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Jain Irrigation Systems - 3QF11: Disappointing Result: We are Buyers into any Stock Weakness
Quick Comment - Renewed focus on working
capital management: JISL’s stock has outperformed
the Sensex by 15% over the past 1 month, driven by
increased confidence in working capital management
(and thus, long-term earnings progression), we believe.
The board has approved an equity raising plan of
$150mn with a view to strengthen the balance sheet and
reduce interest burden. The board has also approved
setting up an NBFC to improve working capital for MIS
and reduce receivables thereon. While we await final
details of the plan, prima facie, we are excited by this
opportunity given that the company will likely have the
backing and experience of its partners, such as IFC.
Results Below Expectations: Jain Irrigation (JISL)
reported 3QF11 results with revenue, operating profit
and adjusted net profit growth of 10%, 9% and (-)1%,
which compares with our expectations of 11%, 14% and
12%, respectively, in Q3F2011. MIS business grew 19%
YoY, in-line with our expectations, driven by a
combination of extended monsoons as well as renewed
management focus on improving working capital
efficiency, in our view. We believe growth in MIS will
likely rebound over the next two quarters driven by
sugarcane and cotton crop season. Overall EBITDA
margins were flat YoY and 80bps below expectation,
driven largely by the pipes and onion dehydration
business profitability.
Key catalysts over the next 6-12 months are likely to
be marked improvement in working capital efficiency by
Q4F11 as well as rebound in MIS growth in Q4F11 and
Q1F12, driven by sugarcane and cotton crop season
respectively. We continue to believe that paradigm shifts
in working capital utilization are difficult to achieve, we
remain confident of a gradual improvement in
efficiencies through our investment horizon. We would
view any weakness in the stock on the back of this result
as an opportunity to accumulate.
Domestic MIS business: The domestic MIS business for the
company grew at 19% YoY, driven by growth in the states of
Gujarat (144%), Rajasthan (132%), Andhra Pradesh (59%),
Karnataka (36%) and Maharashtra (33%). MIS EBITDA
margins in this business were down 50bps. Management
believes good recharging of underground water levels and
improved financial ability of the farmer will likely result in
healthy MIS growth over the next few quarters. In our view, MIS
business is likely to rebound in Q4F11 and Q1F12 driven by
sugarcane and cotton crop season respectively. Long-term
opportunity on MIS is more visible now than before with the
government’s focus to curb rising food inflation. Modern
technologies (drip irrigation) can improve productivity, increase
supply and thereby help in reducing inflation, in our view.
Agro processing: The Agro-processing business has
disappointed this quarter with revenues falling 5% YoY driven
by volume contraction of 20% YoY. The onion dehydration
business had (-)27% operating margins on account of higher
raw material price (Rs 18 per kg) and non-availability of onions.
The fruit processing business continues to exhibit volatility in
quarterly performance, with EBITDA margins up 30bps yoy in
3QF11. Coke India’s off-take in the quarter remained subdued
with 7% growth in revenues.
Plastic Pipes: Pipes revenue grew by 2% while operating
profit declined by 25% in 3QF11. Overall operating margins
were down 230bps yoy largely on account of higher polymer
prices.
Interest costs were up 27% YoY, 10% QoQ and 6% above
our expectations: In our view, JISL required incremental
funding this quarter for its working capital.
PAT Adjusted for VAT refunds pertaining to previous
quarters and unrealized Exchange Rate Gain: We have
treated receipt of VAT refunds received in accordance with
Industrial Promotion Scheme from Govt of Maharashtra
pertaining to previous quarters of ~Rs314mn as exceptional
income and have assumed a 35% tax shield thereon. JISL has
recorded an unrealized net gain of Rs72mn stemming from
exchange rate differences on long-term foreign currency
borrowings, which are repayable over a period of 7-8 years. We
have considered the entire unrealized loss as an exceptional
item, i.e. adjusted net profit of growth of (-)1%.
Bonus shares recommended: JISL has also recommended
the issuance of bonus shares with differential voting rights
(DVR) in the ratio of 1 DVR share for every 20 ordinary shares
held. 10 DVR equity shares will carry voting right of 1 ordinary
equity share.
Valuation Methodology: We value JISL using our residual
income model in arriving at one-year forward intrinsic value for
Jain Irrigation at Rs250 per share, with a terminal RoE of 18%
and cost of equity of 13.6%.
Key Risks
• Upside Risks: Timely MIS subsidy disbursals by the
government, 2) full discounting of MIS subsidy receivables,
and 3) better product mix driving strong margin expansion
• Downside Risks: 1) Spike in polymer prices, 2) lower-than-
expected growth in new states for MIS, and 3) faster-than-
expected increase in competitive activity
Company Description
Jain Irrigation is the largest firm in India's micro irrigation
systems business, which includes drip and sprinkler irrigation
systems. The company is also involved in the agro-processing
and onion dehydration business, as well as the plastics
business.
