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The ground remains fertile
Concerns on NBFC and debtors overdone; valuations lowest since 2008-09 crisis period
Action: Reiterate BUY with an upside of 41%
We reiterate our BUY rating on Jain Irrigation with a target price of
INR229, an upside potential of 41%. We believe that currently valuations
are close to the lows witnessed during the crisis period of 2008-09, with
the stock trading at 11.6x its one-year-rolling forward EPS. This is much
lower than the past five years’ average of 17x. In our view, these low
valuations are unjustified and the concerns on the NBFC and receivables
front are overdone. We estimate receivables are likely to come down over
the next 2-3 quarters while the NBFC scale-up will take time and the EPS
dilutive impact, if any, will not be as much as the market fears. It is too
early to worry about increasing competition, in our view, as it would take
competitors 3-5 years to scale up to a meaningful level. We look for a
28.9% CAGR in MIS revenue and 19% CAGR in overall revenue until
FY14F. Structural expansion in margins and lower growth in interest costs
should help net profit show a 30% CAGR until FY14.
Catalyst: Robust MIS business growth and lower receivables
Strong growth in the MIS business, in the region of 30% y-y, and falling
receivables are likely to boost sentiment.
Valuation: Valuing at 16x one-year rolling forward EPS
We value the company at 16x one-year-rolling forward EPS (average of
FY13F and FY14F EPS), slightly lower than the 17x at which it has traded,
on average, in the past five years and lower than our earlier multiple of
20x, to account for the possible risks emanating from the investments in
the proposed NBFC, possible equity dilution and a lower level of growth
than earlier estimated.
The ground remains fertile
Jain Irrigation’s valuations are now back to a point where, given the growth potential of
the industry and the company, they appear extremely attractive, negating potential risks
emanating from the NBFC plans and the potential equity dilution.
Valuations are attractive; almost back to 2008-09 lows
Jain’s stock has corrected by 27.5% YTD vs. a 13.4% fall in the BSE Sensex on
concerns over high receivables on the balance sheet and increase in debt, equity dilution
to raise funds, establishment of an NBFC to fund farmers and discount receivables,
increasing competition and slowdown in growth in the core micro-irrigation systems
(MIS) business.
Post this correction, the stock is trading at 11.6x its one-year-rolling forward EPS
(average of FY13F EPS and FY14F EPS) vs. the past five years’ average of 17x oneyear-
rolling forward EPS. The only time it has traded lower than this in the past five years
was during the global financial crisis between Sep’08 and Mar’09.
At that time, we believed that the low valuations were unjustified, given the high growth
potential of the company. Even now, we think that these low valuations are unjustified,
as the growth momentum of the company continues, as witnessed in the 1Q FY12
results, where overall revenue was up 32% and PAT up 33% y-y. We address and
evaluate the concerns mentioned above later in the note.
Even if we look at valuations on a standalone segmental basis (EV/EBITDA), we see that
valuations are now cheaper than they were in Mar’09. Jain provides segmental details
only until the EBITDA level; thus, we have conducted a one-year-forward EV/EBITDA
multiple analysis from FY07. We have assumed one-year-forward EV/EBITDA multiples
for the pipes, food processing and other segments to arrive at an implied EV/EBITDA
multiple for the MIS business. We have assumed EV/EBITDA multiples for the pipes
business in line with Finolex Industries, one of India’s largest plastic pipe manufacturers
and for food processing and other businesses based on our conservative estimates on
account of lack of comparables. As an estimate we have divided the debt of the
company in proportion to the EBITDA generated by the segment.
Per our calculation, the MIS business is trading at its lowest implied one-year-forward
EV/EBITDA multiple of 8.6x in the past six years.
We believe that, at current valuations, the stock offers excellent value. We now value the
stock at a one-year-rolling forward EPS (average of FY13F and FY14F EPS) multiple of
16x, down from 20x earlier. We have set our P/E multiple slightly lower than the average
of the last five years of 17x to account for the possible risks emanating from the
investments in the proposed NBFC, possible equity dilution and the lower level of growth
than earlier estimated. Based on this, we arrive at our target price of INR229, which
implies potential upside of 41%, and we maintain a BUY rating on the stock. We
believe that concerns on receivables, NBFC and possible equity dilution are overstated
and that current valuations fully discount the risks.
Receivables likely to move down in the near term
On the standalone balance sheet of the company, net receivables post discounting have
ballooned significantly in FY11 on account of delay in the receipt of subsidy amounts
from various state governments on MIS systems sold. The reason for the delay is the
ongoing political turmoil in Andhra Pradesh, elections in Tamil Nadu and the changes
brought about in the process of subsidy disbursal by the National Mission for Microirrigation.
