Jain Irrigation: Happy days are here again

Higher govt allocation to its market is a positive; efforts to enhance cash flow and lower debt levels are paying dividends

The Street is increasingly turning positive on Jain Irrigation Systems, after many events. The most recent one was the Union Budget, which proposed to raise the allocation on micro irrigation systems (MIS) by 21 per cent, to Rs 1,560 crore, for FY15. This means more opportunity for companies like Jain.

In an under-penetrated MIS market, Jain Irrigation is the largest entity. Its MIS business has been growing robustly (20 per cent in FY14), a trend the company hopes will sustain in FY15. Fear over the impact of the central government cutting subsidies are overdone. Analysts say the move will bring more farmers under MIS (a gain for Jain, while state governments have said they’d compensate for the cut.

Jain Irrigation also manufactures PVC and HDPE pipes (90 per cent used for agricultural purposes, account for a fourth of company revenue) and solar pumps; it also has presence in food processing. Given the new government’s thrust on agriculture, Jain Irrigiation, present across the value chain (including a finance business to fund farm equipment) stands to gain.

Schemes to enhance irrigation and water supply to villages will help the pipe business, which reported a revenue decline in March quarter.

And, the effort to improve its working capital cycle and to conserve cash has started paying good dividends. In recent years, its business was hit because of a high subsidy burden (receivables from government/farmers) leading to higher working capital requirements and, in turn, increased debt. However, receivables 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 per cent of sales, helping conserve cash.

This has been aided by focus on cash-and-carry. In a recent note, Axis Capital analysts said 75 per cent of Jain’s MIS business revenue is from the cash-and-carry model. Thus, any delay in subsidy payment by the government is borne by farmers directly. As a result of the initiatives, cash from operating activities improved to Rs 930 crore in FY14, as against a mere Rs 346 crore in FY13. With these efforts, reliance on debt has reduced and analysts believe on rising income, debt will start to fall in the years to come.

“We remain positive on Jain Irrigation’s improving growth visibility and cash conversion cycle for MIS, which will deleverage the balance sheet (debt-equity ratio might decline from 1.7 in FY13 to 1.2 in FY16)," said Hemant Patel, analyst, Axis Capital. As the situation improves, it will not only ease concerns regarding debt but result in significant improvement in earnings over the next two years.

Axis believes the company’s adjusted net profit is likely to increase from Rs 132 crore in FY13 to Rs 380 crore by FY16, due to lower interest burden. Earnings per share will see similar growth, moving up from Rs 2.9 to Rs 8.4. Considering the turnaround in the business and strong growth in earnings, analysts believe the stock could get re-rated in the coming months. Even as it has more than doubled from Rs 47 in August last year to Rs 106 currently, it is trading at 12.6 times its FY16 estimated earnings, reasonable when based on historical valuations.

With renowned investor Shivanand Mankekar recently buying 1.85 per cent stake in the company, it adds to the confidence.