Jain Irrigation is an India-based company engaged in manufacturing of plastics-based micro irrigation piping and plumbing systems. The company also has a small but growing food processing business, which mainly produces fruit pulps and dehydrated onions. Jain International Trading BV is a wholly owned subsidiary of Jain Irrigation incorporated in the Netherlands.
"Our rating on Jain Irrigation reflects the company's high leverage compared with peers' and elongated working capital cycle, resulting in pressure on liquidity," said S&P Global Ratings credit analyst Ashutosh Sharma. "The company's business is exposed to cyclicality due to the variability in monsoons and seasonality in sales."
Jain Irrigation's strong franchise with a dominant market position in India and second rank globally in the niche micro-irrigation systems market supports its credit profile. We also expect leverage to reduce and liquidity pressure to subside with growth in business and management's commitment to deleverage and reduce dependence on short-term working capital facilities.
"In our view, Jain Irrigation's higher leverage than that of peers, such as Valmont Industries Inc. and The Toro Co., weighs down on its financial risk profile," Mr. Sharma said.
The company has an elongated working capital cycle of more than 160 days due to the seasonal nature of the agricultural business. This duration, combined with high cyclicality and seasonality, will likely keep the leverage high, with the ratio of funds from operations (FFO) to debt likely to remain below 20% over the next 24 months. Agricultural demand is subject to vagaries of rains, which in our view induces demand volatility.
We believe Jain Irrigation's working capital management remains a key risk to our estimates. Any delay in collection of receivables or liquidation of inventory could add further pressure on the company's leverage.
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We believe Jain Irrigation's micro irrigation and the piping systems business face stiff competition from small and midsize players in India, given that these businesses have lower barriers to entry, especially in emerging markets.
We believe management is committed to reducing leverage by focusing on cash flows. A recently adopted cash-and-carry model in India should help reduce the working capital intensity. We expect Jain Irrigation's proposed issuance of senior unsecured notes to help it to refinance a significant part of its short-term working capital facilities and certain higher-cost long-term facilities, and improve the overall tenor of borrowings.
Jain Irrigation is well-diversified across its key markets, which include India, the U.S., Europe, Israel, Latin America, and Africa. In fiscal 2016 (year ended March 31), the company generated more than 45% of its revenues internationally, of which more than 30% was derived from Europe and North American markets. We expect the company to continue to increase its international presence by penetrating new markets in Latin American and Africa.
We consider Jain Irrigation's profitability to be average for the industry. The profitability compares well with that of its peers' such as Netafim (up to 2015) and Valmont but ranks below Toro, which has highly evolved brands. We expect Jain Irrigation's business mix to ensure steady to slightly improving profitability of 13%-15% over the next two years.
Our preliminary rating is based on the expectation that the Jain Irrigation will largely use proceeds from the proposed notes to partly repay its short-term debt and refinance a portion of its long-term debt. This will help relieve some pressure on liquidity for the company and result in a better capital structure. In the absence of the retirement of some of the working capital facilities and short-term debt maturities, the company's liquidity will come under pressure and result in a weaker credit profile.
The stable outlook reflects our view that Jain Irrigation's proposed notes and satisfactory banking relationship will help the company to manage its short-term working capital facilities over the next 12 months. We expect double-digit revenue growth driven by favorable monsoons and management's commitment to deleveraging to result in a ratio of FFO to debt of above 12% over the period.
We may downgrade Jain Irrigation by multiple notches if the company's credit standing in the capital markets weakens, such that we assess its liquidity to be weak. This could happen if the company is unable to secure working capital facilities for its subsequent operating season due to deteriorating working capital or pressure on its banking relationships.
We may also downgrade Jain Irrigation if the company's working capital needs remain high, resulting in significant shortfall of funds in the absence of the proposed notes. We may also downgrade Jain Irrigation if poor monsoons in India result in the ratio of FFO to debt falling below 12%.
We are unlikely to upgrade Jain over the next 12-24 months due to the company's high leverage and liquidity pressure. However, we may upgrade the company if: (1) the FFO-to-debt ratio reaches close to 20%, possibly due to strong operating performance; and (2) the company ensures adequate liquidity and a sustainable capital structure with a longer maturity profile.
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