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.
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.
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.