Buy Jain Irrigation; target Rs 104: P Lilladher

“Jain Irrigation Systems (JISL)’s net sales de-grew by 9.1% YoY to Rs8,649m (PLe: Rs9,925m). Micro Irrigation business (MIS) sales growth has shown de-growth of 32.0% YoY (domestic sales de-grew by 36%) on account of lower credit period to farmers and company’s efforts to reduce high receivable/improve cash collection. Lower-than-expected MIS growth led to below estimate sales. Further, other businesses like piping and agro have shown better-than-expected performance during Q1FY13. EBITDA de-grew by 20.7% YoY to Rs1,813m (PLe: Rs2,179m). Lower contribution from higher margin business i.e. MIS resulted in lower-than-expected EBITDA.

MIS business margin witnessed margin pressure on account of rupee depreciation, higher polymer prices and lower operating leverage. Interest cost has gone up by 29.8% YoY to Rs1,028m (up 6.6% QoQ) on account of higher debt levels due to increased working capital requirement and higher interest rate. Company has taken tax reversal of Rs62m on account of tax holidays in some of the activities and got approval from competent authority as ‘In-house R&D Centre’ which is eligible for higher deduction. PAT de-grew by 34.8% YoY to Rs626m (PLe: Rs721m). JISL has taken MTM as well as realized forex loss of Rs795m in Q1FY13 (considered as exceptional item). Hence, reported PAT stood at a loss of Rs169m.

Management has indicated that company is focusing on cash flow/balance sheet improvement and it would lead to slower/muted MIS sales growth in the next quarter too. Company has already witnessed muted MIS growth since Q4FY12. As on June 2012, company’s consolidated gross debt stood at Rs39bn (Rs38bn in March 2012). Company has received subsidy of Rs1.2bn from the government during Q1FY13 and expected to receive ~Rs5bn in FY13. On a long-term basis, company is likely to achieve sales and PAT CAGR of 20% plus in the next 3-4 years. Company has decided/approved fund-raising up to US$210m by way of mix of equity/convertible bonds/ECB and it is in final stage.

Stock has already been corrected 50% plus in the past one year on account of balance sheet concerns, NBFC initiatives and expectation of slower growth. It has been sharply de-rated from one-year forward P/E of 25x to 9x and EV/EBITDA of 15x to 7x. We believe that the present valuation is comfortable, considering JISL’s strong business model despite considering slower growth, going forward. We expect that increased focus on balance sheet would lead to improvement in earnings as well as re-rating of stock, going forward. We maintain our ‘BUY’ rating with the target price of Rs 104 (i.e. 7.5xFY13E EV/EBITDA and 11xFY13E EPS). Lower-than-expected growth in MIS or disappointment to improve balance sheet could lead to downward risk to our estimate as well as rating, going forward,” says Prabhudas Lilladher research report.

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