Jain Irrigation: Harvesting profits

Focus on high potential areas, foray into new markets and improving macro environment will help Jain Irrigation sustain growth rates.

In light of the tough times that many industries are facing, there are only a few areas that provide the comfort of safety and growth. One of them is Jain Irrigation, a dominant player and catering to the needs of the large untapped agriculture equipment market. Even during the current uncertain times, the company is expected to report revenue and earnings growth of about 35-40 per cent over the next two years.

Growth drivers

Jain Irrigation has presence in water irrigation, piping systems, plastic sheets and food processing. The company’s biggest growth driver has been the micro irrigation systems (MIS), which is also the largest revenue contributor accounting for about 50 per cent of its total consolidated income.

This segment has grown at about 80 per cent annually in last four years and should continue to grow at 45-50 per cent for the next two to years as the company explores new and untapped markets. It’s diversification into new crops such as cotton, groundnut, potato, and chilly and vegetables, as well as the government’s emphasis on agriculture also augur well for the company.

MIS, which includes drip systems, sprinkler, valves, water filters, and plant tissue products, helps in effectively utilising water (in water scare areas and oddly shaped fields), and thus, enhances productivity of seeds and fertiliser (yield and quality of crop).

In order to strengthen its MIS portfolio, the company had earlier made several overseas acquisitions including NaanDan of Israel (specialist in oilseeds, potato and cotton crops), the world’s fifth largest micro-irrigation company. Similarly, it acquired Thomas Machines of Switzerland, a specialist in drip irrigation lines. Besides providing access to superior technology, the acquisitions help the company to enhance presence in growing markets such as South Africa, US and Europe.

Huge opportunities

According to estimates, there is about 140 million hectare of area under cultivation. Of this, about 50 per cent has adequate water resources and only 1.7 million hectare (1.2 per cent of total area) is cultivated using irrigation systems. In this context, and with the government focusing on effective utilisation of existing cultivable land and adding new area for agriculture use, India is seen as a promising market.

These modern techniques (like MIS) are being given a subsidy (about 50-70 per cent of the cost) by central and state governments, thus making it affordable for farmers and thereby resulting in higher penetration.

Jain Irrigation has major presence in the states like Andhra Pradesh, Maharashtra and Gujarat and, commands a market share of 50-70 per cent in these markets. The company has now entered other states like Chattisgarh, MP, Rajasthan, Haryana, Punjab and Himachal Pradesh.

“More importantly, these markets hold lot of potential as penetration level is still very low. As compared to penetration levels ranging 5-8 per cent in our existing markets, the penetration in these new markets is just 1-1.5 per cent. Also, northern states like Punjab, MP, UP and Rajasthan are relatively huge markets,” says Anil Jain, managing director, Jain Irrigation Systems.

Small, but...

Post the acquisition of Cascade Specialities USA, in November 2006, Jain Irrigation has emerged as a global player in the onion dehydration business. Today, the company is among the largest processors globally, having six plants and annual processing capacity of 3,50,000 tonne, of fruits and vegetables which it supplies to domestic companies like Coca Cola India, Nestle, HUL and global players such as Sun Juice (UK) and Langers Juice (US).
 

FERTILE GROWTH
In Rs crore	FY08	FY09E	FY10E
Revenue	2,290.0	3,092.0	3,864.0
OPM (%)	15.0	16.2	17.0
Net profit	126.0	185.0	251.0
EPS (Rs)	17.4	25.6	34.7
PE (x)	19.3	13.1	9.7

This business has grown three-fold from a turnover of Rs 102 crore in FY05 to Rs 303 crore in FY08. Notably, considering that there are ample opportunities in the food processing industry (fruit juices, etc) and as company is now expanding its range to include other fruits (banana, oranges) and vegetables in the near future, this business should grow at about 40-45 per cent over the next two years.

Better margins

The food processing and MIS businesses enjoy operating margins of 25-30 per cent, while the pipes business earns margins of 10-12 per cent. Thus, overall margins are lower at about 15 per cent. Notably, the contribution of the pipes business has declined from 62 per cent in FY05 to 36 per cent in FY08, and is seen falling further as the share of food processing and MIS rise.

Additionally, thanks to the fall in crude oil prices, international polymer prices have come down by 40-45 per cent in last six months. Polymer is the key raw material accounting for 60-70 per cent of total manufacturing cost in the pipes and MIS divisions. This should also lead to improvement in operating margins as well as a decline in working capital required (by about 15-20 per cent; value of inventories and debtors should fall).

Favourable changes

The company’s working capital requirement stood at Rs 1,097 crore or six month sales in FY08 (working capital loan facility was Rs 620-650 crore; total loan outstanding was Rs 1,276 crore). In FY09, assuming a 35 per cent growth in revenue, working capital requirement should typically rise to about Rs 1,500 crore.

However, thanks to the lower polymer price, better receivables and decrease in inventory levels, the overall working capital required should be about Rs 1,275 crore. “As the cash flow will improve due to better working capital and lower capex, the company will require less working capital loan,” says Manoj Lodha, president- finance and banking, Jain Irrigation Systems. Going ahead, even as there may be a marginal increase (Rs 200 crore) in working capital loans (due to jump in turnover), the fall in interest rates (13-13.5 per cent to less than 12 per cent) suggests that interest cost is unlikely to increase in FY10.

Additionally, the company is also talking to state governments for providing a refinancing facility (for subsidy portion) from banks, which if materialises, will further reduce interest expenses.

Valuations

The company is operating in high growth areas, which will help sustain robust revenue growth for many years. The recent developments such as falling interest rates, lower raw material prices and improved cash flow are also some key positives in the near term. At Rs 321.25, the stock trades at 9.26 times its FY10 estimated earnings, and offers a good long-term investment opportunity.