Jain Irrigation an outperformer: SSKI

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SSKI is bullish on Jain Irrigation and has maintianed outperformer rating on the stock.

 

SSKI research report on Jain Irrigation

 

Warrant issuance to promoters

 

Jain Irrigation has approved 8.6m warrant issuance to promoters. The warrants would be convertible within 18 months of issuance at a price not over Rs485. This fund infusion (on conversion) of Rs4.2billion would result in the promoter stake increasing to 38%. While this would lead to equity dilution to the tune of 12% (number of shares post conversion at 82 million), we believe that JISL would redirect the funds towards debt repayment (currently at Rs10billion) thereby result in interest cost savings. The move also reinforces management's confidence in the growth momentum as indeed the value creating potential in the business. We continue to maintain our bullish stance on JISL given the sustained growth momentum at over 35% (MIS and foods in particular), willingness to operate in global arena as indeed its ability to manage the three variables - rainfall, farmers and government. Reiterate Out performer.

 

Details of the warrant issuance 

 

Number of warrants issued - 8.6 million. Terms of conversion - Within 18 months period at not over Rs485 per share. Total fund infusion - Rs4.17 billion. Number of shares post issuance - 82 million (12% dilution). Promoter stake - Up from 31% pre conversion to 38% post conversion.

 

Reduce the debt burden

 

JISL in the last couple of years has aggressively taken inorganic route to growth and has invested approx USD160 million towards acquiring companies like NaanDan, Aquarius, Chapin Watermatics, etc. Jain Irrigation currently has debt on books of Rs10billion (consolidated) and Rs8.5 billion on standalone books. We believe that proceeds of Rs4.17 billion on conversion would be substantially used towards repayment of debt. This fund infusion would reduce the debt equity from 1.3x now to below 1x. However, as the warrant conversion would happen only by end of FY09, we believe that impact on interest cost savings would be visible only in FY10.

 

Increasing promoter stake - infusing confidence

 

Conversion of these warrants would result in promoter stake increasing from 31% now to 38%. This is the second round of warrant issuance to promoters in the last one year, the earlier (2.5 million warrants) issued at Rs401. We believe that promoter increasing stake in the company at incremental price levels reinforces management's confidence in the business growth momentum as indeed the potential to create value even from current levels (market capitalization is up by 8x in the last three years and share price up by 7x).

 

Business momentum - well on track

 

We continue to maintain our extremely bullish call on JISL's business momentum, driven by MIS and food processing. Domestic MIS business is well poised to grow at approx 50% CAGR (FY07-09), driven by increasing allocation by various states - Gujarat, Maharashtra, Andhra Pradesh, Tamil Nadu and allocation to JISL is ahead of its current market share (Rs4.5-5 billion of annual order flow). Taking a step forward, JISL is eyeing three largest MIS markets globally - US (acquisition of Chapin and Aquarius), Israel (NaanDan) and Africa.

 

While PVC Sheets business faces the pressure of slow down in housing market in the US, pipes and foods business continue to grow at over 35%. We are confident of JISL's growth at over 35% CAGR over the next three years. We have always liked JISL's ability to manage the three variables of rainfall, farmers and government as also the appetite to operate in global arena. We reiterate our Out performer call on stock.