Sell JSW Infra shares, target Rs 180; premium over Adani Ports at 35%, says Kotak

Sell JSW Infra shares, target Rs 180; premium over Adani Ports at 35%, says Kotak

Domestic brokerage Kotak Institutional Equities has initiated coverage on JSW Infrastructure Ltd (JSW Infra) with a ‘Sell’ call and a fair value of Rs 180, citing a stiff valuation of 21 times one-year forward EV/Ebitda, a 35 per cent premium over Adani Ports & Special Economic Zone Ltd ‘s .

At Tuesday’s price of Rs 218.95 on BSE, the stock was trading at a 84 per cent premium over its IPO issue price of Rs 119. The stock got listed on October 3, 2023.

Kotak said JSW Infra is well placed to grow at 1.5 times the pace of the sector for a long time, leveraging its growing relationship with the parent and prospects of reinvesting cash flows and doing so in attractive terms, given the virtual duopoly in the private sector for bulk cargo. But it said that its fair value of Rs180 on the stock is baking in 20 per cent boost from new assets.

Relationship with parent is single biggest determinant of growth in volumes, it Kotak said adding that it remains upbeat about the key themes that JSW Infra is a play on JSW Steel’s operations, coastal shipping of thermal coal and new investments in ports and logistics.

It expects the first two drivers to lend a healthy, though lesser, support to volume growth than seen in FY2023. It said the third theme of new investments would become a lot more relevant.

“JSW Infra has added projects equivalent to $200-250 million of EV in recent times and can add 10 times of such a quantum while abiding by the 2.5 times net debt-to-Ebitda by FY2030. The returns on such investments may be healthy, given the duopolistic nature of port capacities for bulk cargo. The parent’s relationship would remain the single largest determinant of growth, planned capacity additions in steel and the prospects of wallet share gains,” it said.

The relationship also increases the probability of JSW Infra renewing its concession at a select port (Goa), Kotak suggested. It is baking in a 12 per cent growth compounded annually in volumes, 15 per cent growth in revenues and 18 per cent growth in Ebitda over FY2023-26.

“The 18 per cent Ebitda CAGR bakes in a 3 per cent inorganic volume CAGR boost and 2.5 per cent CAGR boost from a normalization in cost structure (ESOP costs and license fees). Investments in Keni and Jatadhar should largely be funded by internal accruals, leading to 1 time net debt to Ebitda by end-FY2026,” it said.

Incremental steel capacities of the group, Kotak said, will have a lower reliance on input port volumes versus that of the Dolvi l plant. Kotak still builds in an 8.5 per cent CAGR for JSW Infra’s related exposure over FY2024-31.

“Our asset-wise DCF implies 15.5 times two-year forward EV/EBITDA—13.5 times for the existing concessions, 1 time for known asset additions (Jatadhar, Keni, PNP and Fujairah) and 1 time for incremental asset wins (ports and logistics). We build in the first two opportunities in our 10 per cent decadal volume CAGR estimate and expect 60 per cent Ebitda margins over time,” Kotak said.

Kotak said it was building in a 20-year concession extension across ports at 20 per cent lower Ebitda margins. It ascribed a 1.3 times multiple to $2-2.2 billion of incremental investments possible, with a cap of 2.5 times FY2030 net debt-to-Ebitda.

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