Jain Irrigation-Tepid 2Q, Full Year Guidance at Risk- JPMorgan

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Jain Irrigation Systems Ltd Underweight
JAIR.BO, JI IN
Tepid 2Q, Full Year Guidance at Risk



Jain Irrigation announced its results on 08/11 and hosted a conference call on
09/11. Key takeaways and our views are enumerated below:
• Micro irrigation growth subdued in 2Q: +21% YoY vs. average growth
of 40%-45% - management attributed this to good monsoons, resulting in
natural water availability to farmers. Management expect MIS growth to
pick up from 3Q maintaining its guidance of 40%-50% revenue growth in
FY11. With rains continuing in key markets for Jain in November, we
believe there is increasing likelihood of Jain missing its MIS revenue
guidance for FY11.


• Looking to fund farmers for MIS: With increasing debtors from rising
MIS contribution, management indicated that they are looking at ways to
refinance the government receivables. Management indicated that they are
considering various options (including a NBFC) to finance receivables and
provide credit to farmers. Such a move could auger well for the balance
sheet – however it is not clear if this business would be housed outside or
within the company. We would be wary of it being housed inside JI – we
think any potential entry into a non-core area will likely be viewed
negatively by the market and would adversely impact valuations.
• Key Q2 Standalone Highlights: Pre-exceptional net profit of Rs403MM
up only 3.2%YoY, we see downside risk to street estimates. Revenues up
16%YoY with MIS revenues up 21%YoY (below expectations), Piping
products +24%YoY and Food Products +17%YoY. EBITDA margins at
21.8% (+20bps YoY).
• Maintain UW: We see increasing risk of street earnings downgrades (our
FY11E EPS is 15% below consensus) given tepid 2Q and weakness in PE
pipes and foods processing. Valuations at 24.3x FY12E P/E look rich, esp.
in context of downside risk to earnings estimates. Maintain UW with Mar-11
PT of Rs191. Key risks include adoption of MIS in canal-irrigated and cereal
growing areas of North India, increase in govt. subsidy, and recovery in
overseas business.