Jain Irrigation ::India’s Future Large Caps :: Morgan Stanley

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Jain Irrigation
Pricing in a Business Model
Breakdown, Reiterate OW


This stock is pricing in a business model breakdown,
which is unlikely in our view. We expect significant
improvements in capital efficiencies, and the market
should then start to focus on structural factors driving
overall business growth. Following March ‘12 results,
we expect the stock to re-rate.
Key Catalysts: Continuing strong growth in MIS business,
step-up of growth in the agro processing business, overall
margin expansion aided by growth in MIS & agro processing
business coupled with improvement in capital efficiencies (i.e.
reduced working capital days and rationalized capital
expenditure program) are the key stock catalysts in our view.
Key Debate #1 – visible improvements in capital
efficiency: Poor working capital management and pace of
progress so far have been the key concerns for us – but we
think these concerns are now passé. We expect gross MIS
receivable days to decrease by 60 days by Mar-12 as strategy
prioritizes cash flows over growth. We are confident that JI will
turn FCF-positive in F14, another likely catalyst for re-rating.
Key Debate #2 – Micro Irrigation (MIS) – near-term growth
should moderate… Our long-held view here remains intact
as management focuses on capital efficiencies. With the
recent stock price correction, we believe the market’s
estimates for MIS growth are closer to our views.
…yet MIS remains a multi-year investment theme: Indian
governments will remain committed to improvement in
agricultural productivity, food security, and water scarcity. MIS
is not a cyclical or commoditized business, yet it trades ~7x
F13E implied MIS earnings.
Risks to our call: If there is no improvement in working
capital efficiencies from current levels, JI would have
constraint of capital for funding growth, which could lead to the
stock trade closer to our bear case.



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India’s Future Large Caps :: Morgan Stanley