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Jain Irrigation Systems Ltd
Underweight
JAIR.BO, JI IN
NBFC foray likely to drive de-rating. Maintain UW
• MIS guidance at risk: MIS growth has slowed to 21% YoY (27%-28% for
9mFY11) which puts full year guidance of 30-40% growth at risk.
Management indicated that prolonged rainfalls have delayed microirrigation deployment and expect a sharp pick up going forward.
• Entry into NBFC could de-rate valuations: JI is setting up an NBFC to
fund farmers for micro irrigation. The initial capitalization is expected to be
Rs2B (subject to regulatory approvals) and JI and promoters will hold a
‘substantial’ stake in the company. We believe that JI committing its
balance sheet for a NBFC is likely to drive a de-rating for the stock. Micro
irrigation is already subsidized to the tune of 50%-90% by the government
and we don’t see a strong case for setting up a NBFC.
• Potential equity dilution to fund NBFC: JI board has approved equity
issuance up to US$150M to partly fund its NBFC foray. At current stock
levels, this implies a potential dilution of 8%. Management indicated that
they are looking to raise equity by March ’11 and the NBFC foray is likely
to kick-off by June ’11.
• 3Q below estimates: 1) Revenues +10% YoY driven by MIS +21% YoY,
PVC +15% which implies a de-growth in piping and food processing
business, 2) EBITDA margin expansion of 440bps YoY driven by VAT
refunds and govt. promotional schemes. Excluding these, margins are down
260bps YoY. 3) Pre-exceptional PAT +46% YoY, buoyed by VAT refunds
and slightly lower tax rate.
• Working capital stress continues: Receivables and inventories have
increased in 3Q on account of delays in govt. payments and slowdown in
sales. Gross debt is Rs2.2B, of which Rs1.3B is due to working capital.
• Maintain UW: Over the last 6 months, consensus earnings estimates have
been cut 5%-10% for FY11E-FY12E but are still 10%-14% below our
estimates. We see increasing downside risk to street estimates. Valuations at
22.5x FY12E look rich to us in the context of risk to further earnings
downside and impending foray into NBFC.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Jain Irrigation Systems Ltd
Underweight
JAIR.BO, JI IN
NBFC foray likely to drive de-rating. Maintain UW
• MIS guidance at risk: MIS growth has slowed to 21% YoY (27%-28% for
9mFY11) which puts full year guidance of 30-40% growth at risk.
Management indicated that prolonged rainfalls have delayed microirrigation deployment and expect a sharp pick up going forward.
• Entry into NBFC could de-rate valuations: JI is setting up an NBFC to
fund farmers for micro irrigation. The initial capitalization is expected to be
Rs2B (subject to regulatory approvals) and JI and promoters will hold a
‘substantial’ stake in the company. We believe that JI committing its
balance sheet for a NBFC is likely to drive a de-rating for the stock. Micro
irrigation is already subsidized to the tune of 50%-90% by the government
and we don’t see a strong case for setting up a NBFC.
• Potential equity dilution to fund NBFC: JI board has approved equity
issuance up to US$150M to partly fund its NBFC foray. At current stock
levels, this implies a potential dilution of 8%. Management indicated that
they are looking to raise equity by March ’11 and the NBFC foray is likely
to kick-off by June ’11.
• 3Q below estimates: 1) Revenues +10% YoY driven by MIS +21% YoY,
PVC +15% which implies a de-growth in piping and food processing
business, 2) EBITDA margin expansion of 440bps YoY driven by VAT
refunds and govt. promotional schemes. Excluding these, margins are down
260bps YoY. 3) Pre-exceptional PAT +46% YoY, buoyed by VAT refunds
and slightly lower tax rate.
• Working capital stress continues: Receivables and inventories have
increased in 3Q on account of delays in govt. payments and slowdown in
sales. Gross debt is Rs2.2B, of which Rs1.3B is due to working capital.
• Maintain UW: Over the last 6 months, consensus earnings estimates have
been cut 5%-10% for FY11E-FY12E but are still 10%-14% below our
estimates. We see increasing downside risk to street estimates. Valuations at
22.5x FY12E look rich to us in the context of risk to further earnings
downside and impending foray into NBFC.
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