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How IPO-bound JSW Infrastructure’s strategy will play out, Infra News, ET Infra


MUMBAI: JSW Infrastructure Ltd will hold an initial public offering (IPO) of shares between 25 and 27 September, seeking to tap investor appetite for a Rs2,800 crore fund raise by India’s second biggest private port operator by capacity which relies on the parent Group led by Sajjan Jindal for as much 67 percent of its cargo and 51 percent of the revenue.

Much of this cargo and revenue comes from handling three main commodities – iron ore, thermal coal and coking coal/steam coal – of which thermal coal is among the fossil fuels facing a backlash from a global pivot to green energy to meet climate change goals.

Closer home in India, iron ore and thermal coal have come under stress due to court-imposed export ban and import restrictions by the government, respectively, as policy makers nudge industries to make use of the locally mined commodity.

Of the 92.83 million tonnes (mt) of cargo handled by JSW Infrastructure across its network of nine Indian ports/terminals in FY23, iron ore accounted for 29.91 mt or 32.22 percent, thermal coal handled was 26.92 mt or 29 percent, while non-thermal coal was 23.57 mt or 25.39 percent.

In the April-June quarter of FY24, JSW Infrastructure handled 8.53 mt of iron ore with a 33.55 percent share of the total cargo of 25.42 mt, thermal coal was 8.19 mt accounting for 32.22 percent share while non-thermal coal was 5.91 mt with a 23.25 percent share.

“We are therefore susceptible to a significant downturn in the trade or transportation of coking coal, iron ore and thermal coal,” the port operator said in the prospectus for the share sale which will help list the company on the bourses, making it the third from the JSW Group.

It will also be the third port-focussed Indian company to be listed on the stock exchanges after Adani Ports and Special Economic Zone Ltd – the country’s biggest private port operator – and Gujarat Pipavav Port Ltd which is 43.01 percent owned by A P M Terminals Management B V, the port operating unit of Danish transport and logistics group A P Moller-Maersk A/S.

The nine ports/terminals run by JSW Infrastructure, across the eastern and western coasts, have a capacity to handle a combined 158.43 mt of cargo a year. The company aims to expand capacity to 300 mt by 2030.

In FY23, the Company posted a net profit of Rs739.83 crore on operational revenue of Rs3,194.74 crore.

In the first quarter of the current fiscal, it registered a net profit of Rs320.89 crore on operational revenue of Rs878.10 crore.

The company said it earns a substantial portion of operational revenue from top five customers, two of which are also JSW Group entities or related parties such as JSW Steel Ltd and JSW Energy Ltd.

The cargo handled for JSW Group customers (related parties) grew at a CAGR of 34.38 percent from 34.25 mt in FY21 to 61.85 mt in FY23, and was 16.11 mt in the quarter ended June, reflecting a high degree of stickiness.

In FY23, revenue from JSW Group customers touched Rs1,657.29 crores or 51.88 percent of the total operating revenue, while in the first quarter of the current fiscal, it was Rs447.989 crores or 51.02 percent of the total revenue from operations.

In FY23, the port operator’s top five customers contributed revenue of Rs1,649.847 crores (51.64 percent share in total revenue) of which JSW Group customers contributed Rs1,478 crores (46.26 percent share). In the first quarter of the current fiscal, the top five customers contributed revenue of Rs476.022 crores (share of 54.21 percent) in which related parties contributed Rs402.648 crores (45.85 percent share).

Revenue from JSW Group as well as third-party customers comes from cargo handling, storage and value-added services such as evacuation, sorting, mixing and bagging.

The other main revenue stream is the vessel related charges levied on account of berth hire charges, port dues, pilotage and towage billed to shipping agents pertaining to the cargo handled for JSW Group customers (related parties) as well as third parties.

The huge customer concentration has its risks.

“If such customers were to suffer a deterioration of their business, cease doing business with us or substantially reduce their dealings with us, our revenues could decline, which may have a material adverse effect on our business, results of operations, cash flows, financial condition and future prospects,” it acknowledged.

Port Experts are split on whether the “over reliance” on JSW Group customers is a boon or bane for the port operator.

