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Jain Irrigation Systems (JISL) reported disappointing numbers for 3QFY2011
results. Total revenue grew by 9% to `696cr. EBITDA margin stood at 19% for the
quarter. Post adjusting for forex loss and one-time VAT refund, adjusted PAT
declined by 18% to `37cr. We maintain our Neutral view on the stock.
Underperformance across segments: The MIS segment, the key contributor to the
company’s revenue and profit, showed mere growth of 19% to `360cr, with
EBITDA margin of 30.6%. The poor performance was on account of heavy rain
witnessed across the country. The PVC pipes, PE pipes and PVC sheets segments
largely remained flat, while EBITDA margin for the same declined by 197bp,
299bp and 469bp. The onion segment declined by 48%, reporting loss of `4cr.
The fruits segment registered growth of 14% yoy in sales and posted steady
margins of 19.3% for the quarter.
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 the CMP of `215, the stock is
trading at fair valuations of 18.7x FY2012E adj. FDEPS of `11.5. We remain
Neutral on the stock.
Change in revenue mix continues: Part of the re-jig has been due to the
discontinuation of the PC sheets division, which contributed 1.3% to revenue and
0.6% to EBITDA in FY2010. Revenue contribution from the high-margin MIS
segment increased by 300bp to 52% (47%) in 3QFY2011, while contribution from
the sheet and agro segments dropped by 100bp and 200bp to 5% (6%) and 13%
(15%), respectively.
MIS segment affected by rains: The MIS segment, the key contributor to the
company’s revenue and EBITDA, posted 19% yoy growth (18% volume growth) for
3QFY2011, increasing its contribution to 52% of sales (50% in 2QFY2011, 51% in
1QFY2011 and 50% in 4QFY2010).
Gujarat, Rajasthan and Andhra Pradesh were the fastest-growing regions for the
company, registering growth of 144%, 132% and 59%, respectively. Other key
states that contributed to the company’s growth were Karnataka (36%) and
Maharashtra (33%).
EBITDA margins of the MIS segment increased marginally on a sequential basis
during the quarter to 30.6% due to change in product mix.
PVC pipes segment affected by monsoons: For the quarter, the segment posted
muted top-line growth of 1.9% yoy in (8% decline in volumes) to `137cr, led by
higher realisation due to increased polymer prices. EBITDA margins of the segment
declined by 197bp to 6% (8%).
PE pipes segment reports flat sales, margin under pressure: The PE pipes segment
reported flat sales of `72cr on a yoy basis, although volumes fell by 14%. EBITDA
margins declined by 299bp yoy and 270bp qoq to 8%. The decline in EBITDA
margin was on account of high raw-material prices.
PVC sheets segment: The PVC sheets segment registered revenue growth of 15.5%
during the quarter. However, the segment’s EBITDA margin declined due to high
cost pressure from rising raw-material prices. EBITDA margin of the segment came
in at 8%, reporting a 469bp decline on a yoy and 230bp on qoq basis.
Agro products (onions and fruit puree): Total revenue of the agro products
segment declined by 5% during the quarter, on account of poor performance by
the onion segment.
Revenue of the onion segment declined by 48% to `15cr, as volumes fell by 33%
for the quarter due to low availability (crop destruction due to untimely rain). The
onion segment posted a loss of `4cr in EBITDA, due to high raw-material prices.
The fruit puree segment recorded revenue growth of 14% to `76cr (`66cr),
although volumes fell by 20%. Sales growth was driven by higher realisation on
account of change in product mix. EBITDA margin came in at 19%, same as
3QFY2010 level.
Key takeaways from the conference call
Demand scenario for the MIS division augurs well on the back of continuing
high food inflation, lead by increasing prices in agri-commodities, as it would
encourage farmers to go for installation of micro-irrigation systems.
The subsidiary comprising of MIS and dehydrated vegetables business is likely
to breakeven on the net level by FY2011-end and contribute towards
profitability in FY2012.
The company is considering to start an NBFC to provide loan to farmers who
are planning to invest in MIS.
JISL plans to raise funds worth US $150mn through equity issuances. Raised
funds would be used in 1) reduction of debt from balance sheet 2) equity
contribution towards NBFC start up and 3) regular capex pertaining to MIS
and other divisions.
The company has also decided to carve out its solar business in a separate
100% subsidiary.
JISL’s board has also passed the resolution pertaining to issuance of
differential voting rights (DVR) bonus share. The company plans to issue 10
DVR equity shares for every 20 held; and every 10 DVR equity shares would
amount to voting right equivalent to one ordinary share.
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 140million 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
that there exists huge scope for further MIS in India. The company is the leading
player among 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
farmers for irrigation purposes along with using them for drinking water supply
schemes. However, over the past few years, this segment has evolved with different
applications for pipes ranging from being used in the city gas distribution
networks, for sewage and waste disposal, to telecom cables. Some of JISL’s
esteemed clients include leading telecom and gas companies and municipal
corporations of 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
such as JISL. Domestically, the industry is fragmented and unorganised, which
supplies semi-finished products in crude form to European or US buyers, who
further process the products into finished products. Since the domestic market is
still evolving, JISL has focused primarily on the overseas market. Globally, 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 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 to JISL.
Outlook and valuation
Going ahead, we believe 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 farmers’ income. We expect the segment
to continue to grow between 40% over the next two years. In case of the PVC pipes
segment, a revival in demand is visible.
At the CMP of `215, the stock is trading at fair valuations of 18.7x FY2012E adj.
FDEPS of `11.5. We remain Neutral on the stock.
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Jain Irrigation Systems – 3QFY2011 Result Update
Angel Broking maintains a Neutral on Jain Irrigation Systems.
