Can Jain Irrigation System become part of Indian Agri Growth?

[Chanrdrab]

I am initiating this thread, as I find “Jain Irrigation System” ( http://www.jains.com/ ) is an interesting Company.
Founded by Shri. Bhavarlal Hiralal Jain, Jain Irrigation Systems Limited (JAIN) with more than 11,000 associates worldwide and revenue of more than a billion dollars, is an Indian multinational company with manufacturing plants in 29 locations across the globe. It is an integrated player in global food systems and leads in manufacturing of Micro Irrigation Systems, Plastic Pipes & Products, Agro Processed Products, Renewable Energy solutions, Tissue Culture Plants, Financial Services and other agricultural inputs since several decades. It has pioneered a revolution with modern irrigation systems and innovative technologies using cutting edge research and development in order to save precious water and to get significant increase in crop yields using global agronomical knowledge for millions of small as well as large farmers.

• Currently share is trading @ Rs.84.20
  -Share has fallen from its 52 weeks high of Rs.108 (30th Oct 2016) and consolidating in 80 to 90 Rs. Range in last 1.5 months.
  -Company has come out with Good Sept 2017 Quarterly result with 4.69 Crore Profit ( -5.68 Crore Loss during Sept 2016 Quarter).
• Jain Irrigation Systems reported to Rs 4.69 crore Net profit in the quarter ended September 2016 as against net loss of Rs 5.68 crore during the previous quarter ended September 2015.
  -Sales declined 14.96% to Rs 699.42 crore in the quarter ended September 2016 as against Rs 822.45 crore during the previous quarter ended September 2015.
• CMP / BV Ration is 1.60 (one of the best in industry)
• P/E Ratio 27.66 seems reasonable for this Company.
• Share has fallen from its 52 weeks high of Rs.108 (30th Oct 2016) and consolidating in 80 to 90 Rs. Range in last 1.5 months. Rs.46.80 is 52 weeks low.
• Debt to equity ratio is around 1.5 is on little higher side, but looks Management is trying to bring it down.
• Company has given small Dividend Rs.0.50 per share(25%)Dividend last few years
  ( last dividend Date 15-09-16)

Promoter Shareholding 30.95% looks like a concern.

I am not sure the impact of “Rupee Demonetization” on Jain Irrigation in short term as I have very limited knowledge on this.

Disclosure : Invested small Qty. at around Rs. 90 …Planning to invest more.

[basumallick]

the challenge with this company has been their poor history of capital allocation. They have tried to do several things in the past which are not strictly core to their expertise. Moving into PVC pipes or solar appliances does not seem a very good move. Now they have started frozen foods as well. Seems like they are not really sure what they want.

[Finrahul9]

2 months back approx i had done this study :

Financials : ROE is very Low , Debt /Equity is more than 1 , so on the higher side . However they have been reducing the debt for the past 5 years . Free cash flows to Total revenue is around 2% , which means that for every Rs 100 of revenue --the company is able to generate only 2 Rs profit , which is considered to be LOW .

Recievable Days have been constantly going higher for the past 5 years and payable days are going down - This is a big NEGATIVE for the company . Means the company is paying to its creditors in 66 days , however getting paid from its customers in 159 days which is too HIGH . This can be because the company is dealing with state govts as clients , where the company has very less negotiating powers.

Sales has been stagnant and over a period of 5 years it has declined .

Valuation : As per Owner Earnings the stock looks overvalued . Since March 2016 the market cap increased from 2800 Crores to 5000 crores currently , without any visiblilty of increase in sales. I have observed that if sales is not driving the stocks price , then the movement is generally not sustainable in the long run . The increase in the profitability in march 2016 was primarily because of the decrease in raw material prices.

Some Observations ( Not in any particular order)

1. Promoters had pledged around 20 % of their holding which is around 30 percent of the total shareholding . The promoters have been reducing their pledge since March 2016 ( This could be one reason for prices going up) , however recently i saw that in october they have again pledged 78 lac shares with JM Financial products . This increase of pledge wipes out the earlier positives . Also the promoter holding of 30 % is considered to be low .

2. The company as per their disclosure has inked a pact worth 18.7 million Euros with Ministry of Agriculture and National Development for supply of solar powered drip Irrigation systems . However this is a very small percentage of the total revenue . So the news is not a very big positive.

