Mid-cap mantra: Jain Irrigation to reap gains from a pro-farm Budget

The latest Budget highlighted government's priority area for rural development — irrigating each farm by 2022, while improving its efficiency through micro-irrigation. This, apart from farmer empowerment measures like unified agricultural market, Rs 8.5 lakh crore target for farm loans and investment in rural infrastructure, is all set to benefit Jain Irrigation, which has a business model centred around Indian farmers.

Jain Irrigation is the domestic leader in micro irrigation systems (MIS), which contribute nearly 40% to its consolidated revenues, while PVC pipes and fittings contribute another 25%. Other businesses including food processing, tissue culture and solar make up for the remaining business.

The government's focus on empowering farmers comes at a time when the company is taking steady steps towards reducing its debt burden, which proved to be its undoing in the last three years. The company has decided to transfer its prosperous food processing business to a subsidiary intending to divest minority stake and raise funds. The management has already started negotiations with potential investors for this and a deal is expected in mid-FY16.
The food processing business with nearly Rs 1,500 crore turnover enjoys operating profit margin of around 25%-30%. Secondly, it has modified its business model to encourage farmers pay fully for the micro-irrigation systems and claim subsidy from the government later.

"This change in model impacted our MIS turnover in FY13 and FY14; however, with farmers realising the benefits of MIS our sales have picked up this year," said Anil Jain, managing director. Even as the MIS revenues jumped 24% YoY in the 9-month period ended December 14, the company was able to curtail its MIS receivables to 197 days at the end of December 14 from 211 days from end of September 2014 and is on track to reach 180 days by end March 2015. The Jan-March quarter is typically the best quarter for the company, with not only higher sales and profits, but higher cash generation.

"The company had cut down Rs 250 crore of debt in March 2014. This year we plan to reduce it by Rs 300 crore in March," said Jain. "We expect the debt reduction cycle to start in the current quarter and hope to maintain momentum thereafter," he added. The company expects to achieve debt-equity ratio of 1:1 by March 2016 at standalone level and by March 2017 at a consolidated level. For growth in the MIS segment, the company is focusing on funded turnkey irrigation projects with an order book of Rs 400 crore. States like Karnataka and Maharashtra have mandated the water guzzling crop of sugarcane to adopt micro-irrigation over the next five years, which is set to enable the company maintain its MIS growth above 20%.

Under its tissue culture business, the company is targetting Rs 150-crore turnover in FY16 for its banana and pomegranate saplings, where demand far exceeds supply. Its solar product portfolio consists of water pumps and water heaters, where demand can grow. At market capitalisation of Rs 3,082 crore the company is being valued at 1.5 times its book value.