Net receivables on a standalone basis hence moved up to 163 days of gross
standalone sales in FY11 from 106 days in FY10 and an average of 111 days in the past
seven years.
The company has been working on reducing these receivables and expects subsidy
payments to come through from states in the next two quarters. Receivables have
remained flat in 1Q FY12, suggesting that payments from the state governments have
already started flowing in, resulting in annualised net receivables coming down to 131
days of gross standalone sales. Management expects INR2.5-3.0bn worth of subsidy
payments from the Maharashtra government to flow in during the next 30-60 days. We
are building in 135 days in FY12F and 130 days in FY13F. Please note that our
estimates are still much higher than the average receivable days between FY04 and
FY10, as payments from governments could remain slow in the future given the
uncertainty in the policy and political environment.
The decline in receivables should ensure that cash flows are better, and hence
debt:equity is likely to move down from current levels of 1.5:1.
Equity dilution unlikely to happen soon
While the company has taken approval to raise INR7bn of equity through a fresh issue of
shares, possibly through a qualified institutional placement (QIP), management on the
1QFY12 analyst call mentioned that it is unlikely to go through with the fundraising
unless it sees a better valuation. It has subscribed to warrants worth INR1.4bn at a price
of INR228 per share in Mar’11, and once these warrants are subscribed, the company
should have enough funds to start off the NBFC. We believe the company will not be
raising the entire INR7bn but will possibly look to raise equity in the range of INR3-4bn. It
is likely to use these funds to invest in the NBFC, pay off debt and spend on capex.
NBFC: Growth positive but EPS dilutive for initial two years
Jain has plans to set up a non-banking financial company (NBFC) to fund farmers for
purchasing MIS systems, while also discounting Jain’s receivables. The company
believes that bank funding for farmers is constrained and that access to capital matters
much more to farmers than interest rates.
Jain plans to hold a minority stake in the NBFC, with the majority stake held by the
promoters of Jain and private equity players. The company plans to invest initially
INR1bn in the NBFC as its share of equity and, in our view, will possibly invest more over
the next 2-3 years to scale up operations. It aims to start the NBFC by the end of CY12
and is currently waiting for the license.
At this moment, when Jain Irrigation sells MIS equipment to a farmer, it receives only the
farmer’s share of the cost, while the subsidy portion from the government is assigned by
the farmer to Jain to be received by Jain directly. The subsidy payouts, which are
between 30% and 70% of the cost, typically take between 6 and 12 months to flow to
Jain, which results in expensive working capital debt (11-13% interest cost) on Jain’s
books or Jain has to resort to some amount of discounting of the receivables from banks
(10%-11% cost).
Now, through the NBFC, Jain plans to fund the farmer for 100% of the equipment cost,
with the farmer then receiving the subsidy payout from the government himself after 6-12
months. This raises the question, why would the farmer bear the extra interest cost on
30-70% of the value for 6-12 months? The answer is that Jain will provide the farmer
with an upfront cash discount to negate the approximate interest cost that the farmer will
have to bear. The illustrative example below suggests that Jain will have to offer a
discount of 4.5% to the farmer.
Through this endeavour, Jain’s EBITDA margins on the MIS business are likely to be
affected; however, the company is likely to make it up by saving on its interest cost. In
our estimate, if the company has to provide a 4.5% discount to the farmer, its EBITDA
margins on the MIS business will be affected by ~3.3%, and, given that MIS EBITDA
is 70-75% of overall standalone EBITDA, the overall EBITDA margins can reduce by
2.3%-2.5%. In our opinion, it will be difficult for the company to save this much through
interest costs solely in the first couple of years, as it would mean reducing receivables by
35-40%. We believe the strategy to achieve profit neutrality will involve discounting a
significant portion of the current receivables with the NBFC, which may require more
funding for the NBFC down the line.
The more important aspect of starting the NBFC, though, is the push that it can give to
the growth of the MIS business. As mentioned earlier, access to capital is important for
farmers, and with the NBFC providing this capital without the regulations of bank funding,
growth in this business could be pushed up from our currently estimated levels. By our
calculation, the NBFC needs to lead to INR12bn worth of extra MIS sales over our
current estimates for the NBFC plan to be EPS accretive by FY15. This is approximately
11% of our cumulative MIS sales estimate for FY12-15. Thus, the MIS business’s CAGR
for FY12-15 will need to be boosted from 26% in our current estimates to 33%. This
calculation assumes INR3bn of equity raising at INR180 per share.