3. The share price has risen since march 2016 by approx 65% and the DVR has gone up by approx 60% . The DVR discount in India is prevailing for other shares also and this difference does not seem to get filled .

4. Based on the owner earnings , the shares look Overvalued . Current PE of 40 looks on the higher side when compared to competitors like Finolex Industries .

5. The company has too many subsidiaries .

6. a)Micro and Sprinkler Irrigation ( Saving Water for Agriculture) constitutes around 41% of the total companys turnover which is heavily dependent on Good Monsoons . High Initial Cost is a negative for MIS. This segment is growing the fastest as it is focussing on Saving water . The government provides upto 50% capital subsidy for promoting the use of Micro Irrigation to farmers. This segment has shown degrowth in the past 2 years due to bad monsoons.

b) PVC Piping - Around 18% of the total turnover . Segment - PVC piping is expected to grow at 15 % CAGR . Added capacity during the year Fy 16 =9970mtpa , while the competitor Finolex Industries which is focussed on PVC pipes added a capacity of 30000 mtpa during the same period.

c) Biotech Tissue Culture - About 2.5% of the total company turnover .

d) PE Piping - About 12.8% of the total company turnover .

e) Onion and Vegetable Dehydration - 6.5% of the company turnover

7. The top 4 directors have taken a raise of 21% on their remuneration , inspite of sales being flat and profit primarily rising due to decrease in raw material prices .

Jain irrigation has diversified into too many product lines , while Finolex industries concentrating only on PVC pipes , generates more profits "
This is a commodity type company , which is highly cyclical in nature , Also observed that September quarter and December quarter is historically POOR for the organisation .
The management has been constantly funding its subsidiaries and also diluting equity by issuing shares and warrants . I guess this will continue as management will continue to need funds for CAPEX . However this is bad new for the Shareholders.

Competitive Analysis - Compared to its peers Jain irrigation looks expensive.

EPA stands for Economic Profit Added , it clearly shows that Finolex industries has added more value than Jain Irrigation .

Discl: NOT Invested , Please do your due diligence and study . This is for academic purpose and not a recommendation for Buying /Selling the stock .

[sumi00]

All skepticism about the company is valid but there are many positives emerging in the near to medium term. I will not provide numerical analysis as things could turn around very fast in coming quarters.

• A clear deleveraging plan has been provided and management is delivering on that. Investor community has taken notice of the same.

• Monsoon situation has reversed: One would note that La Nina has emerged and it is expected that over the next 2-3 yrs we would have normal monsoons in India.

• Diversification: I agree that this is a real pain but think again about their plan. They got into pipes since farmers buy MIS systems along with pipes so mostly a backward integration. Even solar pumps are related business and will support their main MIS business.

• Play on water shortage and improvement in productivity: Many state govts. want to make MIS systems mandatory for few cash crops like Sugarcane. As per estimate 1 lac crore worth of MIS orders could be required to become fully compliant on this front. Even water transport systems are being replaced on a large scale. This makes Jain irrigation a clear beneficiary.

• Agri Business: They are among the largest in the world in a few commodities. This segment is growing really well and profitably. they maintain guidance of 20% CAGR over then next 3-4 yrs. Food processing is clearly current govt.’ pet theme. There is a real possibility of value unlocking and also they plan to get into B2C business. They plan to launch fruit based products into the retail market in Q4.

• Huge operating leverage play: The earnings could really surprise due to inherent operating leverage in this business. Effect of financial leverage is already playing out.

Disc: Hold with 10% allocation.

[basumallick]

The problem is backward or forward integration is it is limitless.

To make the point, I am using a bit of hyperbole
Management can say we do drip irrigation which uses pipes hence lets make pipes. Then since we make pipes, lets make PVC. Since we make PVC lets build a refinery. Since we have a refinery, lets invest in oil drilling!!! All in the name of backward integration

The point I was making is that they were not doing well in their area of core competence which they should have tried to correct first. Diversification (backward integration) could have come later.

Not sure how prudent is adding debt to invest in pipe manufacturing. They could have kept their BS light by buying pipes through competitive bidding process.

[sumi00]

He he he that is how Mota bhai’s father made his fortune too

I feel they got caught in a wrong business cycle and very prolonged monsoon troubles. Additionally, the focus of the previous state govt. in Maharashtra was to build large scale dams and canals leading to huge scams. All these issues are reversing now. Many municipalities/state govts are waking up to importance of water conservation. The management has learnt its lessons too.

