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Business News/ Companies / People/  Government’s focus on micro-irrigation to benefit Jain Irrigation
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Government’s focus on micro-irrigation to benefit Jain Irrigation

Government’s focus on micro-irrigation to benefit Jain Irrigation

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The Centre has increased subsidies under the National Mission on Micro Irrigation (NMMI). Under the new NMMI guidelines, small and marginal farmers will get a subsidy of up to 60% of the MI project cost from the Union government, compared with a subsidy of 50% earlier. Other farmers will get a subsidy of 50%, compared with 40% earlier, for land holdings with a maximum area of 5 ha.

The new guidelines also includes new MI technologies such as fertigation systems, sand filters, etc. Besides, payments are likely to get accelerated as the subsidy will now be disbursed by state implementing agencies, instead of district authorities. The agriculture ministry has allocated 1,106 crore for the NMMI scheme for the current fiscal. Note that the detailed guidelines for the scheme were announced only in end-November.

All of the above is expected to benefit providers of MI systems such as Jain Irrigation Systems Ltd. According to IIFL Capital, about two-thirds of the country’s agricultural land is in the hands of small and marginal farmers, and the new NMMI guidelines should provide a significant boost to demand for MI systems. IIFL has raised its earnings estimates for Jain Irrigation by 3-5% for the next two fiscals because of expected increase in demand.

MI systems account for 54% of the firm’s consolidated revenue and have been the fastest growing segment in the past few years. While company-wide revenue has grown at a compounded annual growth rate of 40% in the past four years, that of the MI systems segment has grown by 72%.

While the firm’s domestic performance should get a boost, rising crude prices could affect the profitability of its overseas operations. An IIFL report says, “While the domestic market remains insulated from an increase in crude prices owing to oversupply of polyethylene in the Asian region, Jain Irrigation’s overseas subsidiaries located in North America and Europe are exposed to crude prices." Revenue from these two regions contributes 23% to its consolidated revenue. Back in FY08, when crude prices had risen sharply, operations in these regions barely broke even. With crude prices now rising, profitability could get affected.

This could be one reason why the Jain Irrigation stock has been subdued in the recent past, despite the favourable NMMI guidelines. It has now corrected by around 17% from its highs in early August; but even then it trades at a price-earnings multiple of around 27 times estimated FY11 earnings. Earnings growth expectations are high, and there’s little room left for disappointment.

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Published: 09 Dec 2010, 10:00 PM IST
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