“Too much reliance on group customers is never good,” said an executive tracking the port sector. “So long as you believe in the steel story, it’s fine. But suppose if something happens to steel in future, the ports/terminals also will be impacted,” he said, asking not to be named.

Having a good mix of captive (group) cargo and commercial cargo, according to this executive, is “always better”.

“If one commercial cargo goes, you can always tap other commercial cargo,” he added.

This scepticism, though, is not shared by the chief executive officer of a dry bulk cargo terminal operating on the eastern coast.

“If a port/terminal operators’ capacity is utilised to the extent of 65-70 percent by group cargo, it’s great. What more do you need? It implies that straightaway, the port company has de-risked 65-70 percent of its investments,” the CEO said, asking not to be identified.

He, however, said that while the group customers would be served by the port operator at a price that helps reduce the logistics costs, there is always a possibility that third party customers “would cross-subsidise” the group customers and the resultant higher rates for third parties would make it difficult for the port operator to entice third party cargo.

“Our JSW Group customers (related parties) benefit from relatively low cost of delivery for their cargo due to proximity of our port concessions to their facilities and customized services provided by us. We have long-term contracts with our JSW Group customers, some of which have take-or-pay provisions,” JSW Infrastructure said.

As at March 2023, the minimum annual volume of cargo committed under such contracted take-or-pay provisions was 25.40 mt, which represented 27.36 percent of the total volume of cargo handled in FY23.

JSW Infrastructure has long-term contracts with JSW Group customers (related parties) for tenures ranging from 10 to 15 years on an arm’s length basis for cargo handling services, some of which have take-or-pay provisions which provides long-term visibility of cargo and revenue.

Under the take-or-pay provisions, if the customer is unable to meet the minimum commitment for cargo handling, it 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.

Being a member of the JSW Group, JSW Infrastructure is candid about receiving initial cargo from related parties which “facilitated swift ramp-up of assets and improved utilization of capacities”.

“We expect to continue to benefit from the growth of various businesses within the JSW Group. For example, JSW Group customers are in the process of achieving expanded installed capacities at their facilities in India with JSW Steel aiming to achieve up to 37 mt a year in FY25 from 27.7 mt a year in FY23, and JSW Energy eyeing up to 10 GW in FY25 from 4.8 GW in FY23. We expect such expansions to add to the growth of cargo volumes across our existing assets and provide a base for future growth at new locations,” it pointed out.

“The transactions with our related party customers have been conducted in the ordinary course of business, in accordance with the provisions of applicable laws and on an arm’s length basis and have not been prejudicial to the interests of our Company. It is likely that we will continue to enter into related party transactions in the future,” JSW Infrastructure said.

The port operator’s proposed expansion plans are based on various assumptions including successful expansion of capacities at JSW Group Customers’ facilities, continued reliance on maritime infrastructure for transportation of cargo, and the ability to continue to comply with obligations owed to concessioning authorities and other regulators.

“Adequate utilization of our proposed greenfield and brownfield developments is therefore subject to various factors beyond our control and in case our JSW Group customers are unable to grow their businesses or continue to use our services for transportation of their cargo, we may not be able to utilize our expanded capacities efficiently,” it warned, citing an instance in 2018 when South West Port Ltd at Mormugao Port temporarily suspended operations.

Storm clouds are gathering over coal cargo with the world increasingly looking at green energy to cut emissions from fossil fuels. Coal/coke handling will prove to be a pain point for the Company in the future. JSW Infrastructure is already at the receiving end of a high voltage campaign by environmentalists, particularly against its South West Port in Mormugao Port, where it started the journey as a port operator in 2004.

The South West Port is currently the subject of a public interest litigation seeking to shut coal/coke handling operations at the Mormugao Port in Goa due to the pollution caused by handling the so-called “dirty and dusty” cargo.

The terminal secured environmental clearance (EC) in January this year from the Ministry of Environment, Forests and Climate Change (MoEF & CC) for expanding capacity.