By our sensitivity calculations, even if NBFC is implemented, affecting margins as stated
above, but growth does not increase, then our TP would be affected by about 16% but
will still leave upside of 19% from here.
The ability to maintain loan quality and not allow large non-performing assets would be
an important factor going forward for the NBFC, but the same can only be assessed two
years after operations start and scale-up.
Increasing competition impact likely only 3-5 years from now
In our opinion, new entrants such as Mahindra & Mahindra, John Deere, etc. are still at a
fairly nascent stage in the industry and will require a significant time to scale up. Godrej
Industries is still in the planning stages to enter the MIS business and will also take time
to scale up, though it is in talks to garner technology from an unnamed Israeli company
and has access to farmers through its existing Godrej Agrovet business.
Jain has a competitive advantage in this industry through its first-mover advantage,
which has provided it with a large distribution base, access to farmers, knowledge of
their requirements, and most important knowledge of the way the government machinery
works so as to obtain its subsidy payments as soon as possible. The biggest worry for
the new entrants would be to control their working capital, given the seasonal nature of
the industry and the long lead time for receiving subsidy payouts. The NBFC and the
capital access that it provides to farmers can also be competitive advantages in the face
of increasing competition from these new entrants.
Changes in estimates
We have changed our revenue growth estimates, based on management commentary
and 1QFY12 results along with our view on the industry.
Our EBITDA margins estimate decreases by 10bps in FY12 and 60bps in FY13. We
have increased our interest cost estimates by 100bps each in FY12 and FY13. Our EPS
estimate for FY12 changes by 6% and for FY13 by 10% on changes in these estimates.
Valuation methodology and risks
We value Jain based on an earnings multiple of 16x our one-year-rolling forward EPS of
INR14.28 to arrive at our target price of INR229. This is slightly lower than the 17x at
which it has traded, on average, in the past five years.
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 Jain; 4) volatile raw material
prices, which could affect margins; 5) further depreciation of the rupee against the US
dollar, which could increase forex losses; 6) acquired companies not achieving expected
profitability; and 7) heavy investment requirement in the proposed NBFC and the inability
to maintain loan quality.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The ground remains fertile
Concerns on NBFC and debtors overdone; valuations lowest since 2008-09 crisis period
Action: Reiterate BUY with an upside of 41%
We reiterate our BUY rating on Jain Irrigation with a target price of
INR229, an upside potential of 41%. We believe that currently valuations
are close to the lows witnessed during the crisis period of 2008-09, with
the stock trading at 11.6x its one-year-rolling forward EPS. This is much
lower than the past five years’ average of 17x. In our view, these low
valuations are unjustified and the concerns on the NBFC and receivables
front are overdone. We estimate receivables are likely to come down over
the next 2-3 quarters while the NBFC scale-up will take time and the EPS
dilutive impact, if any, will not be as much as the market fears. It is too
early to worry about increasing competition, in our view, as it would take
competitors 3-5 years to scale up to a meaningful level. We look for a
28.9% CAGR in MIS revenue and 19% CAGR in overall revenue until
FY14F. Structural expansion in margins and lower growth in interest costs
should help net profit show a 30% CAGR until FY14.
Catalyst: Robust MIS business growth and lower receivables
Strong growth in the MIS business, in the region of 30% y-y, and falling
receivables are likely to boost sentiment.
Valuation: Valuing at 16x one-year rolling forward EPS
We value the company at 16x one-year-rolling forward EPS (average of
FY13F and FY14F EPS), slightly lower than the 17x at which it has traded,
on average, in the past five years and lower than our earlier multiple of
20x, to account for the possible risks emanating from the investments in
the proposed NBFC, possible equity dilution and a lower level of growth
than earlier estimated.
The ground remains fertile
Jain Irrigation’s valuations are now back to a point where, given the growth potential of
the industry and the company, they appear extremely attractive, negating potential risks
emanating from the NBFC plans and the potential equity dilution.
Valuations are attractive; almost back to 2008-09 lows
Jain’s stock has corrected by 27.5% YTD vs. a 13.4% fall in the BSE Sensex on
concerns over high receivables on the balance sheet and increase in debt, equity dilution
to raise funds, establishment of an NBFC to fund farmers and discount receivables,
increasing competition and slowdown in growth in the core micro-irrigation systems
(MIS) business.
