The new announcements by the government will provide a fillip to the company’s mainstream business.
The positive news for Jain Irrigation has made analysts re-work their estimates. The Cabinet Committee on Economic Affairs (CCEA) approved the implementation of the micro irrigation scheme as the National Mission on Micro Irrigation (NMMI) on June 10. This augurs well for the company’s mainstream business — Micro Irrigation Systems (MIS).
The business contributes around 47 per cent to the company’s total revenues. It has been one of the fastest growing business areas and recorded a 36 per cent year-on-year jump in revenues during FY10. Operating profit margin, at 31 per cent, is also amongst the highest amongst other businesses like PVC pipes and Agro products.
CCEA has charted an outlay of Rs 8,033 crore for the balance two years of the Eleventh Plan (till March 31, 2012). It has also mentioned the intention to add around 2.85 million hectare under MIS within the next two years. According to analysts, Jain Irrigation plans to add around one million hectares and the industry another million. There would be an additional demand of 0.85 million, which translates into a 22 per cent additional growth in demand for the industry.
Jain Irrigation, the industry leader, is expected to gain substantial market share. The plan even includes a 40 per cent subsidy for general farmers and 50 per cent subsidy for small and marginal farmers. These subsidies have been a driver for MIS growth. However, the details of the manner in which they are disbursed will have a telling impact on the receivables of the company and, thereby, the working capital management. The management has guided for a 45 per cent growth in the MIS business, and this new development could well see the ambitious target met. Over the past five quarters, the growth in the MIS segment ranged 38 to 26 per cent, and after it recorded a 46 per cent growth in the March quarter, there were estimates that the growth rate had peaked. The company, with a price to book value of six times for 2009-10, has always traded at a premium to the market. Analysts expect this will continue only if the rollout of NMMI happens in line with plans.