[Chanrdrab]

Thanks Abhishek , Finrahul9, Sumit for your views.
@Finrahul9 I see P/E as 26.50, in your comments I see 40.75. I refereed Screener site, not sure how accurate it is. Can you please share where I have gone wrong here. https://www.screener.in/company/JISLJALEQS/consolidated/

[aashish2137]

Another tailwind for this company could be the govt’s thrust specifically on irrigation part of the agri story.

From Budget 2016 - http://economictimes.indiatimes.com/news/economy/agriculture/budget-2016-farmers-welcome-focus-on-expansion-of-irrigation/articleshow/51190591.cms

Another such push can be expected from Budget 2017.

[pskrishnan]

As @basumallick has pointed out, their capital allocation skills are very poor and they keep diversifying beyond their core expertise.

Their receivables are always likely to be stretched as Jain Irrigation derives bulk of their revenues through State Government’s micro irrigation subsidy scheme, and payments are delayed and minimum timeframe for receiving payments is between 5 to 6 months from the State Governments. Jain Irrigation has been trying to develop the retail market for micro irrigation systems and pipes. But they are not successful as their product quality does not match up to their competitors across all segments

Having factored the negatives, the opportunity in this space is immense with both Central & State Governments providing significant budget allocation towards micro irrigation systems. We can expect significant budget allocation in Union Budget 2017 too. Jain Irrigation will benefit from this despite their product quality issues as their core competency is in their ability to be part of empanelled suppliers for Government micro irrigation schemes as well their reach into the taluk level horticulture blocks (All farmer referrals / enquiries with the horticulture blocks for subsidised micro irrigation schemes are predominantly directed to Jain Irrigation, though this varies from districts and states depending upon the kickbacks offered and the political clout of other local micro irrigation providers)

There is definitely a significant potential for revenue growth for Jain Irrigation, the issue is whether this will translate into proportionate profitability growth and EVA is the big question?

Disc: Had previously held Jain Irrigation, Planning to enter at Sub 80 levels as a pure trading play given the spike in Q4 results and budget

[abhi2525]

Anyone tracking it currently?

[sumi00]

Yes, I do. The stock is doing just ok in this bull market.

[sumi00]

Jain Irrigation results were underwhelming for me but Mr Market seems to be excited. The effect of operating/financial leverage and reducing financing costs were anyway helpful. I think slew of large order wins will help them achieve better earning growth.

Disc: Invested

[sumi00]

The company is guiding for 25% EBITDA growth in Fy18, stable debt and decline in interest rates. All points to almost 100% increase in PAT/EPS. Management commentary is very positive after long time while leverage is declining. However, despite all these efforts its return ratios will remain pathetic. This shows the potential it has to grow in medium term.

Disc: Invested

[sumi00]

Seems no one is tracking this laggard! management has indicated willingness to demerge agri processing biz in FY19 which does 250-300cr EBITDA and managed by another sibling. Mgmt is very bullish on outlook for H2-FY18 and FY19.

Disc - Invested

[kali32]

http://karvyonline.com/viewdocument.aspx?DocumentID=18651

Target of 140.

Key Takeaways from Conference Call
The management has expressed confidence with regard to picking up of retail business in view of RBI allowing district Cooperative Banks to start functioning which will help remove distress of farmers.

Within Plastic Division, PE pipes have been in good demand for its gas and cable application. PVC pipes demand continued to remain subdued but some positive sign has started to emerge as the company has done good business in the month of November this year.

The food business has grown in terms of profitability wherein domestic business contributed more than export business. The company has good order book for domestic as well as export to achieve double digit growth.

The order book is of about Rs. 39000 Mn and out of that about Rs.19000 Mn is for Hi-tech Agri Input division and about Rs.7700 Mn is for Plastic Division and more than Rs.10000 Mn is for food processing division.

Irrigation in the retail business in states like Andhra Pradesh, MP and Rajasthan were positive but Maharashtra, Tamilnadu, Karnataka and Gujarat were on negative side.

The government reduced GST rate from 18% to 12% on Micro Irrigation Systems (MIS). But, reduction of rate did not make any change as 12% rate was brought only for specific products like Sprinkler and Drippers whereas most of drip irrigation is sold as system and rarely invoices are raised separately for Drippers. So, business remains at 18% GST.

As on date, the company has repaid $45 Mn Foreign Currency Convertible Bonds (FCCBs) including redemption premium; and rest about $10 Mn of outstanding will be due for repayment in month of April next year.

