Drain Out Your Portfolio Of Jain Irrigation
Jain Irrigation Systems Ltd. (JISL)
DRAIN OUT YOUR PORTFOLIO OF JAIN IRRIGATION
Jain Irrigation Systems Ltd. (JISL) is an agri business company. It boasts a production capacity of more than 5,00,000 M.T. per annum, which is equivalent to 8,000 km/day. It is renowned for being the only manufacturer to own a DSIR approved R&D set-up. The company's micro-irrigation division is engaged in the manufacturing of precision-irrigation products and providing services such as soil survey, engineering design and agronomic support. It also operates an expansive 2,300 acre hi-tech agri institute. Jain piping division is the largest producer of thermoplastic piping systems including PE and PVC pipes and fittings for pipes ranging from 3 mm to 1,600 mm in diameter and in pressure ratings ranging from 1.00 kgf/cm2 to 25 kgf/cm2.
Financial Performance
The company delivered a dismal consolidated financial performance for the quarter ended March 2019. Its total income declined 7.01 per cent YoY to Rs.2,583.07 crore in Q4FY19 from Rs.2,777.70 crore in Q4FY18. EBITDA plummeted 37.81 per cent YoY to Rs.248.89 crore in Q4FY19 from Rs.400.21 crore in Q4FY18. EBITDA margin came in at 16.9 per cent for the quarter. Net profit spiralled down 39.16 per cent YoY to Rs.55.47 crore in Q4FY19 from Rs.91.18 crore in Q4FY18 due to the impact of forex conversion. Consequently, EPS sank 44.97 per cent YoY to Rs.1.04 in Q4FY19 from Rs.1.89 in Q4FY18.
Despite the poor performance in the fourth quarter of FY19, the company showcased a positive set of numbers for the full year ended March 31, 2019. Total income from operations rose 7.93 per cent YoY to Rs.8,576.94 crore in FY19 from Rs.7,946.76 crore in FY18. EBITDA declined 12.30 per cent YoY to Rs.925.62 crore in FY19 from Rs.1,055.43 crore in FY18. EBITDA margin stood at 14.6 per cent for FY19. Net profit exhibited growth of 15.08 per cent YoY to Rs.250.48 crore in FY19 as compared to Rs.217.66 crore in FY18. EPS rose 9.18 per cent YoY to Rs.4.64 in FY19 from Rs.4.25 in FY18.
Operating Performance
The overseas business showcased higher growth than the domestic business. The tightening of liquidity in rural markets, draught in certain regions of India and slowdown on account of the uncertainty revolving around elections in April 2019 impaired the sales and collections during the fourth quarter of FY19. Nevertheless, both finance costs and depreciation declined 14.9 per cent and 17.3 per cent, respectively to Rs.112.9 crore and Rs.72 crore, respectively, in Q4FY19.
Meanwhile, in FY19, its finance costs increased 7.3 per cent to Rs.513.7 crore. However, depreciation dropped 9.3 per cent to Rs.312.9 crore in FY19.
The muted growth in Q4FY19 is attributable to purchase deferrals by end-users, as well as delays in the project business of plastic products. Nonetheless, the company exhibited good improvement at the inventory level. Furthermore, the net working capital in the food business improved by 18 days YoY.
Challenges
JISL’s balance sheet is burdened with a massive amount of debt. The company reported debt of Rs.4,954 crore in March 2019 as against Rs.3,891 crore in March 2018, a growth of 27.31 per cent. This led to rating downgrades by the credit rating agencies such as India Ratings and Fitch Ratings. India Ratings and Research downgraded the company’s long-term issuer rating to ‘IND BBB’ from ‘IND A-‘, while also placing it on ‘Rating Watch Negative’. Apart from the growing debt levels, the company’s working capital and interest payments are exerting pressure on the operating cash flows. This does not leave the company with much in hand to make debt repayments. The mounting debt is attributable to delays in receiving payments from the government to fund the company’s micro-irrigation business. Owing to the nature of JISL’s business, a major chunk of its debt is in working capital. Furthermore, the company’s consistent acquisition of assets also contributed to the rising debt.Nevertheless, the company has not defaulted on any debt repayments. Despite its struggles, the company remains a profit-making and dividendpaying entity.
Strategy
The JISL board of directors has decided to pare down the debt of the company and its subsidiaries by at least Rs.200 crore over the course of the upcoming 12 to 24 months. It intends to do so by means of demergers, divestments and equity infusion in the food and plastic business in India as well as in the overseas irrigation business. It will enlist the help of bankers to assist with this process by September 2019. Presently, the company has an order book of Rs.5,152 crore. The focus will be on executing the same with the intention of lowering receivables. The management also intends to focus on overseas orders of MIS and plastics, which are secured and will entail a receivable cycle of 90 days.
Order Pipeline and Acquisitions
JISL bagged an order of integrated micro irrigation project in Karnataka for improving water use efficiency in canal command areas through conduit distribution and the use of drip irrigation system from the main canal onwards. The project will engender revenues to the tune of Rs.584 crore. Furthermore, the company acquired the smart irrigation pioneer ETwater. The acquisition will aid in expanding the ETwater efficiencies, not only across the US, but also across the world. The company received an export order of Rs.127 crore from Rwanda Agriculture Board (RAB) for irrigation and watershed development in the Mahama sector under the Export Targeted Modern Irrigated Agriculture Projects in Rwanda. The project is financed by the EXIM Bank of India under the Government of India Line Of Credit (LOC) programme. JISL has undertaken complete responsibility of the development infrastructure for various irrigation systems such as sprinkler irrigation, centre pivot and pipe hydrant system. These irrigation systems, which will work under gravity, will be designed by JISL under an EPC contract. The project is scheduled to be completed in the next 18 months. In addition, JISL will also execute an integrated drip irrigation project worth Rs.240 crore in the Vidarbha region of Maharashtra. The project will be executed within 24 months and will improve water use efficiency up to 90 per cent (from the present level of 35 per cent) in canal command areas by means of pressurized piped distribution network and on-farm micro irrigation (drip/sprinkler).
Conclusion
Although servicing the existing debt is not a tremendous challenge as the debt repayments are scheduled in such a manner that they are spread out across 5 to 6 years, they depend on expected normal cash flows which are based on the success of the company’s growth plan. Investors have reacted strongly to the company’s struggles, thereby eroding the company’s market capitalisation by two-thirds over the last few years to Rs.1,280 crore. This is in stark contrast to the peak market cap of Rs.9,827 crore, which the company had reached in 2010. By virtue of these factors, we urge our reader-investors to SELL this stock.
"The mounting debt is attributable to delays in receiving payments from the government to fund the company’s micro-irrigation business. Owing to the nature of JISL’s business, a major chunk of its debt is in working capital. Furthermore, the company’s consistent acquisition of assets also contributed to the rising debt. Nevertheless, the company has not defaulted on any debt repayments."
"JISL’s balance sheet is burdened with a massive amount of debt. The company reported debt of Rs.4,954 crore in March 2019 as against Rs.3,891 crore in March 2018, a growth of 27.31 per cent. This led to rating downgrades by the credit rating agencies such as India Ratings and Fitch Ratings"
"The JISL board of directors has decided to pare down the debt of the company and its subsidiaries by at least Rs.200 crore over the course of the upcoming 12 to 24 months. It intends to do so by means of demergers, divestments and equity infusion in the food and plastic business in India as well as in the overseas irrigation business. It will enlist the help of bankers to assist with this process by September 2019."