Jain Irrigation’s cash flow to improve post-NBFC creation

Jain Irrigation’s cash flow to improve post-NBFC creation

Jain Irrigation Systems Ltd’s stock slumped sharply by 30% in three trading sessions to Rs157 per share after it announced plans of setting up a non-banking financial company (NBFC) and its December quarter results were below expectations. There is also a potential equity dilution through a qualified institutional placement (QIP) to partly fund the NBFC and pay off a portion of its debt.

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In the last two trading sessions though, the stock has recovered to Rs177 per share, still lower than Rs225 per share before the announcements.

The firm has said that entering the NBFC business would improve cash flows. What is happening now in its micro-irrigation system business, which contributes a little more than half of the revenue, is that the farmer pays a portion of the price of the equipment to the firm and it gets the rest from the government in the form of subsidy disbursements, which come with a lag of about six months.

This had put a lot of pressure on Jain Irrigation’s receivables, which currently stand at Rs1,300 crore.

Here’s where the NBFC comes into the picture. The firm intends to shift the burden of delay in government subsidy to the farmer, who will borrow from the NBFC and pay Jain Irrigation, thereby easing its cash flows. Jain Irrigation will, in turn, offer a cash discount to the farmer so that the interest burden is less.

So far, so good. At present, Jain Irrigation does not plan to consolidate the NBFC with itself and intends to limit Jain Irrigation’s exposure to the NBFC to less than 50%, with the promoters holding around 20% and the third party (private equity or multilateral organizations) holding around 30%. But this means a large part of the risk of the NBFC would be shared by Jain Irrigation.

How this will eventually shape up would be interesting to watch. Also, the willingness of the farmer to take on the entire burden despite the cash discount offered remains to be seen.

Sure, one could argue that it is worth taking that risk given the improvement in the financials that the firm hopes to achieve with this development. If things go as planned, the firm expects the net debt to drop to Rs1,500 crore from Rs2,100 crore post-QIP.

For now, until investors are convinced about the proposed idea, the stock is likely to see some pressure.

Graphics by Yogesh Kumar/Mint

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