Moody's Investors Service has revised the rating outlook of JSW Infrastructure Limited (JSWIL) to positive from stable. At the same time, Moody's has affirmed JSWIL's Ba2 corporate family rating (CFR) and senior secured bond rating.
“The positive outlook is supported by JSWIL's solid track record of managing execution and ramp-up risks related to port expansion projects, and reflects our expectation that the company's credit metrics will continue to exceed current upgrade triggers, driven by increasing demand of key off-takers and incremental volumes from recently developed port assets,” says Erman Zhang, a Moody's Analyst.
JSWIL has demonstrated a solid track record in managing project risks related to its sizable capital expenditure program. Strong ramp-up was delivered coupled with incremental third-party cargos, which is a supportive development as it helps optimize the company's revenue mix that has been historically dominated by related company cargos. Fiscal year (FY) 2022 has seen the first full-year operation of the company's newly acquired terminals Ennore Bulk Terminal, Ennore Coal Terminal and Mangalore Coal Terminal. Another two terminals Paradip East Quay Coal Terminal and New Mangalore Container Terminal also achieved commercial operations in FY2022.
At the same time, JSWIL's cash flow predictability will continue to be supported by the presence of take-or-pay contracts, which account for around 40% of its revenue in FY2022. Most of the counterparties for these contracts are related group companies that are located in proximity to JSWIL's ports. The company's credit quality will also be supported by the ports' long-life concessions which have a weighted average remaining concession life of more than 25 years as of FY2022.
Tariff arrangements at most ports are subject to escalation based on India's Wholesale Price Index (WPI), which is helpful to offset incremental costs due to inflation. Additionally, about USD65-90 million of JSWIL's annual tariffs are denominated in USD, which are primarily related to vessel handling and berth hire charges. This USD income is credit supportive in relation to JSWIL's capacity to service USD-denominated debt.
JSWIL is exposed to environmental, social and governance (ESG) risks since its key off-takers are in carbon-intensive industries such as steel making, thermal power generation and cement manufacturing, though the exposure will gradually moderate as JSWIL diversifies its cargo mix and ventures into the less carbon-intensive container sector. Additionally, growth expansion and sizable capital expenditure will continue to expose the company to execution and ramp-up risks and drive-up funding requirements. New port concession arrangements that come with moderate to high revenue share will also weigh on the company's profit margin.
For FY2023 to FY2025, Moody's expects JSWIL's funds from operations (FFO)/debt to be in the region of 15%-20% and cash interest coverage to be 3x-4x, such metrics are strong for its current ratings and would indicate a higher credit quality. However, the projected metrics are sensitive to the company's decisions on the funding and timing of future capital expenditure.
The positive rating outlook reflects JSWIL's improving credit quality as the company achieves financial metrics exceeding our original expectations, while continuing to demonstrate a track record of managing capacity expansion risks. Moody's could upgrade JSWIL's ratings if the company's funds from operations (FFO)/debt rises above 12%-15% and cash interest coverage is above 2.7x-3x on a sustained basis. Given the positive outlook, a downgrade is unlikely. However, Moody's could revise the outlook back to stable if FFO/debt and cash interest coverage return to below 12% and 2.7x respectively, on a sustained basis, possibly due to the company pursuing an aggressive debt-funded capital spending program that introduces additional regulatory or operational risks; a weakening of operational performance as a result of ramp-up risks that lead to a lower-than expected throughput growth.
