FERTILE GROUND FOR GROWTH

After the new government took over the reins at the Centre there has been optimism about revival in the growth prospects of Indian economy. Be it the manufacturing, services or agriculture, the new government has plans to revive all the three important segments of India’s GDP growth. While for manufacturing and services, plans have been scripted already, for agricultural growth, it is largely dependent on arrival of monsoon. If investors can recollect, on the monsoon front, we have been consistently updating our investors about the possibility of El Nino affecting rain arrival and also the possibility of below long-term average rains this year. There are early indications of this already, with the IMD announcing that till June 24 there was a deficit of 38 per cent as against the long-term average. In one of our preceding reports on El Nino impact, we had categorically indicated some of the counters that may get benefi tted if El Nino fears come true.

One counter among those stocks was Jain Irrigation Systems (JISL). With initial indications about deficit in rainfall, the stock has witnessed a good momentum on the bourses in the last two months. With a good run-up on the bourses, even the investing fraternity is curious about whether the stock still has some steam left in it, or the best has already been discounted in the price. We present below a thorough analysis of the company for the benefit of our readers.

UNDERSTANDING THE BUSINESS

 JISL manufactures a number of products, including drip and sprinkler irrigation systems, PVC and PE piping systems,plastic sheets, green houses, bio-fertilizers, solar products including water-heating systems, photovoltaic appliances and solar pumps. JISL also processes fruits and vegetables into aseptic concentrates, frozen fruits and dehydrated vegetables, respectively. Overall, it has 21 manufacturing plants spread over 5 continents and its products are supplied to 110 countries through 3,000 dealers and distributors worldwide. JISL has built unparalleled soft infrastructure which is a biggest entry barrier for others. Th e soft infrastructure has been built by maintaining strong networking with farmers, which is helping it to continue its journey on the growth path, especially in rural India. JISL also has a strong supply chain within and outside India. While domestic business contributes 72 per cent, international business contributes 28 per cent to its topline.

DELAYED MONSOON- NOT THE ONLY FACTOR….

While analysing JISL, one fact that came to the fore was that delayed monsoon is not the only factor that has helped the counter surge on the bourses. Th ere are various other factors that are expected to be positive. Th e fi rst and the foremost being the working capital situation is set to improve due to shift in favour of JISL’s NBFC-based model. With a focus on progressive states and switch to a NBFC-based model, we expect the working capital concerns to recede over the next two fi scals. Policy impetus from the new government in the form of direct credit of subsidy ora reduced working capital model on the lines of GGRC can be potential game changer events. We have discussed these issues in detail going ahead in the story.

DIRECT CREDIT OF SUBSIDY BY CENTRE– A BIG POSITIVE

Micro irrigation system (MIS) industry’s growth has been adversely impacted over the last two years due to delay in payments at the state level. Centre contributes 40 per cent towards subsidy for MIS while states contribute another 10 per cent towards subsidy, taking the total subsidy for MIS to 50 per cent. As majority of the subsidy contribution is from the Centre, direct release of subsidy by the Centre in favour of the farmer can substantially reduce the payment delays associated with the states.

WORKING CAPITAL SITUATION LIKELY TO IMPROVE

JISL’s management has moved away from doing business in Tamil Nadu (TN), Karnataka and Andhra Pradesh (AP) due to substantial delays in payments. As a result, revenue contribution from these states has declined from 21 per cent in FY12 to 8 per cent in FY14 and is further slated to decline to 3 per cent of total MIS revenue in FY16. Management has stated that growth over the next two years will be driven by higher contribution from progressive states like Maharashtra and Gujarat, whose revenue contribution is expected to increase from 47 per cent in FY14 to 53 per cent in FY16. Apart from increasing the business in progressive states, JISL is focusing on NBFC-based model wherein payment to the dealers will be made instantly by the farmer and farmer’s fi nanciers. JISL-owned NBFC SAFL or banks will typically act as fi nanciers to farmers for the subsidy portion. Th ese actions, in our view, will collectively ease concerns on working capital for its MIS business. Th us, we expect a signifi cant improvement on gross debtor days in MIS business. Currently, 30 per cent of all MIS business in Maharashtra is being carried out though the NBFC route.

