 175 days in FY21 to 23 days in FY23, largely led by a reduction in receivable days from 160 days to 45 days).

Also Read: Will India see a govt capex surge in FY25?

On top of this, the company also refinanced its local debt through USD-denominated bonds (raised $400 million in FY21) in order to reduce interest outgo (4.95% coupon vs. 8–9% local interest rate then) and elongate the repayment schedule (bonds have a bullet repayment in 2029).

Given the medium-term ceiling of 2.5x net debt/EBITDA and expected balance sheet profile (considering the capex and acquisitions already announced), the brokerage estimates JSWIL can borrow up to an additional 80 billion, if required, to fund its growth plans.

Brighter future in financials 

The brokerage estimates JSWIL to post 17%, 21%, and 33% CAGR in revenue, EBITDA, and PAT in FY23–26 on the back of strong volume growth (16% CAGR in FY23–26), improved operating margin on a ramp-up in capacity utilisation, and lower interest outgo. It anticipates FY26 RoE/RoIC (post-tax) of 17.8% and 19.4%, respectively.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.



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Updated: 29 Nov 2023, 03:01 PM IST

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