October 7, 2011

JAIN IRRIGATION SYSTEMS LIMITED (JISL)

Reiterating- BUY

Analyst Rajiv Bharati

rajiv.bharati@destimoney.com

JISL Reiterating BUY with a target upside of 20%

BUY
TARGET : `162 CMP : `135

Key Data Ticker (Bloomberg) NSE Code BSE Code Sector Industry Face Value (`) Book Value per s hare Dividend Yield (%) 52 Week Range (`) Market Cap. (` mn.) JI JISLJALEQS 500219 Agriculture Irrigation & Food Processing 2 41 0.7% 128.5-246.8 51,568

(In ` m n) Net Sales EBITDA EBITDA Margin EPS (`) EV/Sales EV/EBITDA P/E (x) Price Performance Absolute Relative

FY10 34,200 5937 17.4% 6.5 2.1 12.0 20.8 CY08 -46% 6%

FY11 41,528 7659 18.4% 7.4 1.7 9.3 18.4 CY09 154% 78%

FY12E 53,458 9405 17.6% 9.5 1.3 7.6 14.2 CY10 21% 3%

FY13E 64,865 11472 17.7% 14.1 1.1 6.2 9.6 YTD -35% -15%

Shareholding Pattern (as of Jun 30, 2011)

Bodies Corporate 5% FIIs 55%

Relative Stock Performance (Oct'10=100)

115 100 85 70

Individuals 6%

Others 1% MF/UTI 2% Promoter 31%

55 Oct-10 Jan-11 Mar-11 NIFTY Jun-11 JISL Sep-11

Source: Company, Bloomberg, Destimoney Research

NBFC model not as treacherous at it sounds

JISLs decision to address the problem of rising gross receivables due to delay in receipt of subsidy from govt by setting up an NBFC is a potent solution with a few regulatory and execution related riders. Securitization of the loans given to farmers is eligible to be considered as Priority Sector Lending and hence will reduce the cost of funds for the NBFC which will percolate to farmers in the form of reduced interest burden. Stretched balance sheets of competitors will also inspire them to follow suite if the model gathers momentum. Acceptance of upfront discount on the MIS equipments to negate the interest to be paid by the farmer in case of delay in release of subsidy by the govt is a major determinant in the success of the above solution. During Q1FY12, MIS grew at a robust 30% YoY while Agro processing segment grew by 86% on the back of strong Fruit Pulp processing. Operating margins for MIS shrunk by 100 bps at 30.3% while Agro Processing segment witnessed 300 bps margin at a YoY level. Proposed `7bn QIP to fund the future capex plans remains an overhang as the stock is trading way below the managements comfort level to float the issue. We feel business at large is still robust and NBFC model will iron out the current short term cash flow worries as well. Hence, we reiterate BUY on JISL with a target price of `162 per share.

Increased subsidy and lower allocation to key states are primarily responsible for rising gross receivable

Gross MIS Receivable Days

379

(in days)

310

310

Management aims to bring down the receivable days to 310 days in current fiscal owing to prompt clearance from some of the laggard states

250

2009

2010

2011

2012E

Source: Company

Some of the states have increased the subsidy to promote MIS (from 50% to 65%) which has resulted in delayed cash flow for JISL. Also, states like Maharashtra and Andra Pradesh which contribute sizeable part of JISLs revenue have had lower allocation from central govt, resulting in delay in payments. With implementation of the national mission mode, Maharashtra and Andhra Pradesh have got additional allocations and these extraordinary receivables from these states to the company will help bring down the working capital days for JISL.

In the new model the company is shifting the burden of delay in subsidy payment on farmers in the form of interests coupons to NBFC

Old Mechanism

New Mechanism

JISL
Upfront part payment from farmer MIS equipment Upfront part payment from farmer MIS equipment

JISL
NBFC will provide funding to farmer for subsidy amount

Farmer
Farmer assigns subsidy amount to JISL

Farmer

NBFC
Interest coupons in case of delay in subsidy release by govt Farmer assigns subsidy amount to NBFC

Government Government

Source: Company

New mechanism is expected to become operational by the close of FY12

Management expects license from RBI to float the NBFC to come by Q3FY12. The structure of the NBFC would be Year 1: Equity base `800 mn JISL (max 49%), IFC(10% ), Promoters (balance) Year 2 onwards: Equity base `2,000 mn JISL (40%), IFC(10% ), Promoters (20%), Others (30%) Though operating margins are expected to come under pressure due to the upfront discount offered by JISL to negate the interest cost to the farmer, but we expect reduction in interest burden on JISL will compensate for the same.

Margins are stable as all the segments are growing at steady pace

Revenue Contribution (FY11)

Piping Systems 23% Plastic Sheets 4%

EBITDA Contribution (FY11)

Piping Systems 16%

Plastic Sheets 3% Micro Irrigation Systems 75%

Micro Irrigation Systems 56%

Agro Processed Products 14% Other Products 3%

Agro Processed Products 6%

Standalone
60% 45% 30% 15% 0% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Source: Company

MIS as % of Total Revenue

Operating Margin %

Increased subsidy by several state govts coupled with implementation of mission mode to spur the growth with improved working capital situation

Standalone
24000 18000 (in Rs. mn) 12000 6000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012E Micro Irrigation Sales (LHS) Sales Growth% (RHS) 100% 75% 50%
124000 250000 208000 166000 54% 50% 45% FY08 FY09 FY10 FY11 63% 59%

25% 0%

82000 40000

Capacity (MTPA) (LHS)

Capacity Utilization% (RHS)

