Restructuring to tackle working capital woes

Jain Irrigation stock is down 20 per cent in the current year due to concerns over high debt, increase in working capital and the recent announcement that it is setting up a non-banking financial company (NBFC). Though these issues will have a bearing in the near term, easing working capital requirements, reduction in debt and improvement in cash flows will enable it to post better numbers over the medium term. Importantly, the stock is trading at 10 times its FY13 earnings despite a 40 per cent annual earnings growth over the next two years. Hemant Patel, executive director, (Consumer) at Enam Securities says improving revenue visibility, reduction in leverage and launch of a NBFC will trigger a re-rating of the stock.

WORKING CAPITAL WORRIES
The biggest concern for Jain Irrigation is bulging working capital needs which in turn increases the total debt. The micro irrigation systems which account for 80 per cent of revenues attract government subsidy ranging from 50-70 per cent. These subsidies, which stand as receivables in the books of the company, are realised with a gap resulting in huge requirement of funds also known as working capital funding.

Analysts estimate that of its net working capital requirement of about Rs 2,000 crore in FY11, receivables make up nearly 40 per cent. This is one of the reasons for its mounting debt. A change in receivables could make huge interest cost savings and improve cash flows leading to better earnings.
  

STRONG EARNINGS GROWTH
(In Rs crore)	FY11E	FY12E	FY13E
Revenue	4,069	5,017	6,118
OPM (%)	19.4	20.0	20.4
Interest	255	300	301
Net profit	276.8	386.4	542.4
Net working cap	2,069	2,334	2,624
Debt/equity (x)	1.8	1.7	1.3
EPS (Rs)	7.2	10.0	14.1
PE (x)	24.7	17.8	12.6
Note: E= estimates; (x)= multiple             Source: ENAM Securities

Commenting on his current loan position of Rs 3,000 crore, Anil Jain MD and CEO, Jain Irrigation, says the company will be able to realise Rs 400 crore in the form of receivables this year. In addition to this, the start of its NBFC operations should bring down our requirements by Rs 1,000 crore. Once the company’s NBFC becomes operational (within 6-8 months) it will reduce its dependence on the government receivables which comes in the form of subsidy given to farmers. The NBFC will have initial capital of Rs 200 crore and in which Jain Irrigation will invest about Rs 80 crore. The NBFC in turn will leverage these funds and provide finance to farmers effectively reducing the debtors from the Jain Irrigation balance sheet. However, major benefits of this restructuring will accrue from FY13 onwards.

Meanwhile, Jain Irrigation’s core micro irrigation segment continues to enjoy robust growth. The segment has been a beneficiary of government’s efforts in penetration of micro irrigation in the country to improve crop yield and productivity. Currently 4-5 million hectares come under drip irrigation as compared to the potential of about 45 million hectare, believe experts. This is also a reason that given its positioning and market share of about 57 per cent there are enough opportunities for the company to grow in the long run.