Jain Irrigation: Over the past few years, the world’s second largest micro irrigation firm underperformed largely due to sales made to state governments. A number of state governments delayed their payments and Jain Irrigation, which had by then integrated downstream into food processing, evolved into a debt-heavy company. So even as the company’s balance sheet kept growing in size, this was at the cost of quality. Earnings stagnated; interest cover collapsed; fund managers wrote off the scrip; coverage declined; the stock dropped from a peak of Rs 154 to Rs 47.
The company changed its approach thereafter. Instead of waiting for receivables, it switched the model: it got its dealers to take the receivables on its books and began to divest a part of its downstream businesses.
The impact has begun to show starting the first quarter of the current financial year. The company reported an earnings before interest, taxes, depreciation and amortisation (Ebitda) of Rs 247 crore in the April-June quarter of FY17 against Rs 206 crore in the corresponding quarter a year ago; interest outflow declined from Rs 124 crore to Rs 109 crore; interest cover increased from a dreadful sub-two to well over two.
If the company can sustain this run rate through the course of the year, that could mean an Ebitda of Rs 1,000 crore this year against a market capitalisation of around Rs 4,900 crore. Subsequent top line growth and further interest reduction could be the kicker that investors need.
Nandan Denim: Everyone has just one question to ask: can the management be trusted? Turn to the numbers for clues. Quarterly revenues have grown from Rs 280 crore to Rs 300 crore across the past five quarters; quarterly Ebitda has been predictable in the Rs 45-50 crore range.
A market cap of around Rs 660 crore is attractive for good reasons: one, at this price, the company’s Ebitda has already been discounted around a safe 3.3 times, which means the benefits from its proposed expansion will come virtually free; two, interest cover has been a comfortable 5x through the past five quarters; three, the company increased its denim manufacturing capacity from 71 million metres per annum in FY14 to 110 mmpa from the second quarter of FY16.
This is what is likely to happen: interest costs (uncapitalised) will rise, revenues could rise faster, and earnings could rise fastest.
My optimism: the company is integrated (85 per cent yarn appetite serviced from within), intends to manufacture value-added denim (a third of overall output), uses superior technology (lower costs), consumes cheaper debt (two per cent) and has leveraged a favourable Gujarat government textile policy (value-added tax refund of Rs 450 crore for a Rs 612-crore project) potentially widening Ebitda margins.
My hunch is that once the expansion translates into margin growth, a number of analysts will hurriedly re-rate the company as befits one of the five largest denim makers in the world.
The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed
