CLSA has picked Jain Irrigation. Anil Jain, MD, Jain Irrigation said that the reduction in margins of PVC sheets is due to the slowdown in the US home building market.

He added that the company has a natural hedge against the raw material that they import from abroad and they only need to cover the value addition part of it.

Excerpts from CNBC-TV18’s exclusive interview with Anil Jain:

Q: The PVC sheets part of the business has fallen by about 26% on a YoY basis, in Q2, and the margins have contracted by about 700 basis points. How much would you attribute to the US slowdown at this point of time? What is your exposure to this entire subprime phenomenon that is playing out?

A: Most of the reduction in margins, as well as the business, is due to the slowdown in US home-building market. Plastic sheet is going to be hardly about 10% of the overall revenue and within that 10%, about 45% comes from Europe and 55% comes from the US.

Q: What are your total exports in the PVC sheets business to the US, at this point of time? Do you have any forward cover to hedge against the rupee appreciation at this point of time? 

A: About Rs 80 crore would be our exports of PVC sheets to the US. But if you look at the value addition in this product, we import a lot of raw material. So, we have a natural hedge vis-à-vis the material, which we import against the sheets we are exporting. So, what we need to cover is merely the value addition part of it and not the whole value and for that, we are adequately covered.

Q: The other trigger for your company is the micro-irrigation segment, which commands margins of about 29%. What is your order book position in that segment currently? How do you expect growth to be like and are you adequately funded, 50% of the project cost comes in from the government? Over the next few years, how much of support do you see the government giving you, with regards to the growth in this segment and with to the execution of these projects?

A: Just in terms of the growth, the business this year, is growing 70% till date, from the year when it has started. We hope to maintain that growth rate for the entire fiscal year for this division.

Last year, the division did about Rs 350 crore or so. This year, it should be in range of Rs 650 crore, from Rs 350 crore to maintain that growth rate. In terms of adequate orders and order book, we already have that order book from the various state governments, like Andhra Pradesh, Gujarat, Tamil Nadu, Karnataka and the retail business, which we do in Maharashtra.

The farmers are paying 50% and they get either loan from the banks or are funding on their own. The remaining 50% is being financed by the government. Now, the finance, which is coming from the government, comes partly from the Central government, which is about 40% and 10% comes from the State governments. So, that finance is adequately covered.

If you look at the 11^th five-year plan, the government is actually increasing the total contribution towards creating additional assistance from the farmer. The state government, instead of providing 10%, is in some places willing to provide 20-30%, because they believe this system really gives great benefit to farmers, in terms of the productivity increase. At the same time, it reduces the cost of inputs, in terms of fertiliser, labour, the land, water and energy cost as well.