Although1QFY13 overall revenue at INR8.65 bn (-9% y-y & -30% q-q)
missed our estimates by a small margin, a 32% decline in MIS business
revenue was quite sharp and was well below the ~10% decrease we had
expected. Strong growth of 34% y-y in the piping business was the bright
spot in the quarter. At the net level, Jain reported a INR169mn loss due
to a forex loss. The company’s focus remains on reducing the stress on
its balance sheet and improvement in cash flows. This was reflected in
reduction in exposure to markets like AP, Tamil Nadu & Karnataka,
where receivables have been a concern and a shift towards a cash
model. The company is also raising US$210mn in capital through a mix
of debt and equity issuance, which management believes should help in
reducing interest expense and improving liquidity. The gross receivables
on MIS business declined by INR1.3bn q-q basis to INR16.4bn, and
management has guided for a INR5.0bn reduction in government
receivables to INR6.0bn by end-FY13F. The decline in receivables would
likely be a key catalyst for the stock, in our view. Our earnings are
currently under review
Raising US$210mn through mix of debt and equity
The company is planning to raise up to US$210mn though mix of
equity/convertible bonds/external commercial borrowings, and the
closure of this exercise is expected in next few weeks. The new debt
(largely foreign currency denominated) will help company 1) reduce its
average borrowing cost; 2) replace short-term borrowing with a long-term
and 3) replace foreign currency borrowing which is expected to come up
for payment. Although lower interest cost on foreign borrowings (at
~3.5%) will lower the average current borrowing cost (which is at ~11%),
it will also leave the company exposed to currency risk, in our view. The
company expects a 25% reduction in interest expense – ie, savings of
around INR80-100mn, from lower borrowing cost as well as working
capital.
On equity raising, management noted that fresh capital should not only
help in saving interest expense but also provide extra liquidity especially
when the company is moving toward a newer business model in its MIS
business. Based on recent media reports (Jain Irrigation in talks with IFC
for stake sale; Source Economic Times, dated 10 August 2012), the
company is planning to raise ~INR2.5bn from the IFC at around INR125
per share, implying dilution of around 5%.
MIS business – challenging times; domestic business revenue off
by 36% y-y
MIS domestic business fell 36% y-y, impacted by 1) lower sales in
states where receivables have been an issue; and 2) the company’s
shift toward a cash model. Management noted that the next two
quarters are expected to remain challenging for MIS business, before
it expects a return to double-digit growth by 4QFY13F. Next quarter
(2QFY13) is expected to witness a similar decline in MIS business as
that seen in 1QFY13.
MIS business revenue declined y-y in all states other than Rajasthan &
Gujarat. With regard to Jain’s strategy to shift towards a cash model,
management noted that all sales made in Maharashtra during the
quarter were through dealers, which will take up the burden of the
government subsidy.
As of end-June, gross receivables from the MIS business had fallen by
INR1.3bn q-q to INR16.4bn. Of this INR16.4bn, close to INR10.0bn is
due from the government, with 75% of it pertaining to sales done in
FY11-12, while the remaining 25% is from sales made in previous
years. Management is targeting to lower receivables due from the
government to INR6.0bn by end-FY13F.
Management highlighted that they had witnessed some positive
changes in the way various state governments are operating and
believe this should result in improvement in availability of finances for
the micro irrigation. Specific to the states, Maharashtra has received
funding from the newer central government scheme; Tamil Nadu has
reduced the proportion of government subsidy on equipment; and AP
& Karnataka have streamlined the process of handling MIS proposals.
As part of its strategy to move towards a cash model, Jain has tied up
with two private sector banks that do not have a rural presence. Under
this arrangement, the bank extends a loan to the farmer for buying the
equipment, thereby helping Jain to receive all cash up front from the
farmer. Separately, the company also received an NBFC license
during last month and expects to reap benefits from the NBFC from
4QFY13F.
With improvement in the situation on the receivables front and with no
major capex lined up over next two years, management expects debt
to come down from the current levels. The company has close to
INR39bn of debt on a consolidated basis, up by INR1bn q-q, primarily
due to fluctuation in the currency.
Management remains confident of sustainable growth in the MIS
business and expects the company to deliver +20% growth in the top
line as well as bottom line over medium to long term
Other businesses (ex-MIS) – should aid in overall growth in FY13F
Other business (ex-MIS) will likely underpin overall growth in FY13F,
as management has guided the piping business to record top-line
growth of 20-25% y-y in FY13F; agro processing to see upwards of
10% growth; and other business (including tissue culture and solar
power) to see +50% growth from a low base.
Subsidiaries – positive at the net level
At the net level, subsidiaries were positive with EBITDA of INR900mn,
depreciation of ~INR400mn and interest payment of ~INR400mn.
Result key highlights – Sharp declines in MIS businesses; piping
business aided growth
Although1QFY13 overall revenue at INR8.65bn (-9% y-y & -30% q-q)
missed our estimates by a small margin, the ~32% y-y revenue
decline in the MIS business was quite sharp and well below our
estimate of -10%. Strong revenue growth of 34% y-y in the piping
business was the quarter’s bright spot. Management flagged that
1HFY13F will likely be tougher for MIS business as Jain adjusts to its
new cash business model.
Amongst other businesses, revenue from the piping business grew
sharply by 34% y-y, while agro processing slipped 6.5%, reflecting
lower prices albeit with volume up 37% y-y.
Overall EBITDA margins were in line with our estimate at 21%, but
down 300bps y-y as Jain has now moved to a model of taking full cash
upfront for its MIS products from farmers by offering discounts.
EBITDA at INR1.8bn (-21% y-y & -27% q-q) missed our estimate by
6% but came in well above consensus of INR1.6bn.
PBT adjusted for forex losses (on foreign currency debt) of INR672mn,
however, missed our estimate by a wider margin due to higher interest
costs.
Overall, Jain reported a loss of INR169mn due to forex loss, in line
with our estimate of a loss of INR179mn.
The company reported its consolidated numbers for FY12, and at the
EBITDA level, subsidiaries came in positive. However, due to higher
interest cost and forex losses at the net level, they remain loss
making.
On the balance sheet side, consolidated receivables at INR22.7bn
rose INR5.7bn y-y as of Mar 12. Consolidated receivable days of sales
reached at 166 in FY12 vs 148 in FY11. Consolidated net debt ended
FY12 at INR35bn, approximately 2x D/E.
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