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Jain Irrigation
Action
We are reducing our EPS estimates for FY11 and FY12 by 22% and 24%,
respectively, following disruptions in the micro-irrigation systems (MIS) business in
3Q FY11 due to heavy rains. We believe this is a blip in the long-term structural
growth of JISL, and we continue to value JISL at 20x its one-year rolling forward
EPS to set a price target of INR261 per share, from INR273 per share earlier.
Catalysts
Evidence of higher-than-current growth rates in MIS revenue, along with the ability
to generate strong free cashflows.
Anchor themes
With growing pressure to maintain India’s food security in the face of rising water
shortages, we believe the MIS business will continue its strong growth, as state
governments across India focus on increasing the area covered under MIS to
ensure water saving and a higher crop yield.
Don’t miss the woods for the trees
Reducing EPS estimates; price target down 4%
We are reducing our EPS estimates for FY11 and FY12 by 22% and
24%, respectively, while our price target is down 4% to INR261. The
MIS segment is suffering a temporary blip in growth following
unseasonal rains in 3QFY11 in its key markets. While the company
still expects to achieve a healthy 35% growth in the MIS segment for
FY11F, it will be a disappointment to our 44% estimate. The other
segments of pipes and agro-processing will also suffer from
unseasonal rains and low raw material availability in FY11F. For
FY12F, the national mission status for MIS may not have as much of
an impact as we expected as the processes are still being laid out.
Short-term pain, long-term gain
While in the short term it may appear that the core MIS business is
suffering setbacks, we think this will be a blip in the long-term
structural growth of the business in the country. With current high food
inflation in India, the government will have to urgently look for
solutions to increase farm yields while conserving water.
Implementation of micro-irrigation systems can help do this very
effectively. We believe that there will be increased focus by central
and state governments on micro-irrigation while increasing incomes of
farmers will reduce the capital cost burden. Growing water shortages
in the country will also be a structural driver for MIS.
Some fund raising and some interesting investments
The company plans to raise equity in CY11, the form and quantum of
which are yet to be decided. Part of the funds raised will likely be
invested in a non-banking financial company (NBFC) to be set up by
JISL to fund farmers and channel partners for purchasing its products.
This could reduce JISL’s debtors and improve its cashflows. We are
not worried about the equity raising and the NBFC plans as of now as
cash flows are likely to improve through these measures.
Estimates reduced but maintain BUY
Management commentary
We recently met Jain Irrigation Systems Ltd (JISL) MD Mr. Anil Jain. Some of the key
takeaways are:
1. Jain Irrigation aims to raise equity in CY11. The quantum of equity raising and
amount are not yet decided though management mentioned a rights issue as a
possible way to raise equity. Management feels quite confident about the long-term
growth of the company and hence wants to position the balance sheet to take
advantage of the same, ie, reduce debt.
2. The company plans to establish a non-banking financial company (NBFC) and
expects the Reserve Bank of India (RBI) approval to come through in 4-5 months. The
NBFC will be funded by the company and partly by the International Finance
Corporation (IFC). The funds raised through equity could be used by JISL to fund the
NBFC. The NBFC will be used to initially fund farmers for purchasing JISL’s products
and then would be established as a full-fledged rural-focused NBFC. This NBFC could
help increase JISL’s growth and cashflows but given a history of failed
diversification by JISL (late 1990s), there could be some investor doubt on this account.
3. JISL is now eligible for getting investment-linked duty exemption from the
Maharashtra government as per an MOU signed with the state government in 2007.
JISL invested about INR3.8bn in Maharashtra between 2006 and 2009, and state level
duties paid on revenues generated from these new assets will be refunded back to the
company. Mr. Jain expects this added income to be in the region of INR300mn per
year though we have not built this into our numbers yet. If this income does get
reflected from FY12F, it could provide upside of INR16 to our target price.
4. 3QFY11 has been poor for MIS due to unseasonal rains, and growth rate in MIS for
the quarter will be ~20%, according to the company. The piping business was also hit
in Nov and Dec 10. The company though expects to make up the MIS shortfall in
4QFY11 with 45% growth so that it can register 35% growth for FY11. Piping business
and agro-processing growth for the year will not be more than 10-12%.
5. Onion procurement has been low in the quarter and at a high price. 4QFY11 for the
onion dehydration business will be poor but the mango pulp business will have high
margins due to higher yields. The company is producing and exporting more
dehydrated onions from its US facility to make up for the shortfall from India. The
company expects onion prices to fall in the Apr-Jun procurement period with enough
availability enabling better margins in FY12.
6. Overall, the company expects to register 24% growth in standalone revenues in
FY11F. We have built in 23% in our estimates.