India Multi-Industry
Industry View: Attractive
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Jain Irrigation Systems - 3QF11: Disappointing Result: We are Buyers into any Stock Weakness
Quick Comment - Renewed focus on working
capital management: JISL’s stock has outperformed
the Sensex by 15% over the past 1 month, driven by
increased confidence in working capital management
(and thus, long-term earnings progression), we believe.
The board has approved an equity raising plan of
$150mn with a view to strengthen the balance sheet and
reduce interest burden. The board has also approved
setting up an NBFC to improve working capital for MIS
and reduce receivables thereon. While we await final
details of the plan, prima facie, we are excited by this
opportunity given that the company will likely have the
backing and experience of its partners, such as IFC.
Results Below Expectations: Jain Irrigation (JISL)
reported 3QF11 results with revenue, operating profit
and adjusted net profit growth of 10%, 9% and (-)1%,
which compares with our expectations of 11%, 14% and
12%, respectively, in Q3F2011. MIS business grew 19%
YoY, in-line with our expectations, driven by a
combination of extended monsoons as well as renewed
management focus on improving working capital
efficiency, in our view. We believe growth in MIS will
likely rebound over the next two quarters driven by
sugarcane and cotton crop season. Overall EBITDA
margins were flat YoY and 80bps below expectation,
driven largely by the pipes and onion dehydration
business profitability.
Key catalysts over the next 6-12 months are likely to
be marked improvement in working capital efficiency by
Q4F11 as well as rebound in MIS growth in Q4F11 and
Q1F12, driven by sugarcane and cotton crop season
respectively. We continue to believe that paradigm shifts
in working capital utilization are difficult to achieve, we
remain confident of a gradual improvement in
efficiencies through our investment horizon. We would
view any weakness in the stock on the back of this result
as an opportunity to accumulate.
Domestic MIS business: The domestic MIS business for the
company grew at 19% YoY, driven by growth in the states of
Gujarat (144%), Rajasthan (132%), Andhra Pradesh (59%),
Karnataka (36%) and Maharashtra (33%). MIS EBITDA
margins in this business were down 50bps. Management
believes good recharging of underground water levels and
improved financial ability of the farmer will likely result in
healthy MIS growth over the next few quarters. In our view, MIS
business is likely to rebound in Q4F11 and Q1F12 driven by
sugarcane and cotton crop season respectively. Long-term
opportunity on MIS is more visible now than before with the
government’s focus to curb rising food inflation. Modern
technologies (drip irrigation) can improve productivity, increase
supply and thereby help in reducing inflation, in our view.
Agro processing: The Agro-processing business has
disappointed this quarter with revenues falling 5% YoY driven
by volume contraction of 20% YoY. The onion dehydration
business had (-)27% operating margins on account of higher
raw material price (Rs 18 per kg) and non-availability of onions.
The fruit processing business continues to exhibit volatility in
quarterly performance, with EBITDA margins up 30bps yoy in
3QF11. Coke India’s off-take in the quarter remained subdued
with 7% growth in revenues.
Plastic Pipes: Pipes revenue grew by 2% while operating
profit declined by 25% in 3QF11. Overall operating margins
were down 230bps yoy largely on account of higher polymer
prices.
Interest costs were up 27% YoY, 10% QoQ and 6% above
our expectations: In our view, JISL required incremental
funding this quarter for its working capital.
PAT Adjusted for VAT refunds pertaining to previous
quarters and unrealized Exchange Rate Gain: We have
treated receipt of VAT refunds received in accordance with
Industrial Promotion Scheme from Govt of Maharashtra
pertaining to previous quarters of ~Rs314mn as exceptional
income and have assumed a 35% tax shield thereon. JISL has
recorded an unrealized net gain of Rs72mn stemming from
exchange rate differences on long-term foreign currency
borrowings, which are repayable over a period of 7-8 years. We
have considered the entire unrealized loss as an exceptional
item, i.e. adjusted net profit of growth of (-)1%.
Bonus shares recommended: JISL has also recommended
the issuance of bonus shares with differential voting rights
(DVR) in the ratio of 1 DVR share for every 20 ordinary shares
held. 10 DVR equity shares will carry voting right of 1 ordinary
equity share.
Valuation Methodology: We value JISL using our residual
income model in arriving at one-year forward intrinsic value for
Jain Irrigation at Rs250 per share, with a terminal RoE of 18%
and cost of equity of 13.6%.
Key Risks
• Upside Risks: Timely MIS subsidy disbursals by the
government, 2) full discounting of MIS subsidy receivables,
and 3) better product mix driving strong margin expansion
• Downside Risks: 1) Spike in polymer prices, 2) lower-than-
expected growth in new states for MIS, and 3) faster-than-
expected increase in competitive activity
Company Description
Jain Irrigation is the largest firm in India's micro irrigation
systems business, which includes drip and sprinkler irrigation
systems. The company is also involved in the agro-processing
and onion dehydration business, as well as the plastics
business.
India Multi-Industry
Industry View: Attractive
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