The company’s spice processing plant is going to start soon and revenue visibility will be there from fourth quarter.

The company would start processing Orange and Citrus juice concentrates in next fiscal year. The company is also planning to launch spices and additional fruit snacks products.

The company plans to do IPO for Food Processing Business and see enormous growth possibility in it.

[VALUE2017]

I had been tracking this stock continuously for more then 3 years form Aug 2014 to Nov 2017 and was considerate part of my portfolio. My return during 3 years was around 50% , however at last I lost my patience not because the stock was not performing but because the way management was performing… I still I think its a great sector with government thrust and many tail winds but still the company is performing poorly. I never expected exponential return from this stock but I always wished the company to perform. I was ready to hold this company for even more then 10 years.
There were some parameters because of which I finally decided to exit the company.

1. High level of debt.
2. High level of receivables and also the Quality of receivables ???
3. Frequent Equity dilution.
4. Large number of subsidiaries.(This is some thing which is really very irritating forming large number of subsidiaries and then each subsidiary having cross holding in other , give a reflection of poor corporate Governance)
5. Excess and unrelated diversification.
6. High level of pledged shares of promoters.

Regarding 5th point I would like to elaborate

The company had opened NBFC who in turns finances the farmers to purchase their Irrigation equipment. The company’s logic was that this will help them to increase their sales and bring down the level of receivables and . I think this is ridiculous when you are not able to sell your equipment or realise the sales , you are financing the user. Ultimately this is shifting of liability from one company to another. The books of parent company will be green but it will create NPA in the books of NBFC. However even after this initiative the company was not able to improve the high levels of recievables.

Recently the company has acquired in USA, retail chain of irrigation equipment…it gives an impression that the company is not able to sell its goods in the market so the other way round is that you make acquisition of shops so that you can push your goods.

One more example of unrelated diversification : The company is in the business of manufacturing of PVC pipe of various grades, however during the last 2 years it has bagged many EPC project contract.
The company is not into the work of civil construction. Ideally some EPC contractor should get the order and the company should be competitive enough to sell its pipes to EPC contractor. I really dont understand that for selling of pipes should I first undertake some civil construction Project and then use my pipe in that project. Core competence of Jain Irrigation is manufacturing of PVC pipes and not under taking EPC project of laying pipes.

Further there has been capital infusion of around Rs 800 Cr by way of equity dilution however the there is hardly any improvement in absolute debt figures.

The management in every concall gave a rosy picture for the next quarter however during the last 12 quarter I had been disappointed every time.

I still wish that the company should really turnaround and I will enter only if there is some perceptible change in the performance of the company.

[VALUE2017]

Reduction of GST from 18% to 12% is a very positive for this stock, but its just like " You can take the horse to the pond but cant make him drink"
Ultimately the company will have to perform and the management should show some perceptible change in its performance rather then beating around the bush.
The management should take a conscious call and consolidate all its subsidiaries as much it can and make its balance sheet easy to be understood by its investors.

Also I find the 376 pages Annual report with hardly any improvement in its performance to be very irritating.

Disclosure invested 5% of my portfolio in the hope that the performance of the company will turnaround as there are lots of tail wind in the sector and I wish the company to perform so that it can help Indian farm sector and farmers to progress. (and also my investment)…

[VALUE2017]

I have not analysed the result but this what really irritates me:
The quarterly results announced by the company with auditors remarks that they have not reviewed the financial results of 2 subsidiaries including 31 step down susidiaries.

Total revenue of Rs 896.58 Cr and loss of 32.33 Cr.
Really hard to figure out

[VALUE2017]

I judge this company on only two parameters and I find all there quarterly results as financial jugglery of numbers

1. Receivables and inventory days.
2. Outstanding debt and financial expenses.

Current quarter financial expense of Rs 118 Cr for whole year 118x4 = Approx 450 Cr.
and inventory receivable at almost same level.

In spite of good reported net profit I give a thumbs down to the result and I anticipate that if the current thrashing of mid cap continues this stock is expected to give all its gains of last 3 months.

[Divyanshu_Taneja]

Not fully agrees with your views bcos company is planning to come with ipo of subsidiary so that can help in reducing the debt also if you listen to past comments of promoter they never had a very willer to reduce debt by 100 % it is a problem with this management , i would say results are good and can see upmove by coming tomorrow and week