However, two appeals have been filed before the National Green Tribunal (NGT) challenging the EC, wherein the appellants have sought to quash and set aside the green nod. In the event these appeals are decided against the facility, the EC issued for capacity enhancement can be revoked and consequently it will not be able to undertake the expansion thereby adversely impacting its growth plans.

Further, the EC is subject to certain conditions, including amongst others, the outcome of a public interest litigation pending before the High Court of Bombay at Goa where the petitioners have sought a direction against port operators including South West Port, for total and complete closure of coal/coke handling operations and cancelling all permissions/clearances granted for coal/coke handling operations at Mormugao Port.

While SWPL has filed a response denying the contentions and objected to the admission of the public interest litigation, there can be no assurance that the High Court will accede to our submissions or will not pass any adverse order against SWPL, including imposition of a penalty, or issue any order to Goa State Pollution Control Board to take any actions or revoke our licenses, the company explained.

In FY23, South West Port handled 5.5 mt of thermal/coking coal, representing 5.93 percent of its total cargo. In the first quarter of FY24, the terminal handled 1.31 mt of thermal and coking coal with a 5.15 percent share in the total cargo.

The South West Port has 6 years left of its 30-year concession awarded by Mormugao Port Authority in 1999 to run the facility. Overall, the balance concession periods for its ports/terminals ranges from 6 to 35 years.

JSW Infrastructure also handles coal/coke cargo for customers from berths 7 and 10 at Mormugao Port which are not owned, licensed to or operated by it. In FY23, it handled 2.5 mt of coal/coke at berths 7 and 10 with a 2.69 percent share, while in the June quarter of the current fiscal, these two berths handled 0.54 mt of coal/coke accounting for 2.12 percent share in the total cargo.

Given that a significant portion of the cargo handled at the Mormugao Port comprises coal, an adverse order against the terminal, suspension of its license or permanent suspension of coal handling operations would adversely impact the business, financial conditions, reputation and results of operations.

“If the petition is not decided in our favour, our coal/coke handling operations at the Mormugao Port could be subject to closure which could have an adverse effect on our business, cash flows, and results of operations,” the company said.

Besides, the Union government 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 our other coal handling terminals or any corresponding reduction in coal traffic at our ports will therefore adversely impact our results of operations and profitability,” it said.

The Company also undertakes short-term commercial contracts (of one to three years with JSW Group customers) and up to one year or until completion of evacuation of cargo for third-party customers, which may be renewed periodically.

“If our customers are unwilling to renew such agreements or impose terms less favourable to us than existing terms, it may adversely affect our business operations and our future financial performance. While we have the opportunity to earn minimum revenue based on our take-or-pay arrangements, there can be no assurance that our customers will extend or renew their arrangements with us on comparable terms or at all. Customers may cease to use our services in the event of an adverse change in their business operations or supply chain strategies, including if they decide to use a different port or opt for alternate logistics services such as air, road or rail over the port services we provide, or if their operations are otherwise significantly disrupted,” it said.

For instance, cargo volumes handled at Dharamtar Port declined from 7.38 mt in FY15 to 5.93 mt in FY16 as JSW Steel was unable to produce steel at volumes commensurate with its historical performance. The occurrence of similar events in the future could adversely affect our results of operations, financial condition and growth prospects, it noted.

While its growth strategy hinges on continued association with and support from the JSW Group customers, JSW Infrastructure has recognised the need to “diversify and expand” the customer base and cargo mix to include third-party customers across geographies by leveraging locational advantage and maximizing asset utilization.

The port operator’s efforts to expand the customer base and reduce the customer concentration risks has led to an increase in cargo handled for third-party customers that grew at a CAGR of 65.58 percent from 11.30 mt in FY21 to 30.98 mt in FY23 and by 32.29 percent from 7.03 mt in the three-month ended June 2022 to 9.30 mt in the quarter ended June 2023.

Cargo handled for third-party customers in India as a proportion of total cargo handled (by volume) rose from 24.81 percent in FY21 to 33.37 percent in FY23, and from 30.12 percent in the three-month period ended June 2022 to 36.6 percent in the quarter ended June 2023.