7. Given the structural food inflation, the company is seeing strong under-currents from
the government to increase farming yields and expects some benefits to flow to the
MIS sector too. Growth in Andhra Pradesh in the MIS business after FY11 may no
longer be exciting according to management. The company though expects newer
markets to make up for the same. It expects Karnataka, Tamil Nadu, and Rajasthan to
be big markets in the next 3-5 years from nascent ones currently.
8. Overseas subsidiaries may not be profitable at the net level in FY11F, but Mr. Jain
categorically mentioned that in FY12F, JISL will be positive at the net level too. We are
not so sanguine on this front.
9. The balance sheet will look stable in terms of working capital and leverage in FY11F
vs. FY10 as per management, resulting in possible positive free cashflows.
Changes in estimates
Heavy rains in 2QFY11 and unseasonal rains in 3QFY11 have dealt a blow to the MIS
business growth in these two quarters. After disappointing 20% y-y growth in MIS in
2QFY11 (compared to 35-40% y-y growth in a normal scenario), 3QFY11 is likely to be
no better. Achieving our earlier estimate of 44% revenue growth from MIS would
require hitting 71% y-y growth in 4QFY11, which is unlikely. As per management, the
national mission status for MIS while helpful, will not show significant results before the
start of the 12th Five-Year Plan in FY13. This would mean the MIS business would not
receive any boost to growth in FY12 from current levels of 35-40%. Growth in the
pipes business also has been weak for the same reasons and our earlier expectation
of 21% growth is also unlikely to be met.
On the agro-processing side, low availability and high prices of onions during the OctDec procurement season means that revenue growth will be flat, while margins will get
hit. The availability of mangoes too has been low this year for the mango pulp
business but the company has been able to get better yields, resulting in better
margins and hence should be able to meet our earlier estimates on the agroprocessing business front, we believe.
For FY11F, we are reducing our consolidated revenue estimates by 4.2% and for
FY12F by 10.2%. Our MIS business revenue growth in FY11F is now at 35% vs. 44%
earlier, while for FY12F we now forecast a growth of 38% vs. 48% earlier.
During FY11-13F, we forecast revenues in the MIS segment to record a CAGR of 35%,
the pipes business, a CAGR of 13%, and the agro-processing business a CAGR of
17.8%. Overall margins of the company should structurally improve, in our view, as a
higher amount of growth should come from the high-margin MIS segment. We
estimate the EBITDA margins of the MIS business at slightly more than 30%, the pipes
business at around 9% and the agro-processing business at approximately 18% over
the next couple of years.
On the overseas subsidiaries front, the inability to control employee costs will continue
to hurt margins, and in our opinion, these could continue to make losses for another
couple of years.
Overall, our consolidated EPS estimates for FY11F and FY12F decrease by 22% and
24%, respectively, given lower margin estimates and losses in overseas subsidiaries.
So why is the stock still a BUY?
In our view, the current fall in growth is more of a blip in the long-term growth potential
of the company driven by the MIS segment. With current high food inflation in India,
the government will have to urgently look for solutions to increase farm yields while
conserving water. Implementation of micro-irrigation systems can help do this very
effectively, in our view. We believe that there will be increased focus by the central
government on micro-irrigation, while through the national mission status, there is
already a significantly higher spending outlay, expansion of MIS outside horticulture
and better systems in place to ensure quicker subsidy disbursements. We think that
the growth rate of JISL’s MIS business can exceed 30% over the next four to five
years, which is a much longer period than we had earlier envisaged. With the
establishment of state level bodies over the next year to allocate central government
funds rather than the current district level model, the subsidy disbursements should be
faster and, in our view, should help reduce working capital requirements for JISL and
improve cash flows.
We believe that the earnings CAGR of the company will be 40% between FY11-13F
and ROEs will improve from 20.5% in FY11F to 25.3% in FY12F (provided there is no
equity raising). In such a situation, we believe, the earnings multiple for the stock can
re-rate upwards. Since April 2006, the stock has traded at an average multiple of 22x
one-year rolling forward earnings. We apply a multiple of 20x to our one-year rolling
forward EPS to arrive at our 12-month price target of INR261 per share, down 4% from
our earlier price target of INR273 per share.
Valuation methodology and risks:
We value JISL based on an earnings multiple of 20x our one-year rolling forward EPS
(methodology unchanged) to arrive at our target price of INR261.
Downside risks to our call are: 1) increased working capital intensity, leading to
reduced cashflows and margins; 2) reduction in government support for micro irrigation
systems (MIS) and government spending on infrastructure projects; 3) increased
competitive intensity leading to lower margins or market share for JISL; 4) volatile raw
material prices, which could impact margins; 5) further depreciation of the rupee
against the US dollar, which could increase forex losses; and 6) acquired companies
not achieving expected profitability.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Jain Irrigation
Action
We are reducing our EPS estimates for FY11 and FY12 by 22% and 24%,
respectively, following disruptions in the micro-irrigation systems (MIS) business in
3Q FY11 due to heavy rains. We believe this is a blip in the long-term structural
growth of JISL, and we continue to value JISL at 20x its one-year rolling forward
EPS to set a price target of INR261 per share, from INR273 per share earlier.
