>Jain Irrigation Systems Limited (MERILL LYNCH)

Micro Irrigation growth panning out well

Raising estimates; New PO INR575
Posted a better quality of earnings in Q4 & higher revenue visibility, as such we’ve raised FY10 & FY11 estimates by 1% & 5% factoring in higher margin in MIS business. We reiterate Buy with a PO of INR575 (previously PO INR500) pegged at 17xFY10e and 0.5x PEG. We expect strong performance in domestic MIS to drive 36% EPS CAGR. The stock trades at 15xFY10e and 8xFY10e EV/EBITDA.

Q4 operating earnings growth driven by MIS
While Q4 revenue grew 15%yoy, EBITDA was up 23% yoy driven by 125bps margin expansion. Recurring PAT was down 11% yoy due to higher interest outgo due to new IFC loan and higher taxes. MIS grew 36% yoy with margins 650bps higher than our assumed normalized margin at 26%. Agro processing growth was muted as strong off takes in Q1-Q3 resulted in less Q4 domestic sales..

Expect 36% EPS CAGR; Visibility improves
We expect 36% EPS CAGR driven by 70bps margin improvement over FY09-11. revenue visibility has improved given i) strong order flow and inquiries in pipes, ii) Coke which forms 40% of fruit processing rev has indicated for ~30% higher requirement in FY10, iii) current order book in onion dehydration forms ~60% of our FY10 segmental est. and iv) continuing strong performance in MIS.

MIS growth pans out well; Working capital ratios to improve
Domestic MIS remains the main earning driver for the company. Company’s strategy of growing in new states is succeeding given strong ramp in Tamil Nadu (260% yoy), Madhya Pradesh (80% yoy) and Karnataka (44% yoy). Also, it is consistently deriving better than expected margins given its pricing power and declining raw material prices. As per the company, its working capital ratios have also improved due to lower DSO and inventory days.

To see fuul report: JAIN IRRIGATION