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Jain Irrigation Systems
F1Q12: Strong Operational
Result; Beats Estimates
JI reported strong earnings (+40% YoY), driven by
strong growth in the MIS and agro processing
businesses. Improvement in working capital is a
step in the right direction, we believe.
Operating results above expectations: JI reported
growth of 31% in revenue, 38% in operating profit, and
40% in adjusted profit for F1Q12 compared to our
expectations of 28%, 24%, and 18% growth,
respectively (+12% above market expectations).
Key Positives: 1) MIS business reported 30% revenue
growth, driven by strong demand from cotton and
sugarcane farmers. We continue to believe that MIS is a
multi-year investment theme and that 20-25% revenue
CAGR is achievable over the next five years. 2) Agro
processing business reported 86% revenue growth YoY
(115% growth in Mango pulp and 28% growth in
dehydrated onion business). 3) Export growth for F1Q12
was strong at 23% (15% organic). 4) According to
management, order book position is strong (up 15-20%
YoY with MIS ~Rs5bn, Food processing ~Rs3bn and
Pipes ~Rs1bn). 5) Management remains laser focused
on working capital efficiencies, we believe. MIS gross
receivables reduced by 20 days qoq in F1Q12 (now at
349 days) and management expects to reduce it further
by 40-50 days over the next two quarters.
Key Negatives: 1) EBITDA margin in MIS business
declined by 100bp, driven by the increase in polymer
prices. We believe that the company has sufficient
pricing power to maintain margins within the historical
band. 2) Interest costs increased 58% yoy and 11% qoq
(8% above our expectations), driven by higher working
capital and increase in borrowing costs. According JI, a
combination of faster subsidy disbursements by state
governments, increased upfront payment from farmers,
and the proposed NBFC will likely help constrict overall
working capital for F12. 3) Pipes business revenue and
profit growth of +5% and -8% were lower than our
expectations of 15% and 2%, respectively.
Update on Proposed NBFC: 1) JI has approached the
regulator (The RBI) to seek permission to setup the NBFC and
expects NBFC to start operations by the end of F3Q12. 2)
According to management, shareholding for NBFC over the
next 18 months is likely to be ~40% with JI, 10% with IFC (part
of World Bank), 20% with promoters and 30% by financial
institutions. 3) NBFC roll out is likely to be in phased manner,
starting from the state of Maharashtra. 4) Management expects
to contribute Rs1bn into NBFC for JI’s equity stake (~40%) in a
phased manner, i.e., Rs0.5bn in F2011 and the balance in
F2012. 5) Management expects NBFC to fund JI’s receivables
worth Rs3-5bn by the end of F2012.
Other key takeaways from the results conference call: 1)
Gross debt remained flat sequentially (~Rs21-22bn). 2)
Management has planned capital expenditure of Rs3.5-4bn for
F2012.
Domestic MIS business: Overall growth of 30% YoY. Key
states contributing to the growth were Rajasthan (9x),
Himachal Pradesh (6x), Karnataka (4x) and Gujarat (+176%).
Agro processing: Agro-processing business had strong
revenue growth of 86% YoY, driven by both pricing and
volumes. Food processing margins (28.3%) were 400bp higher
than our expectations, driven by better absorption of fixed
costs and low-priced inventory. According to management,
Coke India’s off-take for fruit processing in F1Q12 was strong
(+114% YoY).
Plastic Pipes: Pipes revenue grew by 5% (MSe 15%) with
EBITDA margins at 8.2%, largely in line with our estimates.
Valuation –Methodology: We value JISL using our
residual income model in arriving at one-year forward intrinsic
value for Jain Irrigation at Rs250 per share, with a terminal RoE
of 18% and cost of equity of 13.1%.
