To part sell stake in impending food arm: Jain Irrigation

Jain Irrigation is in talks for a part stake sale in its soon-to-be-formed food subsidiary, Anil Jain, Managing Director, Jain Irrigation tells CNBC-TV18.Shareholders have already approved the proposal to create a food processing arm, Jain says, adding that the lenders’ approval for the subsidiary should come in by December.Jain declined to comment on the valuations. He expects the food business to grow 20 percent this year and says demand for processed food in the country has risen substantiallyCNBC-TV18 learns from sources that Jain Irrigation may sell a 25 percent stake in its food division for around Rs 500 crore.Jain says the company is looking to reduce debt on its balance sheet, and will eventually list the food subsidiary.The company is also looking to raise another Rs 250-300 crore through preferential allotment, CNBC-TV18 learns. Sources say Jain Irrigation may raise the funds from UTIMCO, TIAA CREF, and JPMorgan Pension Funds among others.Below is the transcript of Anil Jain’s interview with Anuj Singhal, Latha Venkatesh and Varinder Bansal on CNBC-TV18.Anuj: Just a bit of an exclusive news flow that we are getting that you are likely to sell 25 percent stake in food products business for around Rs 500 crore. If you could give us an official response on whether any kind of work is being done on that.A: We have already announced earlier that we are looking to sell some amount of stake in our food subsidiary. That process is on and at right time, we will announce once our board considers the final numbers. So, till then I cannot comment except to say that the process is on and we are moving in the right direction. But what is more important to see is that we are getting very good order flow which is what we wanted to talk more about today.Anuj: But Rs 2,000 crore would the right valuation for that food product business?A: As I said, I cannot really comment on valuation. And we are looking at significantly high valuation than some of the part of will indicate and this is what we had already stated that we are working in that direction. But unless things get finalised, our board considers, we will not be able to comment really on it.Latha: Let us speak about that big order that you have got. Can you first take us through the order that you have got from the Maharashtra electricity companies?A: Yes, this is very exciting because solar water-pump is nascent in a new industry if you look in the context of India and at the same time, opportunity is so large.India has almost about more than 70 million diesel pups being used. And almost 24 percent of imported diesel gets used in agriculture pumps.If that all can be replaced with the solar renewable energy, it will create distributed power, it will create a lot of productivity gain for farmers because they can irrigate every day. Overall, it creates more sustainability and adding more income possibility to the farmer. This particular order is a pilot order because government of Maharashtra has a very ambitious programmes of at least doing 5,00,000 pumps. So, this was a pilot tender and we have won most of the tender and this particular order which is about Rs 473 crore is very exciting. We expect to complete the order let us say within next, the time period is 12 months, but I believe somewhere around between 6-12 months, we should complete that. And this covers about 10,000 farmers, close to 10,000 farmers.Now, when we go and install, there is a good opportunity to do more sales of drip irrigation. So, all in all, this would have significant positive impact for us and overall it creates such a great story in providing the right solutions to the individual small farmers.Latha: How much will you make from this Rs 473 crore? Is it 10 percent, 12 percent? What kind of margins?A: The margins should be good. I mean in our traditional earnings before interest, taxes, depreciation and amortisation (EBITDA) margins in micro irrigation business have been 20 percent and this is a part of the project. So we expect to maintain similar level of margins because the scale is good, we can get some benefits of the scale and we have been building this technology over the last few years. We did not do this business two or three years ago. So, we have been building the technology in terms of bringing together not only the renewable part of it, but the right type of controllers to which is also designed specifically for small farmers who have low pressure in their farms. So, we are very excited about the opportunity, not only what we are doing now, but what we will do next year and going forward. And apart form Maharashtra, in the last 2-3 years, we have done this business in a scattered way in about 8-9 different states. This is a very important project and this is the type of project I am sure many other states government will also look at because state governments have been suffering for the distribution companies (Discom) and electricity because they provide low cost electricity to the farmer and they have to pay for all those subsidies. And this is one way they can help the farmers to buy this one time, then next 20-25 years, they do not have to provide any subsidised either electricity or diesel to the farmer.So, it is a win-win situation for the government, Discoms and especially for the farmers.Anuj: A word on the other bit of exclusive that we are learning from sources that there could be a preferential allotment in the parent company in Jain Irrigation itself. If you could tell us that, is any kind of work on in that direction?A: I think you are coming back to the same question. I can answer all those questions once our board finalises it. As I said, we are planning to raise the funding which we have said, it would be a combination of what we raise maybe at the parent and at the subsidiary. But the purpose is whatever funds we raise and whatever valuations we raise, you will come to know once it is finalised. But that would be based on ensuring that we continue to deleverage. We have additional funds available for the growth because food is really going very well. Yesterday, we also announced that we got a very large order from Hindustan Coca Cola for almost close to Rs 750 crore type of valuation and that is a three year contract.And that shows also how sustainable the growth is in the food business. Last year, our food