Jain Irrigation Systems stock attracts cautious optimism

After a dismal FY12 and June quarter, the management of Jain Irrigation Systems Ltd (JISL) has taken steps such as setting up of a non-banking financial entity and raising $200 million (Rs 1,100 crore) to improve its financial health (read de-leverage the balance sheet).

At the annual general meeting on September 21, shareholders approved the issue of 750,000 warrants to promoters (Anil Jain and Atul Jain) at Rs 86.3 a piece, which is a 25.6 per cent premium to its current market price of Rs 68.7. The move indicates confidence of the management in its efforts to improve the financial performance, going forward.

Analysts, however, remain cautious as the process will take time. Meanwhile, the stock, which is close to its three-year-low level of Rs 67.8 (touched on August 28), provides good entry for investors with a horizon of more than a year.

Efforts to improve financial health
In the last 1-1.5 years, the company’s financial performance has been affected by delayed government receivables, increasing leverage and currency volatility. In this backdrop, the management's focus on achieving capital efficiency, improving cash flows and de-leveraging balance sheet is positive.

Setting up of an NBFC (launch in the next few months) is the biggest step towards achieving this and it will help resolve dependence on government subsidies over the long term. Meanwhile, the receipt of government subsidies has gained momentum and the company expects significant improvement in the rest of FY13.

The fund-raising exercise (mix of debt and equity) is aimed at cleaning up the balance sheet (including repayment of high-cost short-term loans of the company and its subsidiaries and long-term loans due in FY13), reduce interest cost and balance currency exposure with long-term maturities. The company will also use the funds for equity investment into the NBFC.

Hence, investors can expect better gearing and reduced interest costs. Arya Sen, analyst, Jefferies, expects the company’s net debt to equity to reduce to 1.3 times from the current two times on capital infusion.

Anil Jain, managing director of the company expects a reduction in interest cost to the extent of Rs 80-100 crore as most of the funds (Rs 800-900 crore) will be used to retire high-cost debt (carrying an interest rate of 13-14 per cent). However, this will also lead to a dilution of 13 per cent in equity.

Downgrades continue
The company’s subsidiaries (20 per cent of consolidated revenues) continue to be loss-making entities. The benefits of setting up the NBFC will also be visible only from FY14. Thus, analysts welcome the company’s initiatives, but foresee lot of uncertainty amid the optimism.

Says Swati Nangalia, analyst, IDFC Securities Research, “Pain in the business is expected to remain for next few quarters.”

Meanwhile, on September 21, India Ratings downgraded the national long-term ratings on the company from BBB to BB+ reflecting the company’s stretched liquidity position; thanks to greater-than-expected delay in infusion of funds (now to happen in the December quarter). It has also placed it on Rating Watch Negative (RWN) reflecting refinancing risks for the company regarding major repayments due in FY13 (Rs 370 crore) and FY14 (Rs 500 crore) on a consolidated basis.

While JISL has made significant progress in arranging funds to reduce its refinancing risks, uncertainty remains regarding the timing and terms of the capital infusion, it says. The RWN will be reviewed in December 2012 end depending on whether capital infusion happens or not. Morgan Stanley also downgraded the stock from ‘overweight’ to ‘equalweight’ in early September and lowered its target price by 23 per cent to Rs 85. Clearly, its time for action for Jain Irrigation.