Expect H2 FY13 to be better than H1: Jain irrigation

In an interview to CNBC-TV18, Anil Jain, MD, Jain Irrigation spoke about the performance of the company in the second quarter. The company reported disappointing sales of Rs 615 crore. The result h as been an outcome of the company's startegy to enhnce the balance sheet. It expects the coming quarters to be slow as well, but it will be better than the first half.

 

Jain Irrigation launched Non-banking Financial Company (NBFC) in 40 locations in Maharashtra in past two weeks to aid debt reduction. “The first quarter from January to March would be the first quarter of functioning and next year I expect NBFC to do much better because all the procedures would be set,” he adds.

 

 

Below is an edited transcript of Anil Jainl's interview on CNBC-TV18.
Q: Your sales were disappointing at Rs 615 crore, are you sensing a lot of sluggishness in the business?

A: This was part of our planned strategy to reduce sales in certain states where subsidy receivables were very high. In the first quarter we saw our sales lower in micro irrigation division by almost 30 percent and similar reduction has taken place in the current quarter. But in the third quarter the momentum has already picked up and in the second half we are expected to be positive in totality.
In India we are down by almost 14 percent for the first half. Our overseas businesses have done well. On consolidated basis we are almost even for the first half. So for the whole year despite the fact that first half has been negative, we are expecting revenue to be flat to plus on one side.   But this has been a year to be focused more on balance sheet rather than growth. This is because we wanted to reduce significantly the amount of receivables and already in the first 6 months subsidy receivables are down by Rs 300 crore. While we speak they are more down in the last 45 days or so since September. So that is a big positive development for us.

 

Q: Most of the exercise is behind you because you seem to be guiding a bounce back in the second half. Does that mean this exercise is coming to an end?

A: Yes, we started talking about this in January-February assuming it could take somewhere between 4-6 quarters. The first part really saw a massive reduction in sales and everything related to it. Now it will pick up pace so that we end up flat. So, in another two quarters you will see slower numbers than what has been seen in the last 10 years. But in the context of the situation, second half would be better.
During this quarter, which is one of the worst quarters, we have been able to raise more than USD 200 million in terms of equity, debt, convertible. All that money is already into the company, so that is also going to result into lower interest in second half and significantly lower interest for the next year. We should be saving almost Rs 80-100 crore of interest next year. That should impact positively to the bottom-line.

 

Q: Your interest expenses this quarter were in excess of Rs 100 crore. By when do you start getting the run-rate down to Rs 75-80 crore ball park?

A: From the fourth quarter you will start seeing Rs 20 crore quarter. In the current quarter you will see a reduction of about Rs 10-12 crore because money has come in late October. But the benefits have already started kicking because money is already in the bank.
We have also launched NBFC in last two weeks. The entity has already sanctioned loans to farmers in order to start the process, so that would further reduce our receivables and help the increasing the business.

NBFC has been just launched in Maharashtra to start in nearly 40 locations between now and December. The first quarter that is January to March would be the first quarter of functioning and next year I expect NBFC to do much better because all the procedures would be set.   Last week we had 600 of our dealers at our headquarters in Maharashtra and they were all excited with this new business model of cash and carry. So this is going to help us reduce debt significantly. Partly, debt will go down based on the equity which we raised almost to the tune of Rs 400 crore. And partly debt will go down based on the reduction receivables which we have.
So as we move into the next year 2013-14 we will have a lighter balance sheet, lower interest cost, no forex issues because we have raised dollar funds to repay the dollar, so there won't be any net impact on P&L.  We have also reduced our capex in the current year and next year. So, we are expecting the company to move into a free cash flow scenario as against last few years. We were continuously investing into new production capacities based on higher borrowing.

 

Q: Your margins also did not look very healthy in the current quarter. Do you expect them to stabilize even going forward under 20 percent?

A: Yes, the margins were down because micro irrigation which is the highest level division for us was significantly lower in terms of production and sales. So that increased our fixed cost. In this quarter too, oil was high, rupee was at 55, so polymer prices on the end basis to rupee per kilo were also higher which shaved off about 1.5 percent in contribution and about 2 percent in fixed cost due to lower sales. This reduction of about 3.5-4 percent at EBITDA level for the whole company should come back in the third and fourth quarter as the product mix would change going forward.
If you see overall for the first 6 months, we made Rs 300 crore of EBITDA. Typically for our company the first 6 months represent 35 percent, sales 35-40 percent and 60-65 percent comes in the second half. So even if you say Rs 300 crore EBITDA in the first half, we should maintain Rs 600 crore plus EBITDA in the second half.

 

Overall for the whole year we are expecting to maintain growth and profitability while focus is not on growth but on balance sheet. I am quite satisfied with the progress we did there. First quarter, our reduction in receivables was hardly Rs 80 crore. This quarter it is Rs 250 crore on net basis. And in last 45 days it is another Rs 150 crore or so. So there we are moving quite well. It is important to get this new model in place and then the company is outbound for sustainable future going forward.