Monday, February 13, 2012

>JAIN IRRIGATION SYSTEMS LIMITED: MIS growth to remain slow as focus on cash

Jain Irrigation’s 3QFY12 results were impacted by a higher-than anticipated interest cost and high exchange loss on foreign currency loans, which led to the company reporting only a tiny profit. Growth in micro-irrigation systems (MIS) declined to an all time low as the company was focused on controlling receivables. Agro-processing disappointed massively, while the piping business surprised positively. With the stock trading at 8.5x FY13F earnings we reiterate our Buy rating.

Key result highlights:
■ Net sales missed our estimates by 7%, increasing only 13% y-y. The key contributors to the low growth were the core MIS business and the agro-processing business.

 Operating profit also missed our estimate by 6%, as the company saved on staff costs and selling and admin costs. Margins were higher than our estimate on the MIS business but lower on the agroprocessing front, which was a negative surprise given the much better than- expected performance in 2QFY12.

 Interest costs at INR916mn surprised negatively, rising almost 60% yy on higher amount of working capital debt and higher interest rates resulting in profit before tax missing our estimate by 21% and reporting
a 25% y-y decline.

 As we expected, the company did not make use of the option provided by the Ministry of Corporate Affairs to amortize exchange losses on foreign currency debt. It instead reported a surprisingly large exchange loss of INR711.4mn vs. our estimate of INR450mn.

 The foreign exchange loss almost wiped out the profits of the company, leaving only INR12.4mn to be reported as the PAT. The company has taken tax shelter on the exchange loss to report almost no tax payment during the quarter

 With the INR appreciating against the USD in the current quarter, we expect some of the foreign exchange losses to be reversed in 4QFY11.

MIS business:
 The core MIS business grew only 10.5% y-y in 3Q, as the company consciously reduced growth to ensure that receivables on account of government subsidies did not increase.
 However, this low growth was a disappointment, suggesting that at an average of 65% of the value of the system being subsidised the company received only INR3bn from the various governments on older subsidies during the quarter. Jain has reduced the gross receivables on MIS by INR390mn q-q on a base of INR18.2bn. Due to lower bill discounting though, the net receivables on account of MIS are up INR1.5bn q-q. In terms of days of sales they are down 15 days q-q.
 Over the last nine months the company has reduced exposure to its key markets like Andhra Pradesh, Tamil Nadu and Karnataka to just 21% of overall MIS revenues from 37% in FY11 to retain control on the ballooning receivables from these governments. It has tried to make up for the deficit through Gujarat, Rajasthan and exports. In our view, these new states may not have the market to absorb the entire shortfall from the older ones and the company will continue to have to rely on Maharashtra for its growth, where also receivables are an issue.
 The company has cut down on its inventory over the last 12 months to reduce the working capital requirement.
■ We expect growth to remain weak in 4QFY12 too as company conserves cash.

 The pipes business has been the saviour this quarter, with PVC pipes growing 36% y-y after two quarters of slow growth as retail demand has picked up along with exports to Africa.
 PE pipes have displayed a sudden revival growing 15.5% y-y after seeing de-growth or very little growth over the past two years. The growth has been led by the gas distribution and water segments with margins also picking up after four quarters.
 Receivables are also down 20% q-q

■ This segment was the big disappointment in 3Q after showing signs of hope in the 1HFY12. We again reiterate our view that the company should sell off this business as it is a low-return, low-margin, volatile business which can no longer helping with cross-selling opportunities for the MIS business. The company can use the cash generated from the sale to invest in the working capital needs of the core MIS segment

 Dehydrated onions grew 72% y-y on an extremely low base, though EBITDA margins fell 10 percentage points q-q, which is fairly surprising, as onion prices have not risen. This is an export-oriented business, and the depreciation of the INR against global currencies should also have helped both revenues and margins. but surprisingly has not.

 Fruit processing turned out to be the big disappointment, as lower availability of pulp for 2HFY12 has led to a y-y decline in sales.

 Receivables for the combined agro processing segment are down 20%, too, q-q.

Balance sheet:
The company had USD157mn of foreign currency debt on its books as of 31 December 2011, with repayment of USD 3.8mn in FY12 and USD48.6mn in FY13F. The total term loan is INR11.6bn on the balance sheet up INR2.3bn from March 2011. It has a total term loan repayment of INR6.7bn in FY13F and FY14F. The net working capital cycle is at 178 days of sales outstanding down 12 days q-q and 20 days y-y, which is good news. We expect to see this decline further in 4QFY12 as inventory moves down and receivables move down a bit too. The company expects to receive INR3.5-4bn of receivables from the Maharashtra and Andhra Pradesh governments in 4QFY12.

To read full report: JAIN IRRIGATION