Perfect crop

POUND WISE

A focus on global markets and expanding product portfolio as well as government's thrust on agriculture will benefit Jain Irrigation.

The greater emphasis on agriculture by Central and State governments and under penetration of agriculture technologies such as micro irrigation systems, suggest that Jain Irrigation Systems, a leader in micro irrigation systems with over 50 per cent market share, stands to gain enormously.

Jain Irrigation also has a presence in growing businesses such as food processing and, pipes and plastic sheets.

The company, thus, is expected to sustain the 40 per cent compounded annual growth (witnessed in the last five years) over the next few years as well. This growth will also be well supported by its efforts in the export markets and an array of acquisitions in the past 24 months.

Promising prospects
Jain Irrigation generates about 30 per cent of its revenue from micro irrigation systems. These systems find application in various irrigation activities, which in turn result in effective utilisation of water, seeds and fertiliser, all of which help towards increasing the yield and quality of produce.

In some crops, the saving of the water is as high as 50 per cent, compared to traditional irrigation methods.

In India, a large part of the country does not have reliable access to water resources. Only 50 per cent of the 140 million hectare of area under cultivation is covered by water resources and further, only about 1.7 million hectare is cultivated with the use of irrigation systems.

In this light and given the increased focus on irrigation, domestically, these products have promising future. Under the irrigation component of Bharat Nirman programme, the government is targeting to bring more area under cultivation including new land (one crore hectare) besides, improving utilisation of existing irrigated land (about 42 lakh hectare) by 2010.

The increasing prominence of these modern techniques of irrigation is also a result of subsidy (about 50 per cent) provided by the central and state governments and the cost benefit that accrues to the farmer.

Jain irrigation offers a range of products such as drip irrigation systems, sprinkler irrigation systems, valves, water filters, fertigation equipment, plant tissue culture products, nursery plants and systems.

The company's domestic micro irrigation business is expected to maintain its growth momentum in the range of 45-50 per cent over the next 3-4 years. This will be on account of better industry outlook along with ongoing investments and crop diversification.

The latter includes diversification into crops like cotton, chilly and vegetables. This will be partly achieved through the incorporation of newer technologies in its portfolio.

Global gains
The company has done several overseas acquisitions including a 50 per cent stake in NaanDan of Israel (specialised oilseeds, potato, and cotton), the world's fifth largest micro-irrigation company.

On March 3, 2008, the company completed the acquisition of 69.75 per cent stake in Thomas Machines S.A. of Switzerland, wherein it has an option to buy the balance stake.

Thomas Machines is a manufacturer of specialist machines and equipment, including drip irrigation lines. The acquisition will help Jain Irrigation to strengthen its capabilities and increase speed to market for new generation drip lines including 'precision irrigation' products.

In totality, the overseas acquisitions have not only provided superior technology but also helped gain access into growing markets like South Africa, US and Europe. For instance, the acquisition of NaanDan not only provided access to one of the largest markets (Israel), but also to NaanDan's manufacturing and distribution network in USA, Africa, Europe, Latin America and Australia.

Pipe segment
Besides irrigation systems, Jain Irrigation is also into the plastic pipes and sheets. This segment accounted for about 33 per cent of total revenue of Rs 425 crore in FY07.

The company manufactures PVC pipes and sheets and sells through its network 1,500 dealers across the country. These pipes find applications in transport of water and irrigation.

Within pipes segment, the company also manufactures pipes used by telecom (as a casing for wires) and gas companies. Again, this business too is expected to grow at over 50 per cent annually for the next few years.

Food processing
The company is also leveraging its position in the agriculture sector and making efforts in the food processing segment. Today, Jain Irrigation is the largest food processor in India, which accounted for 14 per cent of its total income in FY07.

The company has been adding capacities and has built a wide product portfolio through the organic and inorganic routes.

The acquisitions include Parle's fruit processing plants, Cascade Onion Dehydration, Terra Agro and Orient Vegexpo. The food processing business processes different juices and dehydrated vegetables for supply to institutional clients such as Coco Cola India, Nestle, HUL and global clients like Sun Juice (UK) and Langers Juice (US).

In dehydrated vegetables, Jain Irrigation is focused on onion dehydration. The company acquired controlling stake in Cascade Specialties, which provided access to the US market (the largest globally).

Globally, the onion dehydration capacity stands at around 175,000 tonne, where Jain Irrigation ranks third with a total capacity of about 25,000 tonne. Food processing is a fast growing business and is expected to grow by 60 per cent in FY08 and may account for over 15 per cent of total revenue. Thereafter, too, expect growth rates to remain high. 
 

DRIP PROFITS
Rs crore	FY07	FY08E	FY09E	FY10E
Sales	1,239	2,000	2,730	3,650
Net profit	83	134	203	330
Operating margin (%)	14.5	16.5	16.5	17
RoE (%)	31.3	23.5	20.5	23.5
EPS (Rs)	10.2	18	25	40
PE (x)	66	37.4	26.9	16.8

Investment rationale
The company not only operates in high growth areas, but these areas also offer high long-term growth visibility, which should help Jain Irrigation maintain strong growth in earnings over the next few years. The fruits of its investments into overseas markets including the acquisition, will also fuel growth.

The improvement in operational efficiency of these acquired companies and access of the new technologies and markets should also reflect positively on consolidated numbers going forward.

At the current market price, the stock trades at 27 and 16 times its estimated FY09 and FY10 estimated earnings, respectively and is a worthy investment.