The year 2023 has proven favourable for initial public offerings (IPOs), and among the upcoming IPOs is JSW Infrastructure, which develops and operates ports and port terminals in India. Its IPO, valued at Rs 2,800 crore, has opened smoothly for subscription, securing approximately Rs 1,260 crore from a robust roster of anchor investors. The management is primarily focused on utilising these funds to retire debt amounting to roughly Rs 880 crore, while also having some capital expenditure plans in mind.

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In an interview with CNBC-TV18, Arun Maheshwari, Joint MD and CEO of JSW Infrastructure, discussed the operations and strategies the company, which was the second largest commercial port operator in India in terms of cargo handling capacity in fiscal 2022. Below is the edited excerpts from the interview:

Q: One point that the street is keen to understand is out of the total cargo volumes that you handle how much comes in from JSW Group companies?

A: As of the quarter ended June 23, about 63 percent comes from the group companies and 37 percent comes from outside the group.

Q: Are you looking at reducing this exposure?

A: Yes, it has been continuously reducing because the genesis of the company started way back to cater to the group's captive cargo. Being a process-driven industry, if you see JSW Steel or JSW Energy, way back when we started in 2004, it was largely for the group captive supply chain management control. Till 2018, we were largely into the group company cargoes and thereafter, we started the focus on third-party development. From 2019 onwards majority of our investment has been focused on third-party business development. It was as low as 6 percent in 2019, on a 35 million tonne volume. In 2023, ending March, we did about 33 percent of the third-party volume on a 93 million tonne of cargo. So, the focus, intention and investment have been very clearly defined on how we are going to shape this company as an independent vertical.

Q: Please confirm, that your margin, as compared with the larger listed peer is a little bit lower —you are in the mid-50s or thereabouts, and that company is in 60 percent or a little more than that. Is your pricing at an arm's length with your group companies, or is there some kind of pricing difference? And do you expect margins to improve from here on?

A: I would like to differentiate over here the business model that we have taken for growth and for growing our business, we are 50 percent into the greenfield ports capacity-wise and 50 percent from the terminal side. When we talk about the terminals, which are the ports given on public-private partnership (PPP) model in major ports. Since these are governed and controlled by the Government of India, wherein the ecosystem is provided by that and we just pay a royalty against that ecosystem where capex is very low. So, instead of looking at the EBITDA percentages, we generally go with a return on capital employed. And that is our guiding principle whenever we make an investment. So, our total building capacity at 158 million tonne took a total capital of close about Rs 7,500 crore, which is quite low as per the industry standard. And therefore a part of the EBITDA goes towards the royalty, but the return on capital employed remains very robust in this case.

Q: What is the royalty amount?

A: It ranges from terminal to terminal, it is as low as 18 percent and it is as high as 52 percent, but on average, if I have to look at our existing terminals, it is somewhere around close to 27 percent. And when it comes to arm’s length pricing as was asked earlier, we are a well-governed company, our governance structure is very solid and well in place for all the companies. So, being a listed entity like JSW Steel and JSW Energy, they go through a rigorous process. We were not a listed company, but we were behaving like a listed company, and we have been going through a similar process at our end as well. If I have to give a greenfield port in India, it makes about 60-65 percent of EBITDA margin. Our two greenfield ports are Dharamtar as well as Jaigarh port and they also make similar kinds of EBITDA margin. So, it clearly defines how arm's length transactions have been handled within the group.

Q: The distinction between terminals and ports is important. Basically, ports are high capex and high margins as well, as you said 60-65 percent. Terminals is very asset light, but margins are on the lower side as well and you said you look at return on capital employed as a better kind of metric there to assess profitability. Could you tell us what is the total capacity at and what will this grow to over the next couple of years and just trying to get a sense of what is the visibility for additional capacity that the group will look at?

