IPO: JSW Infrastructure

JSW Infrastructure, a port-related infrastructure company, has come out with its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : The three-year average ROE and ROCE of JSW Infrastructure are 12.4 and 12.8 per cent, respectively. In FY23, the company's ROE and ROCE were 18.3 and 19.5 per cent, respectively.
  
• Growth : Its topline grew by 40.5 and 41.7 per cent in FY23 and FY22, respectively.
  
• Valuation : The stock will be priced at a P/E and P/B of 28.7 and 3.5 times, respectively, as compared to its peer Adani Ports' P/E and P/B of 28.6 and 3.8 times, respectively.
  
• Overview : The company has a competitive edge due to high entry barriers and strategic port locations, but it's notable that a significant portion of its revenue (66.6 per cent) comes from related companies (JSW group). This reliance on related companies has decreased from 75.2 per cent in FY21 to 66.6 per cent in FY23, potentially reducing concentration risk.

About JSW Infrastructure

JSW Infrastructure is the second-largest commercial port operator in India in terms of cargo handling capacity. The company provides maritime-related services including, cargo handling, storage solutions, logistics services and other value-added services to their customers, and is evolving into an end-to-end logistics solutions provider.

Strengths of JSW Infrastructure

• Second-largest commercial port operator in India in terms of cargo handling capacity in an industry where entry barriers are very high due to substantial investment requirements, long gestation periods and significant regulations.
  
• Predictable revenues driven by long-term concessions (contractual agreement where an entity is granted rights to operate a specific port or terminal by a port authority for a defined period in exchange for fees or revenue-sharing) with an average balance concession period of 25 years as of June 30, 2023.

Weaknesses of JSW Infrastructure

• The company relies heavily on its top five customers for a significant portion of its revenue , accounting for 54.2 per cent of total revenue. The top client, which is a related party company, contributes 41.4 per cent to the company's revenue. This concentration of revenue from a small number of clients poses a risk, as any adverse changes in these relationships or their business activities could impact the company's financial stability.
  
• Huge reliance on concessions and licence agreements from government and quasi-governmental organisations to operate and grow business.

Risk report

Company and business

• Are JSW Infrastructure's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes, the company's profit before tax for FY23 was Rs 811 crore.
• Will JSW Infrastructure be able to scale up its business?
  Yes. An increase in import-export activities and new initiatives introduced by the Government for this sector can help the company scale up its business.
• Does JSW Infrastructure have recognisable brands with client stickiness?
  Yes. The company's long-term contracts with JSW Group, including take-or-pay provisions (one party must either purchase a certain amount of products or services or pay for them, guaranteeing a minimum level of business for the provider), demonstrate strong client stickiness.
• Does the company have a credible moat?
  Yes. The need for substantial investments and regulatory requirements act as barriers to entry for potential competitors. The company's ports are strategically located, providing cost-effective and efficient transportation solutions, which can attract customers and give them a competitive edge in the industry.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post-IPO, promoters' stake will be 85.6 per cent.
• Do the top three managers have more than 15 years of combined leadership at JSW Infrastructure?
  Yes. Its Vice Chairman Nirmal Kumar Jain has been associated with the company since 2006.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is JSW Infrastructure free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. The company's three-year average ROE and ROCE are 12.4 and 12.8 per cent, respectively, but in FY23, the company's ROE and ROCE were 18.3 and 19.5 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flows from operations in each of the last three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's net debt-to-equity ratio, as of June 2023, is 0.6 times.
• Is JSW Infrastructure free from reliance on huge working capital for day-to-day affairs?
  No. The company's business affairs are working capital intensive.
• Can the company run its business without relying on external funding in the next three years?
  No. Operations of the company are highly capital intensive.
• Is JSW Infrastructure free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of equity stood at 1 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 4.6 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  No. The company will trade at a price-to-earnings ratio of 28.7 times compared to peer's (Adani Ports) P/E of 28.6 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company will trade at a price-to-book ratio of 3.5 times which is lower than its peer's (Adani Ports) P/B of 3.8 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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