Shares of Jain Irrigation Systems Ltd have underperformed the BSE benchmark Sensex since the company announced a plan to set up a non-banking financial company (NBFC) in January 2011 because of balance sheet concerns.
As on 30 September, Jain Irrigation’s gross debt stood at around Rs2,750 crore, which translates into a debt-equity ratio of 1.55. Higher interest costs have taken a toll on net profit in the past two quarters. The receivables position, too, is quite weak because of the delay in receipt of government subsidy for its micro-irrigation systems (MIS) business.
What’s heartening is that the company is taking steps to improve its balance sheet. One of the ways through which it intends to do so is a change in business strategy, which involves going slow in states where the subsidy element is higher. That strategy seems to be paying off, going by its December quarter performance.
“Jain Irrigation’s MIS receivable stood at 340 days (compared with 355 days in September) and is expected in the range of 300-310 days by March 2012,” points out an earnings update published by Prabhudas Lilladher Pvt. Ltd. Of course, this has come at a cost—a slowdown in the MIS business growth in the December quarter, which is expected to continue in the current quarter as well.
But, at this time, perhaps sacrificing growth is not a bad idea if its balance sheet improves eventually. The company intends to set up an NBFC and is awaiting a licence. According to Jain Irrigation’s managing director Anil Jain, “Apart from the NBFC, the company is also looking at tie-ups with banks to improve its receivables. This is expected to help because RBI (Reserve Bank of India) has come up with new circulars asking banks to increase lending to the priority sector.”
The successful roll-out of the NBFC will be an important trigger for the stock. Meanwhile, in the near term, if the rupee remains strong at March-end, there could be a reversal of mark-to-market losses in the current quarter. While the stock has underperformed over a longer time frame, rumours of a stake sale led to a 6.6% jump in Jain Irrigation’s share price this week to Rs110. During the same period, the Sensex has risen by 2.4%. Jain has denied these rumours.
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