Jain Irrigation v/s Netafim India: An Enquiry into Relative Capital Efficiency. Cut PT to Rs125.::JPMorgan,

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 Jain Irrigation v/s Netafim. We compare capital return ratios for JI’s microirrigation
business with Netafim Irrigation India (one of the large privately held
micro-irrigation player in India). In the growth v/s capital deployment tradeoff,
Netafim appears to have fared much better overall. While JI has larger
scale and better margins, it employs significantly higher capital to generate
similar levels of profitability. Our key conclusions are enumerated below:
1. ROCE: JI’s micro-irrigation business generated 16.8% ROCE,
significantly lower than 30.7% ROCE for Netafim India in FY10.
Decomposing the ROCE, we find JI's generating better margins, but
significantly lower capital turnover compared to Netafim.
2. Margins: JI’s micro-irrigation business generated EBIT margins of
19.7% v/s 13.5% for Netafim in FY10.
3. Fixed Asset Turns: Fixed asset turns for JI’s micro-irrigation business
has ranged between 2.7x-3.2x over past 5 years, Netafim has sweated
its fixed assets better at 4.3x-5.4x range over a similar period.
4. Operating Cycle: Operating cycle for JI’s micro-irrigation business
has been 145-205 days over past 5-yrs compared to 60-65 days for
Netafim India. Jain Irrigation’s receivable days of 148 days are
significantly higher than 69 receivable days of Netafim (FY10).
 Stock re-rating difficult in absence of more disciplined approach to capital
deployment: In our view, for the JI stock to re-rate from here, it will have to
demonstrate improved discipline in capital deployment. We believe that besides
improving its receivables cycle (necessary, but not sufficient), JI also needs to
demonstrate better fixed asset sweat, lower capex intensity and divestments of
unrelated ventures like plastic sheets.
 Cut PT to Rs125, maintain UW. We cut EPS estimates for FY12E/FY13E by
14%/12%, factoring lower micro-irrigation sales in FY12E on account of a good
monsoon, and higher interest. Our EPS estimates are 16%-18% below
consensus; we note consensus estimates for FY12/13 have trended down by
15%/13% over past 2 quarters. We thus cut our PT (Sep-12) to Rs125 from
Rs165 now based on SOTP (valuing each business segment on EV/EBITDA).
Key risks to our thesis include higher micro-irrigation growth, increase in govt.
subsidy, improvement in receivables and turnaround of overseas subsidiaries.