Jain Irrigation’s proposal to form a non-banking financial company, or NBFC, has been approved by the Reserve Bank of India and the company’s stock has gained 23.5% in the last fortnight. While this may be a course correction for the company, investors should not expect any gains in the near term.
The company had been trying to secure an NBFC licence since FY11 after its working capital rose because of delayed recoveries of government dues. Micro-irrigation systems enjoy a capital subsidy of close to 50%, which it needs to obtain from various state governments. Delays on this front had led to itsdebt-equity ratio rising to 1.5 and net working capital swelling to 1.3 times its investment in fixed assets by end of September ’11. The non-deposit taking NBFC, to be named ‘Sustainable Agro-commercial Finance Ltd or SAFL,’ is expected to finance the company’s customers and help the company grow without adding to its debt burden. The company’s interest cost had ballooned to . 408 crore, or more than half its operating profit during FY12. SAFL will be set up with equity funding from JISL, its promoters and the International Finance Corporation (IFC). More investors are set to join later.
In June ’12, Fitch Ratings had downgraded Jain Irrigation’s long-term rating to ‘Fitch BBB (ind)’ from ‘Fitch A(ind)’ with a negative outlook. “The downgrade reflects JISL’s stretched liquidity position as reflected in its almost full utilisation (100%) of its fund-based limits in FY12 (end-March 2012),” according to the Fitch report. It attributed the problem to the delayed receipt of subsidy from Maharashtra, AP, Karnataka and TN.
JISL’s plight worsened as RBI’s guidelines in August ’11 classified the segment as non-priority banking, which prevented it from securitising its micro-irrigation segment receivables. Fitch mentions its negative outlook reflects potential refinancing risks stemming from JISL’s huge repayments lined up —. 460 crore in FY13 and . 370 crore in FY14.
The setting up of the NBFC is key to deleveraging the company's balance sheet without impacting growth.
Last few quarters have seen a slide in institutional holding in the company, but the promoter group holding has inched up. FII holding fell from 55.37% in Dec '11 to 50.51% at the end of Jun '12. Similarly, local institutions have trimmed their stake from 1.02% to 0.74%. But the promoter group holding rose from 30.35% to 31%.
The NBFC will become operational only after the end of the monsoon season and will initially focus on Maharashtra. The management will have to be mindful of the fact that it does not lead to any corporate governance issues. It will be quite a while before this strategy pays off.
The company had been trying to secure an NBFC licence since FY11 after its working capital rose because of delayed recoveries of government dues. Micro-irrigation systems enjoy a capital subsidy of close to 50%, which it needs to obtain from various state governments. Delays on this front had led to itsdebt-equity ratio rising to 1.5 and net working capital swelling to 1.3 times its investment in fixed assets by end of September ’11. The non-deposit taking NBFC, to be named ‘Sustainable Agro-commercial Finance Ltd or SAFL,’ is expected to finance the company’s customers and help the company grow without adding to its debt burden. The company’s interest cost had ballooned to . 408 crore, or more than half its operating profit during FY12. SAFL will be set up with equity funding from JISL, its promoters and the International Finance Corporation (IFC). More investors are set to join later.
In June ’12, Fitch Ratings had downgraded Jain Irrigation’s long-term rating to ‘Fitch BBB (ind)’ from ‘Fitch A(ind)’ with a negative outlook. “The downgrade reflects JISL’s stretched liquidity position as reflected in its almost full utilisation (100%) of its fund-based limits in FY12 (end-March 2012),” according to the Fitch report. It attributed the problem to the delayed receipt of subsidy from Maharashtra, AP, Karnataka and TN.
JISL’s plight worsened as RBI’s guidelines in August ’11 classified the segment as non-priority banking, which prevented it from securitising its micro-irrigation segment receivables. Fitch mentions its negative outlook reflects potential refinancing risks stemming from JISL’s huge repayments lined up —. 460 crore in FY13 and . 370 crore in FY14.
The setting up of the NBFC is key to deleveraging the company's balance sheet without impacting growth.
Last few quarters have seen a slide in institutional holding in the company, but the promoter group holding has inched up. FII holding fell from 55.37% in Dec '11 to 50.51% at the end of Jun '12. Similarly, local institutions have trimmed their stake from 1.02% to 0.74%. But the promoter group holding rose from 30.35% to 31%.
The NBFC will become operational only after the end of the monsoon season and will initially focus on Maharashtra. The management will have to be mindful of the fact that it does not lead to any corporate governance issues. It will be quite a while before this strategy pays off.
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