Post this correction, the stock is trading at 11.6x its one-year-rolling forward EPS
(average of FY13F EPS and FY14F EPS) vs. the past five years’ average of 17x oneyear-
rolling forward EPS. The only time it has traded lower than this in the past five years
was during the global financial crisis between Sep’08 and Mar’09.
At that time, we believed that the low valuations were unjustified, given the high growth
potential of the company. Even now, we think that these low valuations are unjustified,
as the growth momentum of the company continues, as witnessed in the 1Q FY12
results, where overall revenue was up 32% and PAT up 33% y-y. We address and
evaluate the concerns mentioned above later in the note.
Even if we look at valuations on a standalone segmental basis (EV/EBITDA), we see that
valuations are now cheaper than they were in Mar’09. Jain provides segmental details
only until the EBITDA level; thus, we have conducted a one-year-forward EV/EBITDA
multiple analysis from FY07. We have assumed one-year-forward EV/EBITDA multiples
for the pipes, food processing and other segments to arrive at an implied EV/EBITDA
multiple for the MIS business. We have assumed EV/EBITDA multiples for the pipes
business in line with Finolex Industries, one of India’s largest plastic pipe manufacturers
and for food processing and other businesses based on our conservative estimates on
account of lack of comparables. As an estimate we have divided the debt of the
company in proportion to the EBITDA generated by the segment.
Per our calculation, the MIS business is trading at its lowest implied one-year-forward
EV/EBITDA multiple of 8.6x in the past six years.
We believe that, at current valuations, the stock offers excellent value. We now value the
stock at a one-year-rolling forward EPS (average of FY13F and FY14F EPS) multiple of
16x, down from 20x earlier. We have set our P/E multiple slightly lower than the average
of the last five years of 17x to account for the possible risks emanating from the
investments in the proposed NBFC, possible equity dilution and the lower level of growth
than earlier estimated. Based on this, we arrive at our target price of INR229, which
implies potential upside of 41%, and we maintain a BUY rating on the stock. We
believe that concerns on receivables, NBFC and possible equity dilution are overstated
and that current valuations fully discount the risks.
Receivables likely to move down in the near term
On the standalone balance sheet of the company, net receivables post discounting have
ballooned significantly in FY11 on account of delay in the receipt of subsidy amounts
from various state governments on MIS systems sold. The reason for the delay is the
ongoing political turmoil in Andhra Pradesh, elections in Tamil Nadu and the changes
brought about in the process of subsidy disbursal by the National Mission for Microirrigation.
Net receivables on a standalone basis hence moved up to 163 days of gross
standalone sales in FY11 from 106 days in FY10 and an average of 111 days in the past
seven years.
The company has been working on reducing these receivables and expects subsidy
payments to come through from states in the next two quarters. Receivables have
remained flat in 1Q FY12, suggesting that payments from the state governments have
already started flowing in, resulting in annualised net receivables coming down to 131
days of gross standalone sales. Management expects INR2.5-3.0bn worth of subsidy
payments from the Maharashtra government to flow in during the next 30-60 days. We
are building in 135 days in FY12F and 130 days in FY13F. Please note that our
estimates are still much higher than the average receivable days between FY04 and
FY10, as payments from governments could remain slow in the future given the
uncertainty in the policy and political environment.
The decline in receivables should ensure that cash flows are better, and hence
debt:equity is likely to move down from current levels of 1.5:1.
Equity dilution unlikely to happen soon
While the company has taken approval to raise INR7bn of equity through a fresh issue of
shares, possibly through a qualified institutional placement (QIP), management on the
1QFY12 analyst call mentioned that it is unlikely to go through with the fundraising
unless it sees a better valuation. It has subscribed to warrants worth INR1.4bn at a price
of INR228 per share in Mar’11, and once these warrants are subscribed, the company
should have enough funds to start off the NBFC. We believe the company will not be
raising the entire INR7bn but will possibly look to raise equity in the range of INR3-4bn. It
is likely to use these funds to invest in the NBFC, pay off debt and spend on capex.
NBFC: Growth positive but EPS dilutive for initial two years
Jain has plans to set up a non-banking financial company (NBFC) to fund farmers for
purchasing MIS systems, while also discounting Jain’s receivables. The company
believes that bank funding for farmers is constrained and that access to capital matters
much more to farmers than interest rates.
Jain plans to hold a minority stake in the NBFC, with the majority stake held by the
promoters of Jain and private equity players. The company plans to invest initially
INR1bn in the NBFC as its share of equity and, in our view, will possibly invest more over
the next 2-3 years to scale up operations. It aims to start the NBFC by the end of CY12
and is currently waiting for the license.
