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Will cash flow?
Jain has corrected +35% since Jan-11 on concerns on its burgeoning microirrigation receivables. Our recent interactions suggest, though, that this is starting
to ease with the government sharpening its focus on disbursals. We model a cut in
receivables by 30-days in FY12 but management is more optimistic at 60-70 days;
every 30-day helps EPS by ~2-3%. Meanwhile, micro-irrigation revenue growth
remains resilient at ~30% in 1QFY12. We are cutting our FY12-14 EPS estimates
by 1-3% and our target to Rs225/sh but upgrade our reco to BUY as a rebound in
cashflow should bring focus back on the secular micro irrigation investment theme.
Concerns on cashflow. Jain has corrected +35% from recent peaks largely on
concerns around the burgeoning receivables in the core micro irrigation business which
rose to 372-days by Mar-11 (255 in Mar-09, 316 Mar-10). Part of this is related to the
rising share of average capital subsidies in the overall equipment cost from ~50% as
originally envisaged to ~65% by FY11 as state governments increased their share of
subsidies from 10% to as much as 40% in some cases. This increased the reliance on
government disbursements for overall cashflow and attendant collection delays.
Some reasons. Those disbursements also got delayed in 2010 due to the transition of
micro-irrigation projects to a mission mode; these involved a change in guidelines,
costing norms and the decision making process. Also, (a) the state elections in Tamil
Nadu (slower bureaucratic decision making), (b) continued political uncertainty in
Andhra Pradesh and (c) sales in Maharashtra being higher than its allocation under the
central government’s scheme (the state was hence short of funds) were also reasons.
Improvements underway. Our recent conversations suggest, though, that this is
starting to ease. We understand, for example, that the central government approved
disbursal of Rs17.6bn in FY12 that should ease the backlog of FY11 (Rs6-7bn) due to
delayed disbursements post the changeover to the mission mode and fund growth in
FY12 (Rs11bn); the state of AP (Rs3bn receivables to Jain) has received part of its
allocation already, for example. In addition, with the elections in Tamil Nadu (Rs2bn)
now over, decision making may quicken here and recoveries could ease. Maharashtra
(Rs4bn) might remain an overhang near term though as allocations still lag subsidies;
this will necessitate the state government drawing funds from other allied schemes.
EPS impact. Management highlighted that it expects gross receivables in microirrigation to stay flat QoQ at Rs17bn implying that incremental sales in 1QFY12 will
match prior recoveries; this implies receivables coming off 22 days QoQ to 351 days.
We model a cut of 30-days by Mar-12 but management is more optimistic hoping for a
cut of 60-70 days; every 30-day cut increases EPS by 2-3% on lower financing costs.
Upgrade to BUY. Meanwhile, micro revenue growth remains resilient at ~30%; we
expect +20%YoY rise in Ebitda in 1Q (+48%YoY reported PAT). We are cutting FY12-14
EPS by 1-3% and our target to Rs225/sh but upgrade our rec to BUY as a rebound in
cashflow should bring focus back on the secular micro irrigation investment theme.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Will cash flow?
Jain has corrected +35% since Jan-11 on concerns on its burgeoning microirrigation receivables. Our recent interactions suggest, though, that this is starting
to ease with the government sharpening its focus on disbursals. We model a cut in
receivables by 30-days in FY12 but management is more optimistic at 60-70 days;
every 30-day helps EPS by ~2-3%. Meanwhile, micro-irrigation revenue growth
remains resilient at ~30% in 1QFY12. We are cutting our FY12-14 EPS estimates
by 1-3% and our target to Rs225/sh but upgrade our reco to BUY as a rebound in
cashflow should bring focus back on the secular micro irrigation investment theme.
Concerns on cashflow. Jain has corrected +35% from recent peaks largely on
concerns around the burgeoning receivables in the core micro irrigation business which
rose to 372-days by Mar-11 (255 in Mar-09, 316 Mar-10). Part of this is related to the
rising share of average capital subsidies in the overall equipment cost from ~50% as
originally envisaged to ~65% by FY11 as state governments increased their share of
subsidies from 10% to as much as 40% in some cases. This increased the reliance on
government disbursements for overall cashflow and attendant collection delays.
Some reasons. Those disbursements also got delayed in 2010 due to the transition of
micro-irrigation projects to a mission mode; these involved a change in guidelines,
costing norms and the decision making process. Also, (a) the state elections in Tamil
Nadu (slower bureaucratic decision making), (b) continued political uncertainty in
Andhra Pradesh and (c) sales in Maharashtra being higher than its allocation under the
central government’s scheme (the state was hence short of funds) were also reasons.
Improvements underway. Our recent conversations suggest, though, that this is
starting to ease. We understand, for example, that the central government approved
disbursal of Rs17.6bn in FY12 that should ease the backlog of FY11 (Rs6-7bn) due to
delayed disbursements post the changeover to the mission mode and fund growth in
FY12 (Rs11bn); the state of AP (Rs3bn receivables to Jain) has received part of its
allocation already, for example. In addition, with the elections in Tamil Nadu (Rs2bn)
now over, decision making may quicken here and recoveries could ease. Maharashtra
(Rs4bn) might remain an overhang near term though as allocations still lag subsidies;
this will necessitate the state government drawing funds from other allied schemes.
EPS impact. Management highlighted that it expects gross receivables in microirrigation to stay flat QoQ at Rs17bn implying that incremental sales in 1QFY12 will
match prior recoveries; this implies receivables coming off 22 days QoQ to 351 days.
We model a cut of 30-days by Mar-12 but management is more optimistic hoping for a
cut of 60-70 days; every 30-day cut increases EPS by 2-3% on lower financing costs.
Upgrade to BUY. Meanwhile, micro revenue growth remains resilient at ~30%; we
expect +20%YoY rise in Ebitda in 1Q (+48%YoY reported PAT). We are cutting FY12-14
EPS by 1-3% and our target to Rs225/sh but upgrade our rec to BUY as a rebound in
cashflow should bring focus back on the secular micro irrigation investment theme.
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