MIS may lag in Q4, exports may fill gap: Jain Irrigation

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Anil Jain, managing director of Jain Irrigation says the change in business model in micro irrigation systems (MIS) has led to slow growth for the company.

The Pune-based firm reported net sales up 18% at Rs 816 crore and EBITDA up 30% at Rs 170 crore. However, the market was a bit disappointed with the company's MIS revenue growth.

Jain says the growth in the MIS segment is likely to remain sluggish for a year or so. "We plan to focus more on cash collection MIS and exports to fill the gap in the domestic market during this period," Jain told CNBC-TV18.

The company's interest costs are currently at 8.7% of sales. Jain expects to reduce borrowing by Rs 700-800 crore in the coming nine months via efficiency in working capital expenditure.

"We expect lowering of the interest cost and additional profitability from our overseas businesses, which will help us in our efforts to maintain growth earnings," he says. 

Jain says the company has no plans to raise equity at the moment.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Your numbers have not gone down badly but the markets are little disappointed with the fact that your micro irrigation system (MIS) revenue growth was only 11%, any reason why this has slipped and do you think you will maintain sluggish growth rates going forward?

A: As a company, we have still managed to grow about 18% this quarter, and overall for first nine months, we were close to 22% growth in India and outside.

Coming to micro irrigation, we are going through a change in business model where we want to more focus on cash collection and reduce the amount of receivables. If you remember, our receivables had almost gone to almost year, blocking about Rs 1,800 crore capital. We thought that that was not sustainable. So this is by design and deliberate thought process that we assented that might grow slower in the domestic irrigation market for some period of time till the time we get adjusted to the new business model.

We have run on our business model over the past ten years where we had significant growth - this division grew from Rs 700 crore to close to Rs 2,000 crore in the current year. So we have grown 30 times over ten years, and we think we are going to take a change in terms of business model, focusing more on cash in terms of collection bring down receivable significantly down from one year. We have succeeded in the first nine months; our absolute amount of micro irrigation receivables are same as they were in March. So we have grown in micro irrigation overall first nine months about 20%, but our receivables absolute amount has remain same which means that much of efficiency we have brought into the capital.

Q: Agro processing as well has disappointed in terms of the growth, just to break this up in terms of what you see from both these pillars, for the next few quarters what kind of growth rate would you expect to see both on MIS and on agro processing?

A: On agro processing, as you know it's a seasonal business, we sell more during the summer season and less during the monsoon and winter season. Agro processing grew almost more than 50% in the first six months or first two quarters, and our guidance for agro processing was, we would look at about 25% growth on annualised basis. We still stand by that that the division is expected to grow in 20-30% range current year and even next year; we are quite bullish on that.

In terms of micro irrigation, first nine months, we have grown 20%, but current quarter or next quarter could be slower growth or lower growth because of the issues I have explained. However, we are looking at some additional overseas and export markets to fulfill this gap in the domestic market during this period while domestically, we are more focused on balance sheet. So you might see lower domestic growth in micro irrigation for another year or so as we go through business model change but we are trying to fulfill that gap by increasing our exports in places like Africa, China, Asia and others where we are quite positive about. We can give more effective guidance for the next year when we talk about the March results.

Q: On interest cost, what is the timeline in terms of how much of a scale down you want to see and over the course of how many quarters you expect that to happen?

A: Right now, the interest which we are paying is at its peak, its almost at 90 crore this quarter, its almost a crore a day which is significantly high number. On annualised basis, that number is would account to almost 8.5% of sales. Our average for last three years was closer to 7% of sale, so this has increased 7% or so compared to sales in terms of percentage.
We feel that with the lowering of the interest rates going forward generally in the economy, that should help us going forward in the next year. In addition this focus, we are bringing on capital reducing or working capital inventory and receivables. We are expecting to bring that down by about Rs 700-800 crore worth borrowing over next six-nine months by bringing efficiency into working capital through change in business model.

Both of these would allow us next year maybe to bring down interest cost. This year, it is going to be close to Rs 350 crore and against that, we expect next year to be about Rs 250-270 crore.

So as we move into the next year, we expect lowering of the interest cost and we also expect additional profitability from our overseas businesses to aid us to continue to maintain growth earnings, even if our mainstay business of micro irrigation might slowdown for a year or so as a plan to improve the balance sheet.

Q: Any money raising that Jain Irrigation will need to do over the course of this calendar year?

A: In terms of debt, we have enough. We don't have any large capex plans for the next year and as we recover the cash flow from the current inventory receivable money which is blocked in, to run this level of growth, we may not need additional fund raising. We might shift some of our current funding which is short-term in nature to long-term. Secondly, if market price improves or share price improves, to create long-term sustainability, we had thought about raising capital, but as of now, there is nothing on the cards.

We are focusing on creating that level of capital of Rs 750-800 crore from operations apart from the EBITDA level earnings we will have because up to last year, all the EBITDA which we went either into capex or reinvestment into working capital.

FY12-13 would be the first year where we do not expect much increase in working capital and even on the capex, we will be saving. So '12-13, we will be looking at significant amount of free cash flow.  Even in the current year, as a company, almost for first nine months, our EBITDA is close to Rs 600 crore. We should therefore end up Rs 900 crore plus.

While sales have grown 20% for the first nine months, EBITDA has grown almost 25%. So we have good earnings growth trajectory, but some of this earning growth has been eaten away by high interest cost. Next year, as we improve capital, interest costs go down, then even with this change in the growth in micro irrigation, we expect it would be good and healthy for business going forward long-term.