A: Today's capacity is about 158 million tonne. It's a 20-year-old company and the CAGR on the volume side, if I were to look at it, it has been 22 percent over the last 20 years. Given the balance sheet what we have, given the appetite what we have, passion and initiative that the group carries with them for all the verticals, and the opportunities that India offers today in the sector, particularly, I think we will be able to maintain a similar kind of growth story even though the base is very high now at 158 million tonne. But our intention is to remain very robust and keep growing on this sector, especially when the opportunities are unlimited over here. Very few players are there in this market today and because it has a very high entry barrier, the capex is very high in the sector, and you need a strong balance sheet, and we offer that. And you need good intentions to get into this business. We do possess that.

Q: The government is privatising ports, it's putting up more and more port infrastructure out there for bidding, etc. So, there is a large pipeline, which will come up for bidding. What do you envisage JSW Infra capacity to be in 5-years down the line and where will you be at?

A: The greater opportunity comes from the government terminals because the government is inviting more and more private players to mechanise, and modernise the existing terminals. Since the government has done its job in the last 6-7 decades, it has done beautiful ports across the coastline. Now, the government is inviting people, because the government feels it should be going into the landlord model policy wherein they would be charging the royalty for the infrastructure it has created, for the ecosystem that it has created. People like us who hold a number of terminals in India, where we are one of the largest in India, understand this business better and we feel that this is a better way to go ahead where the risk is minimal.

Here, part of the infrastructure is provided by the government, the ecosystem is very robust, the customer base is very defined over there. So, it is a very good model to grow from here on and we are well suited for that — the kinds of terminals we are already holding, the kind of performance we have exhibited in our existing terminals and the upcoming ones which are coming up.

It is difficult to put a number on the future from the terminal side because it is a bidding process; you bid for the terminals to win it. It depends on whether you win it or you don't win it. But the pipeline is superb. The Government of India still owes about 1,400 million tonne of total capacity in India, which is more or less 50 percent of India's capacity. And imagine that kind of capacity is coming up for bidding — even part of it comes for bidding in 5-7-10 years. How many players are there in India today for that? So, I think we will be able to make it good out of it.

Q: How are the volumes have been shaped up in the first half of this year if compared with last year? Has the group exposure has come down to 63 percent – is that a targeted number that it comes down to further?

A: I will take the second question first, the way the group is growing, the kind of ambitions that JSW Steel or Cement or Power has, it will be very difficult to significantly reduce the group volume even though we will continue to grow on the third-party volume. I think on a longer-term basis it will remain 50:50 or 60:40 towards the group side. So, I think that will be a robust number even though however best we try. One good thing is that for any port company, a solid anchor customer is required. What better combination than that when your anchor customers from your own group and which is growth-oriented. Nothing can be a better combination than that for any port company. Now coming to the volume front, for the first half, we don't have the audited figure. as it is yet to end. But for the first quarter, our numbers have been 25.42 million tonne for June 23, which is close to about 10 percent growth over quarter on quarter basis, if I have to look at it.

Q: Since your focus is on return on capital employed — that ratio has been going up. In FY21 it was 8.1 percent, in FY22 you increased it to 10.88 and in FY23 its 19.49 percent Can you increase your ROCE even higher from current levels? Can it go up to 25 percent based on the business model?

A: The ROCE is purely based on how the utilisation is happening. So, our utilisation like June 23 ending was about 63 percent, and March 23 year end was about 57 percent before that it was 45 percent and 35 percent and so on. So, as the utilisation goes up the ROCE keeps improving, especially when the capex is already done and only the utilisation is remaining for performance purposes. Assuming if the company doesn't want to do anything further and just wants to retain this existing asset of 158 million tonne, ROCE will keep on increasing because the utilisation will keep going up. But given the balance sheet, given the appetite, and given the opportunity in India, I don't think we are going to stay here. We will continue to invest and will continue to grow this business. So, ROCE may get a bit tapered down when we go into the capex model and when the capex is high, the ROCE will tend to go lower, but as the utilisation goes up again, the ROCE will find its own ground.

Q: Do you have an aspiration in mind? You said the current capacity is 158 million tonne. What would the numbers stand at, 5 years down the line?

A: The way India is growing, I think putting any number to it would be a bit of a challenge as of now, but then I think our ambition is to remain close to double the numbers in the coming years, maybe 5-7 years or 10 years.

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(Edited by : C H Unnikrishnan)