JISL added 53,060 MT of MIS capacity in FY11 bringing it to 212,410 MT. The company is in process of setting up a plant in Alwar (Rajasthan) to cater to the Northern market. With this the capacity will be augmented by another 8%. In addition to exploring newer territories like Bihar, Himachal Pradesh and Rajasthan the company is also enlarging its crop variety base. The recent development being in cotton and rice which are undergoing trials.
Source: Company, Destimoney research

* MTPA stands for Metric Tonnes per annum

Steady growth in MIS and seasonal spurt in agro processing business

Revenue Break up (Q1FY12) - Standalone

(In ` m n) MIS PVC Pipes PE Pipe PVC Sheets PC Sheets Fruit Processing Onion Dehydration 1,140 332 Q1FY12 4,867 1,790 686 408 Q1FY11 3,739 1,731 624 379 72 531 259 115% 28% %Change 30% 3% 10% 8% FY11 16,992 6,068 3,399 1,402 561 3,252 1,427 2,845 1,464 14% -3% FY10 13,026 5,252 3,167 1,159 %Change 30% 16% 7% 21%

EBITDA Performance(Q1FY12) - Standalone

Q1FY12 MIS PVC Pipes PE Pipe PVC Sheets Fruit Processing Onion Dehydration Total 30.3% 8.2% 8.0% 5.4% 28.4% 28.0% 22.9% Q1FY11 31.3% 9.0% 10.1% 10.3% 27.3% 21.2% 22.4% Change (bps) (100) (80) (208) (490) 111 678 52 FY11 30.8% 7.7% 9.2% 7.3% 17.7% 6.1% 20.8% FY10 31.4% 8.5% 12.2% 10.9% 19.9% 10.5% 21.5% Change (bps) (67) (83) (298) (352) (222) (435) (64)

Higher crude prices as compared to last year has resulted in margin shrinkage in plastic sheet and pipes segment. Q1 being the season of Mango processing there has been substantial rise in sales. Also good availability of Totapuri variety unlike last year drove the margins. Cheaper procurement of Onions as compares to last year has resulted in sharp rise in Onion dehydration margins.
Source: Company

We reiterate BUY on Jain irrigation with a target price of `162 per share

We expect further faster clearance by some of the laggard states and implementation of NBFC to help improve the cash flow situation. Also, expanding in the largely small unorganized player dominated unharnessed northern India belt will help the company to grow faster. The stock is trading at 14.2 and 9.6 times its FY12 and FY13 earnings. We reiterate BUY on JISL with a target price of `162 per share.

Relative Stock Performance (Oct'10=100)

115 100 85 70 55 Oct-10 Jan-11 Mar-11 NIFTY
FY10 EPS (`) P/E (x) P/B (x) ROE ROCE EV/EBIDTA (x) 6.5 20.8 4.2 20.3% 6.7% 12.0

Jun-11 JISL
FY11 7.4 18.4 3.3 18.0% 6.1% 9.3 FY12E 9.5 14.2 2.7 18.9% 7.3% 7.6

Sep-11

FY13E 14.1 9.6 2.1 21.9% 10.8% 6.2

Source: Bloomberg, Destimoney Research

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Financial Summary

Income Statement - Consolidated

(In ` mn) Net Sales Operating expense EBIDTA Depreciation EBIT Interest EBT Other Income PBT Tax PAT Margins Sales Growth % Operating Margin % Net Margin % FY10 34,200 28,263 5,937 1,020 4,917 2,194 2,724 197 2,920 1,203 1,717 19.6% 17.4% 5.0% FY11 41,528 33,870 7,659 1,216 6,443 2,717 3,726 274 4,000 1,201 2,799 21.4% 18.4% 6.7% FY12E 53,458 44,053 9,405 1,422 7,983 2,690 5,293 5,293 1,482 3,811 28.7% 17.6% 7.1% FY13E 64,865 53,393 11,472 1,605 9,867 2,115 7,752 7,752 2,195 5,557 21.3% 17.7% 8.6%
(In ` m n) Liabilities Equity Share Capital Share Warrants Reserves & Surplus

Balance sheet - Consolidated

FY10 783 11,609 (225) 24,447 571 1,024 9,323 687 48,220 FY11 771 348 14,439 29,888 524 1,239 15,604 720 63,533 FY12E 771 348 18,066 29,888 524 1,239 20,314 1,069 72,219 FY13E 771 348 23,439 24,888 524 1,239 20,757 1,297 73,263

Accumulated Translation Reserve Loans Minority Interest Deferred Tax Liability Current Liabilities (CL) Provisions Total Assets Gross Block + CWIP Accumulated Depreciation Fixed Assets Investments Goodwill Deferred Tax Asset Current Assets (CA) Total

22,925 6,667 16,257 211 1,666 414 29,672 48,220

28,110 8,044 20,066 211 1,716 577 40,962 63,533

30,249 9,466 20,783 211 1,716 577 48,931 72,219

34,139 11,071 23,069 211 1,716 577 47,689 73,263

Source: Company, Destimoney Research

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Key risks

Any delay in securing NBFC license and floating the NBFC will act negatively to the already deteriorated cash flow. QIP issue at current levels will cause greater dilution of equity. The business propels on the subsidy provided by GoI. Any cut in the subsidy by GoI will have a direct impact on JISLs business Piping and sheets business are very sensitive to polymer prices Whole business is pivoted around micro irrigation technology and hence the company is vulnerable to the technology becoming obsolete or it may lose out to a cheaper technology providing the same benefits Convincing the farmers to switch from traditional irrigation to MIS usage is time consuming. Most farmers are averse to be the first mover and tend to wait for their peers to switch first. There is a slight possibility of various countries banning imports into their countries which might impact the business of JISL.

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