At this moment, when Jain Irrigation sells MIS equipment to a farmer, it receives only the
farmer’s share of the cost, while the subsidy portion from the government is assigned by
the farmer to Jain to be received by Jain directly. The subsidy payouts, which are
between 30% and 70% of the cost, typically take between 6 and 12 months to flow to
Jain, which results in expensive working capital debt (11-13% interest cost) on Jain’s
books or Jain has to resort to some amount of discounting of the receivables from banks
(10%-11% cost).
Now, through the NBFC, Jain plans to fund the farmer for 100% of the equipment cost,
with the farmer then receiving the subsidy payout from the government himself after 6-12
months. This raises the question, why would the farmer bear the extra interest cost on
30-70% of the value for 6-12 months? The answer is that Jain will provide the farmer
with an upfront cash discount to negate the approximate interest cost that the farmer will
have to bear. The illustrative example below suggests that Jain will have to offer a
discount of 4.5% to the farmer.
Through this endeavour, Jain’s EBITDA margins on the MIS business are likely to be
affected; however, the company is likely to make it up by saving on its interest cost. In
our estimate, if the company has to provide a 4.5% discount to the farmer, its EBITDA
margins on the MIS business will be affected by ~3.3%, and, given that MIS EBITDA
is 70-75% of overall standalone EBITDA, the overall EBITDA margins can reduce by
2.3%-2.5%. In our opinion, it will be difficult for the company to save this much through
interest costs solely in the first couple of years, as it would mean reducing receivables by
35-40%. We believe the strategy to achieve profit neutrality will involve discounting a
significant portion of the current receivables with the NBFC, which may require more
funding for the NBFC down the line.
The more important aspect of starting the NBFC, though, is the push that it can give to
the growth of the MIS business. As mentioned earlier, access to capital is important for
farmers, and with the NBFC providing this capital without the regulations of bank funding,
growth in this business could be pushed up from our currently estimated levels. By our
calculation, the NBFC needs to lead to INR12bn worth of extra MIS sales over our
current estimates for the NBFC plan to be EPS accretive by FY15. This is approximately
11% of our cumulative MIS sales estimate for FY12-15. Thus, the MIS business’s CAGR
for FY12-15 will need to be boosted from 26% in our current estimates to 33%. This
calculation assumes INR3bn of equity raising at INR180 per share.
By our sensitivity calculations, even if NBFC is implemented, affecting margins as stated
above, but growth does not increase, then our TP would be affected by about 16% but
will still leave upside of 19% from here.
The ability to maintain loan quality and not allow large non-performing assets would be
an important factor going forward for the NBFC, but the same can only be assessed two
years after operations start and scale-up.
Increasing competition impact likely only 3-5 years from now
In our opinion, new entrants such as Mahindra & Mahindra, John Deere, etc. are still at a
fairly nascent stage in the industry and will require a significant time to scale up. Godrej
Industries is still in the planning stages to enter the MIS business and will also take time
to scale up, though it is in talks to garner technology from an unnamed Israeli company
and has access to farmers through its existing Godrej Agrovet business.
Jain has a competitive advantage in this industry through its first-mover advantage,
which has provided it with a large distribution base, access to farmers, knowledge of
their requirements, and most important knowledge of the way the government machinery
works so as to obtain its subsidy payments as soon as possible. The biggest worry for
the new entrants would be to control their working capital, given the seasonal nature of
the industry and the long lead time for receiving subsidy payouts. The NBFC and the
capital access that it provides to farmers can also be competitive advantages in the face
of increasing competition from these new entrants.
Changes in estimates
We have changed our revenue growth estimates, based on management commentary
and 1QFY12 results along with our view on the industry.
Our EBITDA margins estimate decreases by 10bps in FY12 and 60bps in FY13. We
have increased our interest cost estimates by 100bps each in FY12 and FY13. Our EPS
estimate for FY12 changes by 6% and for FY13 by 10% on changes in these estimates.
Valuation methodology and risks
We value Jain based on an earnings multiple of 16x our one-year-rolling forward EPS of
INR14.28 to arrive at our target price of INR229. This is slightly lower than the 17x at
which it has traded, on average, in the past five years.
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 Jain; 4) volatile raw material
prices, which could affect margins; 5) further depreciation of the rupee against the US
dollar, which could increase forex losses; 6) acquired companies not achieving expected
profitability; and 7) heavy investment requirement in the proposed NBFC and the inability
to maintain loan quality.
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