Catalysts
Evidence of higher-than-current growth rates in MIS revenue, along with the ability
to generate strong free cashflows.
Anchor themes
With growing pressure to maintain India’s food security in the face of rising water
shortages, we believe the MIS business will continue its strong growth, as state
governments across India focus on increasing the area covered under MIS to
ensure water saving and a higher crop yield.
Don’t miss the woods for the trees
Reducing EPS estimates; price target down 4%
We are reducing our EPS estimates for FY11 and FY12 by 22% and
24%, respectively, while our price target is down 4% to INR261. The
MIS segment is suffering a temporary blip in growth following
unseasonal rains in 3QFY11 in its key markets. While the company
still expects to achieve a healthy 35% growth in the MIS segment for
FY11F, it will be a disappointment to our 44% estimate. The other
segments of pipes and agro-processing will also suffer from
unseasonal rains and low raw material availability in FY11F. For
FY12F, the national mission status for MIS may not have as much of
an impact as we expected as the processes are still being laid out.
Short-term pain, long-term gain
While in the short term it may appear that the core MIS business is
suffering setbacks, we think this will be a blip in the long-term
structural growth of the business in the country. With current high food
inflation in India, the government will have to urgently look for
solutions to increase farm yields while conserving water.
Implementation of micro-irrigation systems can help do this very
effectively. We believe that there will be increased focus by central
and state governments on micro-irrigation while increasing incomes of
farmers will reduce the capital cost burden. Growing water shortages
in the country will also be a structural driver for MIS.
Some fund raising and some interesting investments
The company plans to raise equity in CY11, the form and quantum of
which are yet to be decided. Part of the funds raised will likely be
invested in a non-banking financial company (NBFC) to be set up by
JISL to fund farmers and channel partners for purchasing its products.
This could reduce JISL’s debtors and improve its cashflows. We are
not worried about the equity raising and the NBFC plans as of now as
cash flows are likely to improve through these measures.
Estimates reduced but maintain BUY
Management commentary
We recently met Jain Irrigation Systems Ltd (JISL) MD Mr. Anil Jain. Some of the key
takeaways are:
1. Jain Irrigation aims to raise equity in CY11. The quantum of equity raising and
amount are not yet decided though management mentioned a rights issue as a
possible way to raise equity. Management feels quite confident about the long-term
growth of the company and hence wants to position the balance sheet to take
advantage of the same, ie, reduce debt.
2. The company plans to establish a non-banking financial company (NBFC) and
expects the Reserve Bank of India (RBI) approval to come through in 4-5 months. The
NBFC will be funded by the company and partly by the International Finance
Corporation (IFC). The funds raised through equity could be used by JISL to fund the
NBFC. The NBFC will be used to initially fund farmers for purchasing JISL’s products
and then would be established as a full-fledged rural-focused NBFC. This NBFC could
help increase JISL’s growth and cashflows but given a history of failed
diversification by JISL (late 1990s), there could be some investor doubt on this account.
3. JISL is now eligible for getting investment-linked duty exemption from the
Maharashtra government as per an MOU signed with the state government in 2007.
JISL invested about INR3.8bn in Maharashtra between 2006 and 2009, and state level
duties paid on revenues generated from these new assets will be refunded back to the
company. Mr. Jain expects this added income to be in the region of INR300mn per
year though we have not built this into our numbers yet. If this income does get
reflected from FY12F, it could provide upside of INR16 to our target price.
4. 3QFY11 has been poor for MIS due to unseasonal rains, and growth rate in MIS for
the quarter will be ~20%, according to the company. The piping business was also hit
in Nov and Dec 10. The company though expects to make up the MIS shortfall in
4QFY11 with 45% growth so that it can register 35% growth for FY11. Piping business
and agro-processing growth for the year will not be more than 10-12%.
5. Onion procurement has been low in the quarter and at a high price. 4QFY11 for the
onion dehydration business will be poor but the mango pulp business will have high
margins due to higher yields. The company is producing and exporting more
dehydrated onions from its US facility to make up for the shortfall from India. The
company expects onion prices to fall in the Apr-Jun procurement period with enough
availability enabling better margins in FY12.
6. Overall, the company expects to register 24% growth in standalone revenues in
FY11F. We have built in 23% in our estimates.
