Jain Irrigation: investors betting on a good monsoon
Jain Irrigation Systems Ltd’s fortunes are closely linked with the monsoon.
The poor rainfall last year took a toll on the company’s micro-irrigation systems (MIS) business in fiscal 2016.
The MIS business revenue declined 1.7% from a year earlier and accounted for 45% of consolidated revenue in FY16.
However, if the monsoon rainfall is better this year, then the MIS business could well bounce back. Anil Jain, managing director, Jain Irrigation Systems, says the MIS business should register a 12-18% revenue growth this fiscal year.
Of course, this depends on how good the monsoon actually turns out to be. Notably, Jain Irrigation shares have risen by around 37% from its lows in mid-February. Investors appear to be pricing in decent growth this year.
Last year, while the domestic MIS business was weak, the revenue from the overseas business increased 4%. Commenting on the overseas business, Jain says: “These countries did not have specific drought and we had strong growth in China and Latin America.” Needless to say, if the MIS business bounces back, and the overseas business stays strong, Jain Irrigation will be in a sweet spot.
There are other reasons to cheer as well. The consolidated net debt reduced by about 20% from December end to Rs.3,559 crore at the end of the March quarter. Jain expects a further reduction of Rs.300 crore this year, helped by stronger revenue and a reduction in working capital. That should bring down the net debt-to-equity ratio to 1 by FY17-end from 1.2 at the end of FY16. Naturally, this would lead to some relief on finance costs, which were as high as Rs.477 crore, or 58% of operating profit, last year.
Over FY16 to FY18, Motilal Oswal Securities Ltd estimates 14% and 19% compounded annual growth rate (CAGR) in revenue and earnings before interest, tax, depreciation and amortization (Ebitda), respectively. That should translate into a profit after tax of CAGR 93% to Rs.380 crore in FY18, mainly to factor in the lower interest outgo, according to the brokerage.
Jain Irrigation shares trade at about 14 times this year’s estimated earnings. Sure, these valuations appear to be factoring in a good share of the optimism. But a higher government thrust on irrigation and a good monsoon season, along with an improvement in profitability aided by lower interest costs, could well offer some more room for valuations to expand.