>Jain Irrigation (JISL) has finally received RBI’s approval to launch its NBFC

Jain Irrigation (JISL) has finally received RBI’s approval to launch its NBFC. This, we believe, will help the company ease its stretched working capital cycle (steep gross receivable days of MIS at 340 days at FY12 end). JISL plans to expand this NBFC into a pan-India player over the next 3-4 years. Maintain ‘BUY’.


NBFC launch to be followed up with aggressive expansion
• The NBFC will be incorporated as a JV named, “Sustainable Agro-commercial Finance Limited” (SAFL; pronounced as SAFAL). It will initially be promoted by JISL, promoter entities of JISL and International Finance Corporation (IFC) – a member of the World Bank group. Post the launch of SAFL and the initial phase of its expansion, JISL plans to bring in some banks and financial institutions into the equity shareholding of the JV.


• Main activities of SAFL would include financing farmers for MIS, agri projects, contract farming, small businesses, setting up solar pumps and other appliances.


• JISL indicated sometime back that the initial investment into SAFL would be ~INR0.8bn, in the proportion of 10% by IFC, 40% by JISL and rest by promoter entities. In the second phase, INR1.2bn is likely to be infused by bringing in strategic partners.


• SAFL plans to commence its business activities post the monsoon period this year, by setting up ~25 offices in Maharashtra by Aug 2012 end and another 15 offices in the state by Dec 2012. In the second phase, SAFL plans to expand operations to Karnataka, Andhra Pradesh, Tamil Nadu, Gujarat, Madhya Pradesh and Rajasthan. In the phase three, it plans to cover the remaining states. SAFL envisages a pan- India presence with over 150 offices within the next 3-4 years.


Outlook and valuations: WC likely to ease; maintain ‘BUY’
While high working capital, high leverage and unhedged forex loans remain key concerns, the NBFC license coming through after a long wait will accelerate the pace of rationalizing the WC cycle. Consequently, leverage concerns for JISL are likely to subside. The stock is currently trading at 9.9x and 8.0 x P/E for FY13E and FY14E, respectively. We maintain ‘BUY’ with a target of INR110 based on DCF.


To read report in detail: JAIN IRRIGATION
RISH TRADER