7. Given the structural food inflation, the company is seeing strong under-currents from
the government to increase farming yields and expects some benefits to flow to the
MIS sector too. Growth in Andhra Pradesh in the MIS business after FY11 may no
longer be exciting according to management. The company though expects newer
markets to make up for the same. It expects Karnataka, Tamil Nadu, and Rajasthan to
be big markets in the next 3-5 years from nascent ones currently.
8. Overseas subsidiaries may not be profitable at the net level in FY11F, but Mr. Jain
categorically mentioned that in FY12F, JISL will be positive at the net level too. We are
not so sanguine on this front.
9. The balance sheet will look stable in terms of working capital and leverage in FY11F
vs. FY10 as per management, resulting in possible positive free cashflows.
Changes in estimates
Heavy rains in 2QFY11 and unseasonal rains in 3QFY11 have dealt a blow to the MIS
business growth in these two quarters. After disappointing 20% y-y growth in MIS in
2QFY11 (compared to 35-40% y-y growth in a normal scenario), 3QFY11 is likely to be
no better. Achieving our earlier estimate of 44% revenue growth from MIS would
require hitting 71% y-y growth in 4QFY11, which is unlikely. As per management, the
national mission status for MIS while helpful, will not show significant results before the
start of the 12th Five-Year Plan in FY13. This would mean the MIS business would not
receive any boost to growth in FY12 from current levels of 35-40%. Growth in the
pipes business also has been weak for the same reasons and our earlier expectation
of 21% growth is also unlikely to be met.
On the agro-processing side, low availability and high prices of onions during the OctDec procurement season means that revenue growth will be flat, while margins will get
hit. The availability of mangoes too has been low this year for the mango pulp
business but the company has been able to get better yields, resulting in better
margins and hence should be able to meet our earlier estimates on the agroprocessing business front, we believe.
For FY11F, we are reducing our consolidated revenue estimates by 4.2% and for
FY12F by 10.2%. Our MIS business revenue growth in FY11F is now at 35% vs. 44%
earlier, while for FY12F we now forecast a growth of 38% vs. 48% earlier.
During FY11-13F, we forecast revenues in the MIS segment to record a CAGR of 35%,
the pipes business, a CAGR of 13%, and the agro-processing business a CAGR of
17.8%. Overall margins of the company should structurally improve, in our view, as a
higher amount of growth should come from the high-margin MIS segment. We
estimate the EBITDA margins of the MIS business at slightly more than 30%, the pipes
business at around 9% and the agro-processing business at approximately 18% over
the next couple of years.
On the overseas subsidiaries front, the inability to control employee costs will continue
to hurt margins, and in our opinion, these could continue to make losses for another
couple of years.
Overall, our consolidated EPS estimates for FY11F and FY12F decrease by 22% and
24%, respectively, given lower margin estimates and losses in overseas subsidiaries.
So why is the stock still a BUY?
In our view, the current fall in growth is more of a blip in the long-term growth potential
of the company driven by the MIS segment. With current high food inflation in India,
the government will have to urgently look for solutions to increase farm yields while
conserving water. Implementation of micro-irrigation systems can help do this very
effectively, in our view. We believe that there will be increased focus by the central
government on micro-irrigation, while through the national mission status, there is
already a significantly higher spending outlay, expansion of MIS outside horticulture
and better systems in place to ensure quicker subsidy disbursements. We think that
the growth rate of JISL’s MIS business can exceed 30% over the next four to five
years, which is a much longer period than we had earlier envisaged. With the
establishment of state level bodies over the next year to allocate central government
funds rather than the current district level model, the subsidy disbursements should be
faster and, in our view, should help reduce working capital requirements for JISL and
improve cash flows.
We believe that the earnings CAGR of the company will be 40% between FY11-13F
and ROEs will improve from 20.5% in FY11F to 25.3% in FY12F (provided there is no
equity raising). In such a situation, we believe, the earnings multiple for the stock can
re-rate upwards. Since April 2006, the stock has traded at an average multiple of 22x
one-year rolling forward earnings. We apply a multiple of 20x to our one-year rolling
forward EPS to arrive at our 12-month price target of INR261 per share, down 4% from
our earlier price target of INR273 per share.
Valuation methodology and risks:
We value JISL based on an earnings multiple of 20x our one-year rolling forward EPS
(methodology unchanged) to arrive at our target price of INR261.
Downside risks to our call are: 1) increased working capital intensity, leading to
reduced cashflows and margins; 2) reduction in government support for micro irrigation
systems (MIS) and government spending on infrastructure projects; 3) increased
competitive intensity leading to lower margins or market share for JISL; 4) volatile raw
material prices, which could impact margins; 5) further depreciation of the rupee
against the US dollar, which could increase forex losses; and 6) acquired companies
not achieving expected profitability.
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