Accordingly, the “sticky cargo” (volume of cargo handled for JSW Group customers and long-term third-party customers) increased at a CAGR of 33.68 percent from 35.17 mt in FY21 to 62.85 mt in FY23 and was 16.47 mt in the three-month ended June 2022 and 16.37 mt in the quarter ended June 2023, accounting for 64.40 percent of the total cargo handled in the three-month period ended June 2023.

With India positioned to be one of the fastest growing major economies in terms of GDP between fiscal 2024 and 2026, JSW Infrastructure intends to capitalize on the strong growth momentum by broadening the cargo profile, expanding geographical presence and diversifying revenue streams.

“We propose to achieve this by leveraging on our experience in developing and acquiring assets across geographies and catering to diverse cargo types. We have developed two greenfield non-major ports, four port terminals at major ports including a container terminal in New Mangalore Port (Karnataka) and have acquired three port terminals in India. We are in the process of undertaking similar greenfield projects and are exploring selective inorganic growth opportunities to further expand our capacities, customers, service offerings and geographical footprint,” it said.

The acquisition of two terminals at Kamarajar Port in Tamil Nadu (the Ennore Coal Terminal and Ennore Bulk Terminal) and one coal terminal at New Mangalore Port in Mangalore, Karnataka from the Chettinad Group for Rs996.49 crores in November 2020 helped add 16.73 mt of capacity. The acquisition provided the company with access to third-party customers and helped further spread its footprint along India’s east coast.

The Company’s expansion plan includes building a 2 mt a year capacity LPG terminal at Jaigarh Port in Maharashtra and a greenfield port at Jatadhar (Odisha) with a capacity of 52 mt to cater to JSW Steel’s upcoming steel facility in Odisha.

It has submitted a bid for developing an all-weather deep water greenfield port at Keni district in Karnataka.

“We plan to further expand our asset portfolio and grow our operations by evaluating acquisition opportunities to strengthen our presence in handling container and liquid cargo, with a focus on increasing our third-party customer base,” it added.

The eagerness to expand its third-party cargo is abundantly clear from the plan to raise the capacity of the container terminal at New Mangalore Port earlier than the time stipulated in the concession agreement, the threshold for which is handling 1,80,000 twenty-foot equivalent units (TEU’s). In the first year of operations after the February 2022 start, the Mangalore Container Terminal handled 1,65,595 TEU’s, which is higher than the minimum guaranteed cargo of 91,000 TEU’s set by the contract.

JSW Infrastructure will pursue opportunities in synergistic businesses to increase revenue diversification.

“We intend to pursue synergistic businesses such as development of container terminals, liquid storage terminals, container freight stations (CFS), multi-modal logistics parks (MMLP) and inland container depots (ICD) to enable us to provide end-to-end logistics solutions to our customers,” it said.

It also plans to focus on developing assets/capabilities to handle crude oil and Petroleum, Oil and Lubricants (POL) cargo.

“We aim to widen our mix of customers to achieve a balanced customer base and have been focusing on strengthening our relationships with third-party customers. We seek to derive diversification benefits by expanding our base of third-party customers while also maintaining our JSW Group customers relationships that lend greater stability and predictability to our operations,” it stated.

As pressure on sustainability builds up, given its main cargo profile, the Company has aligned its climate change targets to India’s Nationally Determined Contribution (NDC) targets for reducing emission intensity under the Paris Agreement. The Company’s Board has approved a 15 percent reduction of GHG Emission Intensity by FY26 and a 35 percent reduction by FY31, in each case from the base year of FY21.

In January 2022, it raised USD 400 million priced at 4.95 percent through sustainability-linked senior secured notes due in 2029.

“Furthermore, in our journey towards sustainability we have developed covered storage sheds for coal and iron ore at Jaigarh Port to contain the spread of airborne pollutants. We will continue strengthening the environmental aspects of operations and adopt measures such as cover sheds, water sprinklers and windshields for dust suppression, monitoring systems for pollutants, and green vegetation surrounding our facilities,” it added.

  • Published On Sep 18, 2023 at 08:05 AM IST

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