Jain Irrigation Systems (JI IN) Annual Report Analysis: Concerns Remain Despite Some Improvements :: Jefferies

Key Takeaway
Jain's FY12 Annual Report shows some improvement in inventory and
receivables against FY11 but not enough given growth slowdown. Subsidiaries
disappointed again and forex losses have removed Rs5/share of net worth.
Management needs to deliver on promise of reducing capex. Recent fund
raising is incremental positive but does not solve the core business model issue.
As Jain looks for a "new normal" there is significant uncertainty ahead.

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Working capital cycle: Improvement from FY11 but concerns still remain. After
adjusting for the negative impact of the sharp decline in securitization (from Rs9.7 to 4.3bn),
Jain Irrigation's working capital cycle reduced from 255 to 205 days of sales in FY12 due
to lower inventory and receivables. Yet gross receivables in the core MIS business remained
high at 343 days despite management's intentions to reduce it to 300-315 days and marked
slowdown in sales. Receivables due for over six months grew sharply to Rs5bn from Rs1bn.
High capex in FY12, slowdown implies significant under-utlization.
Management needs to deliver on promise of lower capex going forward. Capex
in FY12 was Rs4.8bn higher than management guidance of Rs4.5bn. At current capacity,
utilization in MIS business is likely to remain below 35% for the next two years against peak
of 60%. Management needs to deliver on lower capex guidance of Rs2bn for FY13/14.
Performance of subsidiaries continue to disappoint. Forex losses wiped out Rs5/
share of book value since FY11-end. Subsidiaries continued to be loss-making which is
disappointing given large revenues and capital employed. Since FY11-end forex losses have
wiped off Rs5/share from consolidated net worth.
Fund raising positive but does not solve business model issue. Significant near
term uncertainty as Jain looks for "new normal". Jain recently announced fund
raising of Rs12bn (US$215mn) through equity, debt, and convertibles. While incrementally
positive as it reduces net D/E from 2.0 to 1.3x and should not be earnings dilutive, we do
not think one-time equity infusion solves the core issue of an unsustainable business model.
With management focusing on cashflows over growth, there is significant uncertainty in the
near-term as Jain looks for a "new normal". We expect EPS to decline sharply in FY13 with
de-growth in MIS revenues and ROE to remain at 9-12% for some time.
Valuation/Risks
We value Jain Irrigation at 1x FY13 book to get a fair value of Rs52/share. Key upside risks:
1) Improvement in debtors and working capital cycle; 2) Significant earnings beat.