Stock Review: Jain Irrigation Systems

 

The recent dip in Jain Irrigation's valuations appears temporary, offering long-term investors a good entry opportunity

 

   A dampened December 2010 quarter, doubts over its new initiatives and removal from the MSCI index have brought down Jain Irrigation's valuations recently. Globally, high food prices and the government's focus on improving farm productivity mean the company's future growth prospects remain intact. Long-term investors should seize the opportunity to buy into this scrip, particularly when it is available cum-bonus.

BUSINESS:

From being a PVC pipes maker, Jalgaon, Maharashtra-based Jain Irrigation Systems (JISL) has come a long way to emerge as India's leader in micro-irrigation equipment with around 50% market share.

   Today, the company is totally focused on Indian farmers and produces tissue culture plants, hybrid seeds, greenhouses, solar water heaters and lanterns, among others. It has also emerged a leading processor of mangoes and onions.

   In FY10, nearly 48% of its revenues came from micro-irrigation systems, 38% from PVC pipes and sheets and 14% from fruit pulps and dehydrated onions. The company's micro-irrigation business is dependent on the government's subsidy scheme under which more than 50% of the cost for setting up a micro-irrigation system is borne by the government. However, delays in government disbursals have resulted in bloating the company's working capital and higher interest burden over the past few years.

GROWTH DRIVERS:

The 4% annual growth target for agriculture in the Eleventh Plan period as well as high food prices have driven the government's focus on various financial assistance schemes towards boosting productivity of the Indian agriculture. Even today, nearly half of arable land in India is rainfed. In June 2010, the government upgraded its erstwhile micro-irrigation scheme (MIS) to a National Mission on Micro Irrigation, which is expected to boost the convergence of micro irrigation activities under various other government programmes such as National Food Security Mission (NFSM), Integrated Scheme of Oilseeds, Pulses, Oil Palm & Maize (ISOPOM) etc for increasing water use efficiency, crop productivity and farmers income.

   The Union Budget for FY12 also increased allocation for Rashtriya Krishi Vikas Yojana (RKVY) by 16%, which included a 15% rise in allocation for micro-irrigation to 1,150 crore. Similarly, the Budget has planned for 27% jump in farm credit at 4,75,000 crore during FY12. It also increased the interest subvention to 3% reducing the farmers' effective cost of debt to just 4%. All these schemes are set to maintain robust demand for micro-irrigation projects in the country in the coming years.

   The company is trying hard to bring down its debt burden and lower the impact of interest costs, which ate away nearly 28% of its gross profit in 12-month period ended December 2010. It is planning a $150-million preferential equity issue and setting up an NBFC, which can finance farmers for buying micro irrigation equipment in future. Apart from repaying debt and funding NBFC, a part of the amount raised will also be invested in boosting its solar equipment business. The company's success in bringing down its debt will boost its profits in future.

FINANCIALS:

The company's net sales have grown at a cumulative annualised growth rate (CAGR) of 24.6% in the past five years, while the profit grew at 37.5%. In the December 2010 quarter, the company's operating performance weakened due to delayed rains. The company booked 38.9 crore of VAT refunds during the quarter, in accordance with an Industrial Promotion Scheme of the state government.

   The company's debt stood at 2,200 crore as at the end December 2010 or a debt-equity ratio of 1.5. The company has a history of healthy cashflows. Its board has proposed a bonus issue of shares with differential voting rights in 1:20 proportion.

VALUATION:

The scrip is currently trading at a price-to-earnings multiple of 23.5, which is lower on a historical perspective. The scrip traded at an average P/E of 34.6 during 2010, at 31.9 during 2009 and at 25.6, 29.1 and 24.7 in the preceding three years. In view of the company's continued bright growth prospects, the valuations appear attractive.