BackJain Irrigation slips on growth and debt concerns
A high level of debt is clouding the prospects of Jain Irrigation and its stock is down 43% from its highs in July
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A high level of debt is clouding the prospects of Jain Irrigation Systems Ltd, even as a depressed operating environment affects its performance. Its share is down by 43% from its highs in July. For the half year ended September, Jain Irrigation’s consolidated revenue increased by 7.5% over the same period last year.
Exports revenues of both pipes and micro irrigation systems (MIS) were weak, though domestic MIS business fared better. If that was not enough, rising costs took a toll on operating profit margins, worsened by higher depreciation, higher interest costs and lower other income.
Its profit before tax and exceptional items declined to ₹ 14 crore in the first half of FY15, compared with ₹ 43.5 crore a year ago. Interest costs are considerable because of higher debt; on a consolidated basis, Jain Irrigation’s net debt increased to ₹ 4,240 crore by the end of September, compared with ₹ 3,980 crore at the end of June.
That level of debt is going to continue to cast a shadow over its performance. A falling stock price may have made it notionally cheaper, but whether it really is depends on its outlook. The Street’s main concern seems to revolve around its increasing debt levels. This needs to be brought under control to permit the sharp earnings ramp-up projected over FY15-17, wrote analysts from IIFL Institutional Equities in a note on 14 November.
According to the brokerage firm, cash generation in the second half of fiscal year 2015 is, therefore, critical, and a potential stake sale in the food processing business could help further.
While announcing the September quarter results, Jain Irrigation had said its board had approved transferring its food processing business to a wholly owned subsidiary. This process could take another four-five months. The company says that the “subsidiarization" provides a good opportunity to unlock value by raising money through a stake sale.
“Stake sale will ensure accelerated debt reduction for the parent entity and entry of an external investor will strengthen the overall focus on the business," pointed out Motilal Oswal Securities Ltd. In a conference call last month, the company management had indicated that the mode of stake dilution had not been finalized.
Investors will be watching for signs if business conditions for its pipes and micro-irrigation business improve, and if it succeeds in generating cash to pay down its debt.
At the same time, falling crude oil prices could lower the cost of its main raw material—polymers. Till these factors play out, investor sentiment is likely to remain down.
The writer does not own any shares in the above mentioned company.
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