Jain Irrigation Systems, the largest micro irrigation company in the country, is banking on its new non-banking finance business to improve its financial position.
"Management is clear and open about the working capital challenges. It is upbeat about the impact of the new NBFC as it becomes operational in the third quarter. Management sees this as a key step towards addressing a bloated balance sheet with high debtors driven by delayed subsidy payments, and high gearing because of working capital finance," Nitesh Sharma, analyst with Espirito Santo Securities wrote in his note to clients after his recent meeting with the company's top brass.
Jain Irrigation had received approval from the Reserve Bank of India (RBI) in July, 2012 to float a non-banking finance company (NBFC). The NBFC, Sustainable Agro-commercial Finance, is a joint venture between the promoters of Jain Irrigation and IFC, a member of the World Bank Group.
The NBFC will begin operations on a pilot basis by opening 20-30 offices in Maharashtra. It will then expand its business to other states like Andhra Pradesh, Madhya Pradesh and Rajasthan.
A farmer will have to take a loan from Sustainable Agro-commercial Finance equivalent to the amount of subsidies. The loan will be paid to Jain Irrigation in lieu of subsidy receivables. Once the subsidy is disbursed it will directly go to the NBFC and the loan will be closed. The farmer will have to pay interest at the rate of 15-16% on the loan.
The company will benefit because of better working capital management since there will be less blockage of cash in subsidies. Since farmers will bear the interest burden, the company plans to offer 5-10% discount on micro irrigation system to those borrowing money from the NBFC.
"The key point to monitor in the next two quarters is the company's ability to persuade farmers to take loans and pay for that part of the irrigation system that is currently funded through subsidies. To what extent farmers will accept this change, especially in the environment of deteriorating farm economics led by rising input costs, is a key monitorable over the next few quarters," Sharma said.