MIS – BIG GROWTH OPPORTUNITY

JISL is the largest player in India’s organized micro irrigation sector, with a dominant market share of 55 per cent. Th e second largest player with a 20 per cent market share is Netafi m, which is the global leader in MIS. We are of the opinion that penetration of MIS is lowest in India at 3.5 per cent as against global penetration of 14.4 per cent, thus providing strong growth potential. MIS remains a key thrust area for the government with subsidies ranging from around 45-70 per cent and budget allocation to MIS having grown at 26 per cent CAGR over FY09-14 to `1,690 crore.

PVC PIPES -LOGICAL EXTENSION OF JISL’S MIS BUSINESS

JISL, with a 15 per cent market share, is the second largest player in the organized market, off ering pipes in 20mm to 560mm diameter range. JISL has a domestic market share of 35 per cent in polyethylene (PE) pipes business, with a sheer domination in gas distribution business. Th e Centre’s allocation of `2,30,000 crore on water management and `5,00,000 crore in the 12th Five Year Plan is expected to provide signifi cant growth opportunities for rigid PVC pipes manufacturers in India. Th ough there is competition from unorganized players, post the implementation of GST, we feel that the pricing diff erence between organized and unorganized players will not be signifi cantly diff erent, which will allure customers to choose quality over price.Capacity utilization is also likely to increase over the next two year, helping the company notchup better margins.

FOOD PROCESSING – ANOTHER PROMISING OPPORTUNITY

 JISL is India’s largest player in the food processing sector, with a market share of about 30 per cent and is the third largest in the world. Its food processing business is involved in processing of onion, vegetable dehydration and fruit processing. JISL’s extensive experience and high involvement with the farmers has given it an edge in the most crucial aspect of the food processing business – sourcing. JISL is India’s largest player in the food processing sector with a market share of around 30 per cent and is third largest in the world. Th e world dehydrated onion (DHO) market is around 180,000 MTPA growing at around 4-5 per cent. JISL is India largest and world’s third largest player in onion dehydration space. It has seven per cent of world market share in DHO market. With acquisition of Cascade Specialities Inc, JISL has established its manufacturing presence in the US.JISL is involved in the processing of fruits like mango (80 per cent), guava, papaya and tomato. India is the largest producer of mangoes with a 60 per cent share of the world market. JISL is the largest producer of mango pulp, puree and concentrate in the world, with 35 per cent of the world production. We feel this segment provides a good growth opportunity going ahead.

INTERNATIONAL BUSINESS MARGINS TO IMPROVE

Led by acquisitions, JISL is now the second largest MIS player globally with a market share of 20 per cent as against 30 per cent market share held by Netafi m. International MIS profi tability is set to climb on the back of new initiatives. JISL is increasingly sourcing more MIS products from low cost centres such as India to cater to international markets, which is expected to drive profi tability. Also, JISL is actively working on more project business (10 per cent of revenue) in places like Latin America where margins are higher. Further, JISL’s greenfi eld capacity in Turkey is expected to ramp up revenue over the next couple of years, thus translating into better profi tability from Turkish operations. Management expects overseas business profi tability to improve with the current 7 per cent margins expected to expand to 12 per cent over the next 3 years

 FINANCIAL PERFORMANCE

If we take a look at the yearly financial performance of the company, it may not depict a real picture as it posted a loss of `39.79 crore in FY14. However, we have to look at the performance on quarterly basis, which has improved on YoY as well as sequential basis. For the quarter ended March 2014, it posted a consolidated topline of `1,833.28 crore and bottomline of `74.19 crore as against `1,682.07 crore and `54.69 crore respectively for March 2013 quarter. While the fi nancials are already improving, company’s debt to equity has declined from 1.6x to 1.0x as cash generated from improved working capital is utilized towards retiring of debt. Improved debt ratings helped the company reduce its cost of debt by around 200 basis points. We are of the opinion that the factors like expected macro improvement, expected improvement in margins for international markets and, most importantly,the delayed monsoon are likely to be benefi cial factors for the company. We feel the scrip has good steam left in it and hence recommend the readers to buy the counter with a target price of `150 in the next one year.