In the Union Budget, allocation towards agriculture increased by 45% year-on-year (y-o-y) and for micro-irrigation by 108%. This improves growth visibility for Jain Irrigation System Ltd’s (JISL) micro-irrigation business. JISL’s recent entry into the solar systems business (which is also supported by a 30% government subsidy) should further support earnings growth.
The company’s piping and plastic sheets business should also see a turnaround, driven by increased demand from government infrastructure projects and export markets. Accordingly, we raise our earnings estimate by 3.5-5% for FY11-FY12. We maintain buy and raise our target price to Rs1,028.
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Budgetary allocation towards all schemes supporting micro-irrigation has increased 52% y-o-y for FY10-11. The Union Budget reflected an overall increase in thrust towards agriculture. The agriculture ministry saw one of the highest increases in allocation (45%) this year, reflecting the continued commitment of the United Progressive Alliance government to this sector.
The company’s solar systems business should add approximately 4% to revenues in FY11. We estimate 30% revenue compounded annual growth rate (CAGR) for this business in the next two years.
Given widespread power shortage in rural areas, bundling this product with micro-irrigation systems (MIS) should improve the value proposition to farmers. The 30% government subsidy for solar panels makes these systems more affordable.
The solar systems business will be one of JISL’s fast growing segments.
As it is dependent on government subsidies, JISL has negotiated with farmers and banks, so that the financing burden of delayed subsidy receivables rests with the farmers. In FY10, JISL’s micro-irrigation business was weighed down by poor implementation of irrigation programmes in one of the key states for its business—Andhra Pradesh. The Budget’s increase in allocation (up 108% y-o-y) towards direct subsidy for micro-irrigation should provide significant traction to the company in FY11.
The company recently expanded its capacity to manufacture solar systems to 25MW. We estimate Rs150 crore sales from this product in FY11 (around 4% of consolidated revenues).
We estimate this segment will register 30% revenue CAGR during the next two years, driven by the government’s thrust towards this sector (allocation towards renewable energy has gone up 30% y-o-y). The potential captive market for solar systems for JISL includes 4-5 million diesel-powered pumps operating in Indian farmlands. Given the strong value offering of its MIS products, a stable source of power supply is likely to further enhance the value proposition for the mainstream MIS business.
Nevertheless, these solar panels are fairly expensive (about Rs75,000 per unit per ha), which means they are affordable only for big farmers. Hence, the management plans to bundle this product along with its MIS product, while selling to large farmers growing horticultural crops.
We raise our revenue estimates for FY11 by 5% and for FY12 by 3%.
We also increase our earnings before interest, tax, depreciation and amortization margin estimate by 20-30 basis points for FY11 and FY12, to reflect the change in the product mix (higher-margin MIS business and solar panel business increasing their share of revenues).
Graphics by Yogesh Kumar/Mint