Improving metrics drive Jain Irrigation up 65%

Working capital cycle, receivables seen improving, as demand for drip irrigation picks up

Through the past two years, the private sector's working capital cycle has been disrupted, as the government cut payouts to curb its fiscal deficit. With a new government taking charge, it is expected the dues of such companies will be cleared soon.

The revenue of the world's second-largest micro-drip irrigation systems (MIS) company, Jain Irrigation, has declined 10 per cent through FY12-FY14, as states have inordinately delayed subsidy payouts. Analysts believe there are several triggers for the company, clearance of dues being the first.

The Centre contributes 40 per cent towards the subsidy to farmers for micro-drip irrigation; states contribute 10 per cent. Jain Irrigation's working capital cycle has seen major upheaval, as the company hasn't received its subsidy dues from states such as Tamil Nadu, Karnataka and Andhra Pradesh. In FY12, these three states contributed 21 per cent to the company's revenue, against eight per cent in FY14. Analysts expect the share of these states to further decline to three per cent of the overall revenue from the micro-drip irrigation segment.

Motilal Oswal Securities expects growth in FY14-FY16 to be driven by higher contribution from states such as Maharashtra and Gujarat, whose revenue contribution is expected to increase from 47 per cent in FY14 to 53 per cent in FY16.

The company has benefited by setting up a non-banking finance company that lends to farmers to buy drip-irrigation systems. This has helped the company improve its receivables cycle, instead of waiting for the government to pay the subsidy amount. Receivables from micro-drip irrigation systems (gross) stood at Rs 1,089 crore at the end of March this year, an improvement of eight days (days outstanding) compared to December 2013. The company's micro-drip irrigation systems receivables declined from 265 days in the third quarter of FY14 to 257 days in the fourth quarter.

Along with the payment cycle, the working capital cycle has also improved. With receivables outstanding seeing a fall, Deutsche Bank Market Research expects the company's interest costs to fall 100 basis points on credit rating upgrades. Besides, the company is also expected to benefit from regulatory changes. The Maharashtra Water Resources Authority has made use of drip-irrigation mandatory for farmers growing cash crops. For this, the government is expected to spend Rs 1,200 crore on subsidies. This will benefit companies such as Jain Irrigation.

The Bharatiya Janata Party's manifesto mentioned promotion of irrigation techniques that required less water.