Jain Irrigation Systems (JISL) reported disappointing numbers for 3QFY2011
results. Total revenue grew by 9% to `696cr. EBITDA margin stood at 19% for the
quarter. Post adjusting for forex loss and one-time VAT refund, adjusted PAT
declined by 18% to `37cr. We maintain our Neutral view on the stock.
Underperformance across segments: The MIS segment, the key contributor to the
company’s revenue and profit, showed mere growth of 19% to `360cr, with
EBITDA margin of 30.6%. The poor performance was on account of heavy rain
witnessed across the country. The PVC pipes, PE pipes and PVC sheets segments
largely remained flat, while EBITDA margin for the same declined by 197bp,
299bp and 469bp. The onion segment declined by 48%, reporting loss of `4cr.
The fruits segment registered growth of 14% yoy in sales and posted steady
margins of 19.3% for the quarter.
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 the CMP of `215, the stock is
trading at fair valuations of 18.7x FY2012E adj. FDEPS of `11.5. We remain
Neutral on the stock.
Revenue growth slows down: JISL registered 9% yoy growth in 3QFY2011 to
`696cr (`641cr). Growth was one of the lowest posted by the company in the last
10 quarters, owing to heavy rains across the country, which impacted the
performance of key segments such as MIS, piping and onion.
Change in revenue mix continues: Part of the re-jig has been due to the
discontinuation of the PC sheets division, which contributed 1.3% to revenue and
0.6% to EBITDA in FY2010. Revenue contribution from the high-margin MIS
segment increased by 300bp to 52% (47%) in 3QFY2011, while contribution from
the sheet and agro segments dropped by 100bp and 200bp to 5% (6%) and 13%
(15%), respectively.
MIS segment affected by rains: The MIS segment, the key contributor to the
company’s revenue and EBITDA, posted 19% yoy growth (18% volume growth) for
3QFY2011, increasing its contribution to 52% of sales (50% in 2QFY2011, 51% in
1QFY2011 and 50% in 4QFY2010).
Gujarat, Rajasthan and Andhra Pradesh were the fastest-growing regions for the
company, registering growth of 144%, 132% and 59%, respectively. Other key
states that contributed to the company’s growth were Karnataka (36%) and
Maharashtra (33%).
EBITDA margins of the MIS segment increased marginally on a sequential basis
during the quarter to 30.6% due to change in product mix.
PVC pipes segment affected by monsoons: For the quarter, the segment posted
muted top-line growth of 1.9% yoy in (8% decline in volumes) to `137cr, led by
higher realisation due to increased polymer prices. EBITDA margins of the segment
declined by 197bp to 6% (8%).
PE pipes segment reports flat sales, margin under pressure: The PE pipes segment
reported flat sales of `72cr on a yoy basis, although volumes fell by 14%. EBITDA
margins declined by 299bp yoy and 270bp qoq to 8%. The decline in EBITDA
margin was on account of high raw-material prices.
PVC sheets segment: The PVC sheets segment registered revenue growth of 15.5%
during the quarter. However, the segment’s EBITDA margin declined due to high
cost pressure from rising raw-material prices. EBITDA margin of the segment came
in at 8%, reporting a 469bp decline on a yoy and 230bp on qoq basis.
Agro products (onions and fruit puree): Total revenue of the agro products
segment declined by 5% during the quarter, on account of poor performance by
the onion segment.
Revenue of the onion segment declined by 48% to `15cr, as volumes fell by 33%
for the quarter due to low availability (crop destruction due to untimely rain). The
onion segment posted a loss of `4cr in EBITDA, due to high raw-material prices.
The fruit puree segment recorded revenue growth of 14% to `76cr (`66cr),
although volumes fell by 20%. Sales growth was driven by higher realisation on
account of change in product mix. EBITDA margin came in at 19%, same as
3QFY2010 level.
Key takeaways from the conference call
Demand scenario for the MIS division augurs well on the back of continuing
high food inflation, lead by increasing prices in agri-commodities, as it would
encourage farmers to go for installation of micro-irrigation systems.
The subsidiary comprising of MIS and dehydrated vegetables business is likely
to breakeven on the net level by FY2011-end and contribute towards
profitability in FY2012.
The company is considering to start an NBFC to provide loan to farmers who
are planning to invest in MIS.
JISL plans to raise funds worth US $150mn through equity issuances. Raised
funds would be used in 1) reduction of debt from balance sheet 2) equity
contribution towards NBFC start up and 3) regular capex pertaining to MIS
and other divisions.
The company has also decided to carve out its solar business in a separate
100% subsidiary.
JISL’s board has also passed the resolution pertaining to issuance of
differential voting rights (DVR) bonus share. The company plans to issue 10
DVR equity shares for every 20 held; and every 10 DVR equity shares would
amount to voting right equivalent to one ordinary share.
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 140million 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
that there exists huge scope for further MIS in India. The company is the leading
player among 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
farmers for irrigation purposes along with using them for drinking water supply
schemes. However, over the past few years, this segment has evolved with different
applications for pipes ranging from being used in the city gas distribution
networks, for sewage and waste disposal, to telecom cables. Some of JISL’s
esteemed clients include leading telecom and gas companies and municipal
corporations of 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
such as JISL. Domestically, the industry is fragmented and unorganised, which
supplies semi-finished products in crude form to European or US buyers, who
further process the products into finished products. Since the domestic market is
still evolving, JISL has focused primarily on the overseas market. Globally, 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 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 to JISL.
Outlook and valuation
Going ahead, we believe 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 farmers’ income. We expect the segment
to continue to grow between 40% over the next two years. In case of the PVC pipes
segment, a revival in demand is visible.
At the CMP of `215, the stock is trading at fair valuations of 18.7x FY2012E adj.
FDEPS of `11.5. We remain Neutral on the stock.
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