The affirmation with Positive Outlook reflects JISL's satisfactory deleveraging in the last 12 months, which is in line with our expectations. We expect JISL to be able to reduce leverage (defined as lease adjusted debt net of cash adjusted for seasonality/EBITDAR) further to around 3.5x by the financial year to 31 March 2019 (FY19) from 4.3x at FYE18 and 4.7x at FYE17, underpinned by robust growth in EBITDA. However, the bulk of the company's micro-irrigation business, which accounts for around 60% of its EBIT, is susceptible to unpredictable weather patterns and India's vulnerable agricultural sector, which may yet pose risks to the company's deleveraging.
JISL's ratings reflect its high, albeit improving leverage, and its strong business risk profile as a globally diversified producer of micro irrigation systems (MIS), a leading manufacturer and distributor of polyvinyl chloride and polyethylene pipes in India for industrial and residential uses, as well its leading position in supplying processed fruits and vegetables to leading multinational fast-moving consumer goods companies across several geographies.
KEY RATING DRIVERS
Deleveraging On-Track Despite Challenges: We expect JISL's leverage to reduce to 4.3x by FY18 supported by a boost in revenue and EBITDA from the acquisition of two US dealers of MIS products in April 2017, as well as strong growth in contracts won for projects in MIS and plastic pipes in India and overseas. We expect the rise in project revenue in total revenue to improve EBITDA margins. The demand for retail-MIS sales in India is likely to remain muted in 2HFY18 due to a gradual turnaround in domestic crop prices after a weak start to the fiscal year, as well as farmers possibly delaying spending until after the government processes their farm loan waivers.
Long-Term Structural Growth: India's low irrigation coverage and high dependence on erratic rainfall underpin the demand for JISL's micro-irrigation products. Policies such as the Indian government's Pradhan Mantri Krishi Sinchai Yojana (PMKSY) Scheme, which aims to improve country-wide irrigation access, are likely to drive the long-term growth of JISL's cash flows. In FY17 the government spent around INR20 billion to bring an estimated 840,000 hectares (ha) under irrigation, up from INR16 billion and 570,000 ha in FY16. The government estimates the PMKSY scheme will invest INR500 billion over FY16-FY20 to irrigate 7.6 million ha.
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Furthermore, JISL's pipes business stands to benefit from initiatives, such as India's Atal Mission for Rejuvenation and Urban Transformation to develop urban infrastructure such as roads, water supply and sewage services, solid waste management and storm water drains. The government of India aims to spend a total of INR500 billion as part of this scheme from FY16 to FY20. In the last 12 months JISL won orders worth INR13.3 billion in its MIS and pipes divisions in India, and at end-1HFY18, had a global project order book of INR27 billion for these divisions. The orders are typically executed over one to two years.
Cash-Flow Seasonality: JISL's sales are slower during the first half of the fiscal year than the second half, which results in a higher cash balance at the fiscal year-end of around INR1 billion on average, compared with the preceding three fiscal quarters. This is primarily because sales of MIS in India depend on the performance of the monsoon rains, which usually occur between June and September. Fitch therefore deducts INR1 billion from JISL's year-end cash balance when calculating the year-end leverage ratio to account for this seasonal variance.
Diversified Cash Flows: JISL's revenue is diversified across products and geographies, with sales outside India accounting for 45% of revenue in FY17. High-tech agricultural inputs (MIS and tissue culture), plastic pipes and food processing accounted for 62%, 15%, and 19% of operating profits, respectively.
DERIVATION SUMMARY
Fitch does not rate any of JISL's direct competitors. However JISL may be compared with companies in the diversified manufacturing segment, such as JSC HMS Group (HMS, B+/Stable) and Yingde Gases Group Company Limited (B+/Stable).
HMS is a major pump, compressor and equipment manufacturer to the oil and gas industry in Russia and CIS. Its ratings reflect the lack of diversification by customer and geography, and a low share of after-market services. The ratings factor in the group's leading market position and stable fundamentals of the oil industry. JISL has a stronger business risk profile than HMS, supported by its larger operating scale and more diversified cash flows across geographies and end-markets. As a result, JISL can support more leverage than HMS at the same rating.
Yingde provides industrial gases to customers in the Chinese steel and chemical manufacturing sectors, with a high 70% exposure to the steel sector. Risks to Yingde's credit profile from its industry concentration were evident during the industry's downturn in the last few years, although this situation has now improved. Therefore, despite Yingde's larger operating scale compared to JISL, we assess both companies as having a similar credit risk because JISL's cash flows are diversified by end-market and geography, which mitigate the risks stemming from a smaller scale. Unlike Yingde, JISL's rating is on Positive Outlook because we expect its leverage to improve in the next 12-18 months. Yingde's rating is on a Stable Outlook because there is more uncertainty around its ability to achieve the requirements for an upgrade at this point.
No country-ceiling, parent/subsidiary linkage or operating environment aspects impacts the rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions within Our Rating Case for the Issuer
- Revenue of INR79 billion in FY18 and INR87 billion in FY19
- EBITDA of INR11 billion in FY18 and INR12 billion in FY19
- EBITDA margin to remain around 14% in the next two years
- Capex of INR3.5 billion and INR3 billion respectively in FY18 and FY19
Recovery Rating Assumptions
- The recovery analysis assumes that JISL would be considered a going-concern in bankruptcy and that the company would be reorganised rather than liquidated. We have assumed a 10% administrative claim.
- We have assumed that JISL's going-concern EBITDA is equal to JISL's EBITDA in the last 12 months to September 2017 with no further discount applied. This is conservative because it does not include most of the EBITDA from JISL's April 2017 acquisitions in the US, and it does not factor in the robust EBITDA growth we expect JISL to post over the medium term. It reflects Fitch's view of a sustainable, post-reorganisation EBITDA level, upon which we based the valuation of the company.
- An enterprise value (EV) / EBITDA multiple of 6x is used to calculate the post-reorganisation valuation and we believe this is closer to a distressed multiple, considering that as of 30 September 2017, JISL was trading at a EV/EBITDA multiple of 11.3x.
- We used secured and unsecured debt (including vendor financing reclassified from trade payables as unsecured debt) as of 31 March 2017.
- We have assumed that JISL's sanctioned but undrawn lines of INR12.8 billion will be fully drawn at the point of distress, and that these lenders would have a prior ranking claim on JISL's assets ahead of bond investors.
- The recovery waterfall results in a 100% recovery estimate corresponding to a 'RR1' Recovery Rating for the USD200 million unsecured notes. Nevertheless, Fitch has rated the senior notes at 'B+' with a Recovery Rating of 'RR4' because under Fitch's Country-Specific Treatment of Recovery Ratings criteria, India falls into 'Group D' of creditor friendliness. Instrument ratings of issuers with assets in this group are subject to a soft cap at the issuer's IDR.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Lease adjusted debt net of cash adjusted for seasonality /operating EBITDAR sustained below 3.5x
- Ability to generate sustained neutral free cash flow
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Not meeting the positive rating sensitivities for an extended period will result in the Outlook being revised to Stable
LIQUIDITY
Comfortable Liquidity: At FYE17, JISL had readily available cash (net of cash adjustment for seasonal variations) of INR1.4 billion and approved but undrawn credit facilities of INR12.8 billion available to fund debt maturing in FY18 of INR5.8 billion and vendor financing of INR2.4 billion, plus Fitch's estimate of free cash outflow (after capex and dividends) for FY18 of around INR700 million. The group had a further INR12.3 billion of working capital debt repayable on demand, which we expect lenders to roll over during the normal course of business given the group's satisfactory credit profile.
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