business out of India grew almost 23 percent and we have also overseas food business. And even this year, overall consolidation, we are expecting food business to grow at 20 percent and this order provides a very stable kind of a back bone to that type of a growth planning. And again, it also underscores the kind of supply chain which we have built. Today, we are already largest process of mangoes in the world. And we continue to build onto it. Now, even other fruits are growing.So, that is also very exciting that as a company, we are able to touch base with this entire value chain with the farmers whether it is agriculture input, drip or solar pump, but also buying from them and participating into the consumption economy in a sense. So, that is also very exciting for us. Varinder: Just wanted to check one thing. As you rightly said, food product business has been growing at around 24-25 percent compounded annual growth rate (CAGR) since the last five years. Can you just help us understand what kind of debt is there on the food product segment alone out of that total around Rs 4,000 crore debt? A: Right now, where the business has run, all the debt is in the parent company, Jain Irrigation. Now, we have carved out the subsidiary and the business of the food is being now transferred to the food subsidiary and that process will get completed in the next four to five weeks. So, at that time, it would become more clearer. As we carve out the overall business and the assets and liabilities go down to that subsidiary. Certain amount of loans from the parent will go down. I believe the loan portfolio for the food is in line with the overall business size and a little bit less because in terms of receivables, it has low receivables, but it carries more inventory. So, all of those details would become clearer once actual business transfer takes place. And we can talk a little bit more about it, once our board approves the likely transaction and then we can discuss more details. Varinder: So, is this the first step to possibly demerge the food business going ahead after a few months, because that is one of the pie which has been growing substantially compared to any other segment? A: Yes, we already took the first step. We took shareholder approval a few weeks ago to create a subsidiary and we took the shareholder approval to transfer the business to the subsidiary. So, in essence the step one in terms of shareholder approval is already in the process. The remainder part which is the lender approval etc. that is happening right now and I expect sometime in December, that process will get completed that we will have let us say, 100 percent owned subsidiary of Jain Irrigation Systems Limited (JISL) acting called Jain Farm Fresh Foods Limited (JFFFL) and that entity will start operating some time in December. Now, this whole fund raising which we have talked about, as and when that gets finalised and announced, then we will bring funds into that entity and it would allow that entity to grow further. So, that is all moving as per planning. We would have hoped that things would have closed by now, but we are already in November. So, by December we expect all of this is in place. The demand opportunity whether it is in domestic market or in export market, and it is not just about juice concentrate. There is more and more demand for this convenience food especially which is based on natural fruits, natural vegetables, etc. and with all that health consciousness, nutrition also coming along, we think we can play a very important role, especially because no other company in the food processing business has the kind of supply chain and relationship with farmers which we possess. And that is going to be a distinctive advantage available to us to maintain and spur more and more business into the food side and ensure that it continues to grow more than 20 percent overall if you look at multi-year opportunity.Latha: You are telling us that it will grow at 20 percent. At the moment what is the sales volumes that it generates?A: Overall, if our global food business last year or about Rs 1,400 odd crore already, so one can do the math and say that maybe this year, our global consolidated food business should hit a number closer to Rs 1,700 crore. And at that level, not many people realised that at that level and at that level of volume, we are already one of the largest food company in the company, but we have never been treated as a food company. And that was one of the reasons that we wanted to bring more focus and that is the reason we did subsidiarisation. So, the objective is to do value creation to bring more focus on that business because opportunity which is opening up, is immense. The food processing being done in our country, fruits and vegetables is especially is less, in single digit and in so many other developed economies, the total fruits vegetables which gets processed is 60-70 percent. We do 5-6 percent. So, we think there is a large opportunity there as well.Varinder: My question remains that will it happen that at a later date, since it will be a different entity altogether, as you rightly said, it may get demerged and listed as a separate entity on the exchanges at one point of time going ahead?A: Currently our plan is to create a subsidy and grow the business and get some equity and capital into the entity. Once it goes to the next level in terms of its critical size, based on the opportunity, the growth opportunity, the right timing, eventually, we will plan to list that entity, but I do not think that is somewhere in the immediate future, eventually that can happen, that should happen, but one will have to wait and see how it goes. Our focus right now is to execute all these good orders we are getting. Second half it seems will be much stronger than the first half despite the bad monsoon and the climate. We think all our products are helping farmers. And some of the structural changes which we are doing in the business model eventually should also create a lot of good value for our shareholders.Varinder: Can we expect this capital grazing news to come out by this weekend or anytime soon?A: Once our board looks at it, we will be able to talk to you about it. Let us wait a little bit and then we can go aheadVarinder: When is your board meeting?A: We have an upcoming board meeting on 9th for approval of our quarter two results.