Jain Irrigation Systems – 2QFY2011 Result Update -Angel Broking

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 Jain Irrigation Systems – 2QFY2011 Result Update

Angel Broking maintains a Neutral on Jain Irrigation Systems.

Jain Irrigation Systems (JISL) reported in-line 2QFY2011 results. Total revenues

for the quarter grew 14% to `641cr, 2% below our estimate. EBITDA margin stood

at 22% for the quarter. Adjusted PAT grew 12% to `44cr, 5% ahead of our

estimate. We have marginally revised upwards our estimates to factor in the

acquisition and higher-than-estimated working capital cycle in 1HFY2011. We

maintain our Neutral view on the stock.

In-line segmental performance: JISL’s 2QFY2011 results were in line with our

expectations. The PVC pipes and PVC sheet segments registered robust growth of

26% and 49% respectively, during the quarter. The fruit segment posted 16%

growth, while the onion segment remained flat during the quarter. The key

revenue and profit contributing segment, micro irrigation systems (MIS), registered

20% growth. EBITDA margin came in at 22% on the back of higher contribution

from the high-margin MIS segment. Reported PAT stood at `62cr. Adjusted for

forex gains, PAT for the quarter grew 12% yoy to `44cr (`40cr).

Outlook and Valuation: Going ahead, we expect the MIS segment to register

healthy 40% yoy growth over the next two years with the government continuing to

focus on agriculture. The PVC pipes segment is also expected to post decent

performance, with revival in demand visible. At `231, the stock is trading at fair

valuations of 19.2x FY2012E adj. FDEPS of `12.1. Hence, we remain Neutral on

the stock.

Acquisition

During the quarter, JISL acquired 80% stake in the UK-based Sleaford Quality

Foods (SQF), which is a 40-year old company involved in the supply of food

ingredients. We believe the acquisition gives JISL entry into one of the biggest food

markets of the world - Europe. SQF clocked revenues of approximately `200cr

(£26mn) in CY2009. On account of being primarily a distribution company

registers low OPM. We estimate acquisition cost to be in the region of `50cr.

Investment Arguments

Opportunity abound in MIS

JISL is one of the pioneers in introducing micro irrigation systems (MIS) in India.

India has total arable land of 140 million hectares (mn ha), of that over 71mn ha

is rain-fed, while the immediate MI potential that can be created through major

and medium irrigation projects is 69mn ha. However, around 4mn ha is covered

under sprinkler and drip irrigation (around 7% of the total MIS potential), which

signifies there exists huge scope for further MIS in India. JISL is the leading player

among the organised players accounting for a sizeable 55% market share of the

MIS market.

Pipes – Unfolding opportunity

JISL had traditionally been in the PVC pipes business, which were primarily used by

the farmers for irrigation purposes and some portion was utilised for the drinking

water supply schemes. Over the past few years however, this segment has evolved

with different applications for the pipes ranging from being used in the city gas

distribution networks, for sewage and waste disposal, telecom cables, etc. Some of

JISL’s esteemed clients include leading telecom and gas companies and municipal

corporations of the various cities. With the rise in urban population, JISL’s pipe

segment is well-placed to capitalise on the upcoming opportunity.

Agro products (dehydrated vegetables and fruit processing) – A

budding story

Food processing, which was a small part of JISL’s business, is now quite a sizable

business having taken off on the back of the company’s organic as well as

inorganic initiatives. Although the Indian market is not yet ripe for dehydrated

vegetables, the overseas market offers huge opportunities for organised players

like JISL. Domestically, the industry is fragmented and unorganised, which supplies

semi-finished products in crude form to the European or US buyers, who further

process it into finished products. Since the domestic market is still evolving, JISL

has focused primarily on the overseas market. India is the second largest producer

of fruits after China. Although, India accounts for around 10% of the total global

fruits production, fruit processing has been limited to a mere 2% of production.

JISL is one of successful food processing companies in India to take advantage of

the same. The domestic fruit juice and nectar business is growing at a fast pace

further offering good potential for JISL.

Outlook and Valuation

Going ahead, we believe that the MIS segment will continue to post healthy

growth, as the central government focuses on increasing farm output to tackle the

long-term food security issue, along with increasing the farmers’ income. We

expect the segment to continue to grow between 40% over the next two years. In

the case of the PVC pipes segment, a revival in demand is visible.

We have marginally revised our FY2012E estimates to factor in: a) Acquisition and

(b) elongated working capital management in 1HFY2011.