Key Downside Risks: 1) Spike in polymer prices. 2) Lower-
than-expected growth in new states for MIS. 3) Faster-than-
expected increase in competitive activity. 4) Deterioration in
overall working capital management.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jain Irrigation Systems
F1Q12: Strong Operational
Result; Beats Estimates
JI reported strong earnings (+40% YoY), driven by
strong growth in the MIS and agro processing
businesses. Improvement in working capital is a
step in the right direction, we believe.
Operating results above expectations: JI reported
growth of 31% in revenue, 38% in operating profit, and
40% in adjusted profit for F1Q12 compared to our
expectations of 28%, 24%, and 18% growth,
respectively (+12% above market expectations).
Key Positives: 1) MIS business reported 30% revenue
growth, driven by strong demand from cotton and
sugarcane farmers. We continue to believe that MIS is a
multi-year investment theme and that 20-25% revenue
CAGR is achievable over the next five years. 2) Agro
processing business reported 86% revenue growth YoY
(115% growth in Mango pulp and 28% growth in
dehydrated onion business). 3) Export growth for F1Q12
was strong at 23% (15% organic). 4) According to
management, order book position is strong (up 15-20%
YoY with MIS ~Rs5bn, Food processing ~Rs3bn and
Pipes ~Rs1bn). 5) Management remains laser focused
on working capital efficiencies, we believe. MIS gross
receivables reduced by 20 days qoq in F1Q12 (now at
349 days) and management expects to reduce it further
by 40-50 days over the next two quarters.
Key Negatives: 1) EBITDA margin in MIS business
declined by 100bp, driven by the increase in polymer
prices. We believe that the company has sufficient
pricing power to maintain margins within the historical
band. 2) Interest costs increased 58% yoy and 11% qoq
(8% above our expectations), driven by higher working
capital and increase in borrowing costs. According JI, a
combination of faster subsidy disbursements by state
governments, increased upfront payment from farmers,
and the proposed NBFC will likely help constrict overall
working capital for F12. 3) Pipes business revenue and
profit growth of +5% and -8% were lower than our
expectations of 15% and 2%, respectively.
Update on Proposed NBFC: 1) JI has approached the
regulator (The RBI) to seek permission to setup the NBFC and
expects NBFC to start operations by the end of F3Q12. 2)
According to management, shareholding for NBFC over the
next 18 months is likely to be ~40% with JI, 10% with IFC (part
of World Bank), 20% with promoters and 30% by financial
institutions. 3) NBFC roll out is likely to be in phased manner,
starting from the state of Maharashtra. 4) Management expects
to contribute Rs1bn into NBFC for JI’s equity stake (~40%) in a
phased manner, i.e., Rs0.5bn in F2011 and the balance in
F2012. 5) Management expects NBFC to fund JI’s receivables
worth Rs3-5bn by the end of F2012.
Other key takeaways from the results conference call: 1)
Gross debt remained flat sequentially (~Rs21-22bn). 2)
Management has planned capital expenditure of Rs3.5-4bn for
F2012.
Domestic MIS business: Overall growth of 30% YoY. Key
states contributing to the growth were Rajasthan (9x),
Himachal Pradesh (6x), Karnataka (4x) and Gujarat (+176%).
Agro processing: Agro-processing business had strong
revenue growth of 86% YoY, driven by both pricing and
volumes. Food processing margins (28.3%) were 400bp higher
than our expectations, driven by better absorption of fixed
costs and low-priced inventory. According to management,
Coke India’s off-take for fruit processing in F1Q12 was strong
(+114% YoY).
Plastic Pipes: Pipes revenue grew by 5% (MSe 15%) with
EBITDA margins at 8.2%, largely in line with our estimates.
Valuation –Methodology: We value JISL using our
residual income model in arriving at one-year forward intrinsic
value for Jain Irrigation at Rs250 per share, with a terminal RoE
of 18% and cost of equity of 13.1%.
Key Downside Risks: 1) Spike in polymer prices. 2) Lower-
than-expected growth in new states for MIS. 3) Faster-than-
expected increase in competitive activity. 4) Deterioration in
overall working capital management.
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