JAIN IRRIGATION: Stalled Fund Flow Takes a Heavy Toll

The stock has slumped on delayed subsidy payments, but looks attractive now as the company has moved to contain the fallout

Jain Irrigation's woes are not over yet as the sharp fall in its December 2011 quarter profits showed. However, its efforts to curb the rise in receivables are showing some results. Besides, initiatives such as a thrust on exports, setting up of an NBFC etc will enable it to get back on track in another couple of quarters. The worst seems to be over for the stock. 

BUSINESS India's biggest micro-irrigation systems (MIS) maker has been in trouble for the last couple of quarters as its receivables shot up on delays in government's subsidy payments. MIS, which make up nearly half of Jain Irrigation's revenues, are eligible for capital subsidy from the central government. However, with the government delaying payments, Jain Irrigation's working capital cycle has stretched to unmanageable levels.
Its outstanding debtors doubled between March 2010 and September 2011 increasing working capital investments by 60%. The company lost more than half its value on the bourses in 2011 for its inability to curb receivables.

GROWTH DRIVERS The December quarter results reveal that the company is going slow on sales of MIS to protect its balance sheet. Its MIS sales grew just 10.5% in the December quarter. This reduced its net working capital cycle by 12 days to 178 days in the December quarter. The company's PVC pipes business is doing quite well. It grew 36% y-o-y in the latest quarter thanks to healthy retail demand and exports to Africa. The company is also focusing on exports to drive its growth. It is targeting exports of $100 million in FY13 from just around $15 million in FY12. Next year it will also see its international subsidiaries contributing.
The company has approached RBI for a licence to operate a non-banking financial company (NBFC) - something that can address its working capital issue. The company hopes to obtain the licence within six months. 

FINANCIALS The company's profitability in the last two quarters was hit by mark-to-market losses on its $157-million outstanding loans. The losses stood at 59.3 crore in the September quarter and 71.1 crore in the December quarter. However, these mainly remain non-cash adjustments. The main source of pain was the interest cost, which at 250.6 crore for the nine months ended December 2011 was up 58% against the year-ago period. The net profit in the same period almost halved to 95.2 crore. 

VALUATIONS The company recently issued bonus shares with differential voting rights (DVR) in the ratio of 1:20. On an expanded equity base it is trading at a P/E of 21.3. However, sans the forex losses its profits in coming quarters will get a boost.