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Jain Irrigation System ------------------------------------------------------------- Maintain NEUTRAL
3Q11 results: disappointment across segments but could provide a buying opportunity
● Jain Irrigation’s 3Q results were weaker than expectations across
segments, leading to miss on both revenue (10% YoY growth vs
23%) as well as profit (29% below estimate). MIS and PVC pipes
were affected by the extended monsoon. Onion dehydration
business was impacted by availability and price of onions.
● Post results, we cut our full-year estimates for revenue growth and
EBITDA margin for its different businesses. Overall, we cut our
FY11E, FY12E and FY13E EPS by 12-17%. We raise our target
price to Rs248 (from Rs232) as we now value it at 20x 12-month
forward EPS as of Jan-12 vs FY12 EPS earlier.
● Management elaborated on its plans to set up an NBFC to extend
credit to farmers. We are concerned that this may increase credit
risk for Jain and dilute its positioning as a play on MIS penetration.
● We believe that the underlying reasons for the weak earnings in
2Q and 3Q are temporary in nature and the MIS business in
particular will continue to show strong growth over the next few
years. The weakness in the stock price could provide a buying
opportunity.
Weak results across different segments; reducing our
FY11E full-year earnings by 12%
Jain Irrigation’s 3Q results were weaker than expectations across
segments, leading to miss on both revenue (10% YoY growth vs 23%
estimated) as well as profit (29% below estimates). Sales in MIS and
PVC pipes, which together account for ~70% of revenues, were
affected by an extended monsoon. Revenue growth in the PE pipes
segment was low due to de-growth in the duct segment. Sales and
margins of the onion dehydration business were impacted by
availability and price of onions.
Post results, we cut our full-year expectations for revenue growth
(MIS: 33% vs 36%, PVC pipe: 12% vs 28%, PE pipe: 14% vs 9%,
onions: 11% vs 18%) and EBITDA margin for the different businesses.
Overall, we cut our FY11E, FY12E and FY13E EPS by 12-17%.
Takeaways from the conference call
• Jain Irrigation is looking to set up an NBFC to forward credit to
farmers and intends to apply to RBI over the next few months for a
licence. While management explained that instituting the NBFC
would help improve the balance sheet of the core business by
reducing receivables and also lead to higher growth, we see a few
concerns. Recovery of credit from farmers is a different business,
which requires different skillsets and would dilute the positioning of
Jain to investors as a play on MIS penetration in India. Moreover, it
is likely to raise the risk on the consolidated balance sheet –
management indicated that Jain Irrigation and Jain family would
own a substantial stake in the NBFC.
• The company is planning to raise US$150 mn of equity. At the
current stock price this implies an 8% dilution. A third of the money
will be used for capital infusion into the NBFC. The balance would
be used to reduce debt.
• The board has approved the issue of one bonus share for every 20
equity shares of Jain. These will have differential voting rights, i.e.,
ten bonus shares will carry voting right equivalent of one ordinary
share.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Jain Irrigation System ------------------------------------------------------------- Maintain NEUTRAL
3Q11 results: disappointment across segments but could provide a buying opportunity
● Jain Irrigation’s 3Q results were weaker than expectations across
segments, leading to miss on both revenue (10% YoY growth vs
23%) as well as profit (29% below estimate). MIS and PVC pipes
were affected by the extended monsoon. Onion dehydration
business was impacted by availability and price of onions.
● Post results, we cut our full-year estimates for revenue growth and
EBITDA margin for its different businesses. Overall, we cut our
FY11E, FY12E and FY13E EPS by 12-17%. We raise our target
price to Rs248 (from Rs232) as we now value it at 20x 12-month
forward EPS as of Jan-12 vs FY12 EPS earlier.
● Management elaborated on its plans to set up an NBFC to extend
credit to farmers. We are concerned that this may increase credit
risk for Jain and dilute its positioning as a play on MIS penetration.
● We believe that the underlying reasons for the weak earnings in
2Q and 3Q are temporary in nature and the MIS business in
particular will continue to show strong growth over the next few
years. The weakness in the stock price could provide a buying
opportunity.
Weak results across different segments; reducing our
FY11E full-year earnings by 12%
Jain Irrigation’s 3Q results were weaker than expectations across
segments, leading to miss on both revenue (10% YoY growth vs 23%
estimated) as well as profit (29% below estimates). Sales in MIS and
PVC pipes, which together account for ~70% of revenues, were
affected by an extended monsoon. Revenue growth in the PE pipes
segment was low due to de-growth in the duct segment. Sales and
margins of the onion dehydration business were impacted by
availability and price of onions.
Post results, we cut our full-year expectations for revenue growth
(MIS: 33% vs 36%, PVC pipe: 12% vs 28%, PE pipe: 14% vs 9%,
onions: 11% vs 18%) and EBITDA margin for the different businesses.
Overall, we cut our FY11E, FY12E and FY13E EPS by 12-17%.
Takeaways from the conference call
• Jain Irrigation is looking to set up an NBFC to forward credit to
farmers and intends to apply to RBI over the next few months for a
licence. While management explained that instituting the NBFC
would help improve the balance sheet of the core business by
reducing receivables and also lead to higher growth, we see a few
concerns. Recovery of credit from farmers is a different business,
which requires different skillsets and would dilute the positioning of
Jain to investors as a play on MIS penetration in India. Moreover, it
is likely to raise the risk on the consolidated balance sheet –
management indicated that Jain Irrigation and Jain family would
own a substantial stake in the NBFC.
• The company is planning to raise US$150 mn of equity. At the
current stock price this implies an 8% dilution. A third of the money
will be used for capital infusion into the NBFC. The balance would
be used to reduce debt.
• The board has approved the issue of one bonus share for every 20
equity shares of Jain. These will have differential voting rights, i.e.,
ten bonus shares will carry voting right equivalent of one ordinary
share.
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