Buy Jain Irrigation, target Rs 600: CLSA

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CLSA is bullish on Jain Irrigation and has maintained buy rating on the stock with target price of Rs 600.

 

CLSA research report on Jain Irrigation

 

Jain Irrigation's announced a preferential issue of 8.6million warrants to the promoter group convertible at Rs485/share; the second such issue in 2007 which will cumulatively increase promoter stake by 8ppt to 38%. This will raise Rs4.2 billion and makes Jain fully funded for its organic capex for the next three years and bolsters its balance sheet. We are trimming FY10 EPS estimates by 4% to build in this issuance noting that the 11% rise in share-capital will be partly offset savings in interest cost on lower debt. Jain's 20x FY09 PE is well supported by a 35% 3-year EPS cagr.

 

BUY Preferential issue of warrants to promoters

 

Jain Irrigation has announced a preferential issue of 8.6m warrants to the promoter family convertible into 8.6 million equity shares at Rs485/share. This follows a smaller a similar issue of 2.5 million warrants earlier in the year at Rs401/share and will cumulatively take eventual promoter holding up by 8.2ppt to 37.8%. Minority shareholders will see their holdings diluted by 10.5%, however but the issuance does demonstrate a vote of confidence by controlling shareholders in medium and long term prospects of Jain.

 

A stronger balance sheet; net gearing will fall to 35%

 

The issuance will raise Rs4.2billion in equity in early FY10 and makes it fully funded for its capex (largely in micro-irrigation and agro-processing) over the next 3 years. This quasi-equity issuance will also bolster Jain's balance sheet strength by allowing it to cut high cost debt. Strong operating cashflow, lower debt, the warrant issuances and the ongoing FCCB conversion will see Jain's net gearing fall to 35% in three years from 200% at the end of FY07.

 

Upgrading FY10 profit estimate by 7% but cutting EPS by 4%

 

We are upgrading our FY10CL profit estimates by 7.4% to build in the saving in interest cost from the resulting lower debt. Its fully diluted outstanding share capital will rise by 12% to 81.8million, however, and we are cutting our FY10 EPS estimates by 3.9% to build that in. We now expect Jain to deliver a 51% cagr in profits over FY07-10CL and a 35% cagr in EPS.

 

Premium valuations supported by strong medium term outlook

 

We recently tempered our expectations on Jain's non-irrigation divisions and our estimates rest almost solely on the outlook for the domestic microirrigation business. We note, further, that our assumptions on this segment (52% revenue cagr) may also prove conservative given its rising salience and penetration (60% cagr over the last three years and 75% YTD). This strong momentum will support premium Jain's valuations (20x FY09 PE) and drive stock performance even after its 12m PE re-rating over the last year buy.