Last week, Jain Irrigation Systems Ltd and Coca-Cola India Pvt. Ltd launched Unnati, a partnership project with farmers that would enable the adoption of ultra-high density plantation (UHDP) practice for mango cultivation.
The companies maintain the introduction of UHDP will double the average mango yields. It’s a relatively small development involving an investment outlay of more than $2 million (around Rs 10 crore today) in the first phase, which will be shared equally by both the companies.
Jain Irrigation’s stock has not reacted materially to this event. In fact, the stock has fallen by 2.4% to Rs 170 apiece since this announcement, compared with the 3.6% increase in the Sensex in the same period.
However, larger issues such as balance sheet concerns and the proposed non-banking financial company (NBFC) have been acting as an overhang on the stock for a while now. The stock has underperformed the BSE-200 index since the NBFC news was announced at the end of January.
It’s well known that the firm’s micro-irrigation systems business receives some portion of its payments from the government in the form of subsidy disbursements, which comes with a lag. This has put a lot of pressure on Jain Irrigation’s receivables.
“Based on the consolidated balance sheet, receivable days widened to 152 in FY11 from 109 in FY10, driving the increase in total working capital days from 123 to 145,” points out an annual report analysis note from India Infoline Research, released last week. The note adds that the working capital increase led to higher cash burn, reversing a trend of improving free cash flow seen since FY08.
Jain Irrigation wishes to set up an NBFC, which would help in easing its cash flows. The NBFC is expected to be operational towards the end of this fiscal year. Some analysts are hopeful that the proposed NBFC will bring the much needed respite for Jain Irrigation.
How things eventually pan out as far as the NBFC is concerned will be one of the key things to track in the days to come for investors.
Meanwhile, even as the stock has underperformed since the NBFC news, it has recovered smartly from its lows in June and has appreciated by 25% till now.
During this time, Jain Irrigation delivered good financial results for the June quarter. On a year-on-year basis, revenue and operating profit in the June quarter increased by 31% and 38%, respectively.