Mumbai: The Street is significantly turning positive on Jain Irrigation Systems following a host of events. The most recent is the Budget, which has suggested improving allocation on micro irrigation systems (MIS) by 21 per cent to Rs 1,560 cr for FY15. Higher allocation means more opportunity for companies like Jain Irrigation. In an under-penetrated market for MIS, Jain Irrigation is the largest player with greater achieve.
Actually, its MIS business has been growing robustly (20 per cent in FY14), a trend the company hopes will sustain in FY15 as well. Fears over the effect of central govt cutting subsidies from 50 per cent to 35% are also overdone. Experts say while the move will bring in more farmers under MIS (gains for Jain Irrigation), state governments have also agreed to compensate for the cut in subsidy rate.
Jain Irrigation also manufactures PVC & HDPE pipes (90% used for agri purpose; accounts for a 4th of company’s revenues) and solar pumps, and has presence in the food processing business. Given the new government’s thrust on agriculture, Jain Irrigation which is present across the value-chain (including finance business to finance farm equipment) stands to gain. Schemes to enhance irrigation & water supply to villages will help the pipe business, which reported a revenue decline in March quarter.
On the other hand, the company’s attempt towards enhancing its working capital cycle & conserving cash has also started paying good dividends. In the last few years, its business was hit because of high subsidy burden (receivables from government/farmers) leading to higher working capital requirements and in turn improved debt. However, the receivables days have come down to 114.4 days in FY14 as against 145.1 in FY13. In this period, the working capital has fallen from 60 per cent to 50% of sales, helping conserve cash.
This has been aided by focus on cash-and-carry business. In a recent note, Axis Capital experts said that currently, 75% of Jain Irrigation’s MIS business revenue is from the cash-and-carry model. Therefore, any delay in subsidy payment by govt is borne by the farmers directly. As a result of the initiatives, cash from operating activities has enhanced to Rs 930 crore in FY14 as against a mere Rs 346 crore in FY13. With these efforts, reliance on debt has decreased & now experts believe that on increasing income, debt will start to fall in the years to come.
“We remain positive on Jain Irrigation’s enhancing development visibility & cash conversion cycle for MIS, which will deleverage balance sheet (debt-equity ratio may decline from 1.7 times in FY13 to 1.2 times in FY16)”, said Hemant Patel, expert, Axis Capital. As the situation improves, it will not only ease concerns regarding debt but also result in important enhancement in earnings over the next 2 years.
Axis Capital believes that the company’s adjusted net profit is likely to improve by 3 times from Rs 132 cr in FY13 to Rs 380 crore by FY16 due to lower interest burden. In this period, the earnings per share, too, will see related growth moving up from Rs 2.9 to Rs 8.4. Considering the turnaround in the business & strong growth in earnings, experts believe that the share could get re-rated in the coming months. Even as it has more than doubled from Rs 47 levels in August last year to Rs 106 currently, it is trading at 12.6 times its FY16 estimated earnings, which is reasonable based on historical valuations. With renowned millionaire investor Professor Mankekar recently purchasing 1.85 per cent share in the company, it only adds to the confidence.
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