See better second half on higher demand: Jain Irrigation

A patchy monsoon, with better August rains, is likely to increase demand for irrigation equipment, resulting in a stronger second half performance, says Anil Jain, MD, Jain Irrigation.Though the domestic business grew 10 percent, the company’s overall micro business declined 1.4 percent due to the currency hit suffered by its overseas irrigation subsidiaries, and on lower exports, Jain tells CNBC-TV18."Our overseas irrigation markets like Brazil and other locations which are otherwise strong, they grew in local currency but when you translate and give the result in rupee, because rupee has remained much stronger against dollar versus various other countries’ currency, it has created an impact," he explains.Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) will be executed in another 3-4 months where at a district level, the government will provide water and aid the structure with drip and sprinkler irrigation systems, he adds."Also, government of Maharashtra is saying that they would like to make it mandatory drip irrigation for sugar cane and certain other crops; all of these are good drivers but the real impact will come in the fourth quarter and the next fiscal of this government interventions," he says.But for the forex losses, Anil believes the profit growth would have been better due to cost savings.Below is the transcript of Anil Jain’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: I want to talk first about your micro irrigation systems business. I understand that this quarter you saw a contraction of 1.4 percent in that segment. Has the situation deteriorated compared to when we spoke last and what is the expectation going into the next couple of quarters?A: In fact if you look at it, micro irrigation business in India grew almost by 10 percent. Exports were less but domestic business grew more than 10 percent. Our overseas irrigation markets like Brazil and other locations which are otherwise strong, they grew in local currency but when you translate and give the result in rupee, because rupee has remained much stronger against dollar versus various other countries’ currency, it has created an impact. But in local currencies, we have sold more. In India we have sold more and we expect for the whole year, as we predicted at the start of the year that we should have in micro irrigation business, double digit growth. Whether it is 12-15 percent or higher will depend on some of the project business that we are expecting which typically comes into the second half. And also as you know, the monsoon has been patchy. June was good, July was dry, August has started well. So, assuming it goes well, then we are looking forward to a very strong second half and having 10 percent growth in the first quarter, we should overall do well within micro irrigation business going forward.Latha: So, this 1.4 percent which Sonia referred to entirely a currency hit?A: Yes, I mean if you look at it, our domestic business because exports were less grew by five percent, but the business of our overseas subsidiaries, when it translated into rupee, it has resulted into a reduction.Latha: Are you all terribly related to drought at all? I would think you should be positively related because usually, in fact invest in irrigation more when water is scarce. What is the expectation therefore in the current year?A: In terms of monsoon, a good monsoon is always good for us, because farmers will have a better income, a better sentiment. And in certain areas like in Marathwada and in Telengana, there is a huge drought right now. there is no water to drink, forget about irrigation. So, that kind of severe drought is not good but overall we are seeing that more and more farmers are adopting irrigation. So, all-in-all, a good monsoon should help us and at least currently the signs are that it has improved quite a lot.Latha: Is there any government efforts at all with the new government. The expectation was that there will be a lot of concentration on irrigation and food processing in particular; it was part of the Bharatiya Janata Party (BJP) manifesto. So, is that part of your business seeing any higher traction, higher order books?A: To be honest, in food processing for example, we sell to large global and local food companies and that was slow in this particular quarter. But last year, we grew that business 23 percent and we hope to grow more than 20 percent in the current fiscal. Business was slow in April and May because of the extra rains which came in and people do not drink juices during that period, etc. But coming back to your question about the government policy and action on that front, during this quarter, government also announced this Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) saying that they would like to spend Rs 50,000 crore. I think it would take another three to four months for that whole programme to take shape and thereafter only one would be able to see the result. So, what they have announced is quite ambitious and a very structured in a systematic way where at a district level, they want to prepare irrigation plan, not only about creating water, but also using that efficiently with the help of drip and sprinkler. Also, government of Maharashtra is saying that they would like to make it mandatory drip irrigation for sugar cane and certain other crops. All of these are good drivers but the real impact will come in the fourth quarter and the next fiscal of this government interventions. We have not seen anything right now.Sonia: I just wanted to talk a little bit about your margin performance because your earnings before interest, taxes, depreciation and amortization (EBITDA) margins compared to last quarter have not grown at all. You have been around this 13.7-14 percent range and the fear is that your pricing power ability has reduced and you have not been able to retain the benefits from lower polymer costs despite oil prices falling. Are you facing some difficulty to grow your EBITDA margins and what could the margin performance be in the next couple of quarters?A: That is a good analysis. In terms of margins if you really see, compared to year-to-year, because in our business sequential quarters we cannot compare because fourth quarter usually at 40 percent of sale better fixed cost absorption, so fourth and the first quarter we are unable to compare. But if you see compared to the last year same quarter, our margins are up about 90 basis points in India, if you look at overall global, they are about one percent. We believe our profit growth in the current fiscal would be much higher than the revenue growth because we have been able to do certain amount of cost saving in terms of people and other things, especially our overseas subsidiaries. We have also been able to pass on certain increases and improve the business. So, for example in fourth quarter pipe business was very strong. In micro irrigation our margins this quarter are up about half a percent compared to the same quarter last year. So, all-in-all, we are very confident about improving our margins going forward and as I said that second half will make about 65 percent of our business and that is when you will see similar or higher level of margin and not where last year third and fourth quarter. But we have done very well current quarter by improving our margins. And if in fact, if you really look at my EBITDA this quarter grew from Rs 162 crore to Rs 184 crore. So, that is a significant improvement in the EBITDA as well. And if we eliminate the foreign exchange (Forex) issue, in fact the net earnings have gone up more than 100 percent. Last year, without the Forex adjustment, our net earnings on consolidated basis was Rs 24 crore and now, they are close to Rs 44 crore. So, there is significant improvement in the net earnings. About one percent increase in the EBITDA and overall positive growth into the revenue despite a very unseasonal impact of rain and all of those issues on the business. So, we have done well, but we should do and we will do far better in the second half.