Hello Amit,
Hope you are having a nice weekend.Great going on Kernex, have taken a small position will add on once it get stabilized at 248.Have attached below the jain irrigation report.
Regards
Roneeth
Jain Irrigation:
Jain Irrigation Systems Ltd (JISL) is a diverse play in the agri-related sector. The company is set to enter into a high-growth trajectory on the back of increased government thrust on agriculture, its leadership position, a well-diversified portfolio and a de-risked business model. The company is expected to sustain its growth going forward with revenues and profits likely to grow at a CAGR of over 20%.
Company Background
Incorporated in December 1986, JISL is a one-stop integrated agricultural equipment manufacturer. The company manufactures and supplies micro-irrigation systems (MIS) that encompass irrigation through strip tubing, emitters, jets and mini-sprinklers. The company also makes polyethylene (PE) and polyvinyl chloride (PVC) pipes and sheets and is scaling up its business in a big way. The company has two main divisions -- agri input product division which consists of products such as drip irrigation and sprinkler irrigation systems, PVC pipes, biotech tissue culture plant materials and other agri inputs. The other division mainly manufactures PVC sheets, polycarbonate sheets and PE pipes. It is also involved in fruit processing, onion and vegetable dehydration.
Industry Outlook
The company operates in diverse, but integrated segments of the agri equipment business. In each segment, the company competes in the domestic and export markets with global players. While India accounts for 16% of world population, it has only 2.4% of land area and 4% of global water resources. The country has to manage growth in the agricultural sector through these scarce resources. The economy is poised to grow at around 8% going forward and agricultural sector is likely to provide impetus for this growth. Use of modern irrigation equipment to increase productivity will be the only way to achieve robust growth in the agriculture sector. The total domestic industry size for drip and sprinkler irrigation is more than Rs 200 crore, out of which the company has more than 50% market share. Projected investments in the agricultural sector during the 10th and the 11th plan stand at Rs 6200 crore, and most of this investment is beginning to reach the implementation phase, which would propel revenue growth for companies operating in the agricultural sector. This implies a positive business outlook for the industry in the short and long-term.
Thrust on agricultural sector to drive growth
The contribution of the agricultural sector to overall GDP has drastically come down over the last 10 years. Although this is partly because of the rising share of the industrial and service sector, inefficiencies that plague the agricultural sector also play a role. Only about 1.2mn hectares in India is under the micro-irrigation program (MIP). The task force on micro irrigation has recommended covering 67mn hectares under MIP in a phased manner. Since investment in such equipment is huge for the average Indian farmer, the government has decided to subsidise it by 50%. The company's MIS segment, with a 50% market share, contributed 23.6% to revenue in Q3FY06 with EBIDTA margin of 25%. We expect this segment to be the growth driver for the company in years to come. Initiatives by the Andhra Pradesh and Gujarat state government are already under implementation, while other states are looking forward to implementing the same. The finance minister had announced a budgetary allocation of Rs 350 crore in the budget last year which was spent on subsidising the cost of drip and sprinkler irrigation systems. The forthcoming budget is likely to provide more sops for the industry .Infrastructure development augurs well for PE & PVC pipes business
The thrust on the infrastructure sector will be a key initiative in the forthcoming budget. PE pipes are used in telecommunications, sprinkler irrigation systems, gas distribution and water conveyance. Since all these areas are likely to witness robust investment in the coming years. In Q3 FY06, this segment contributed 42% to the topline with EBIDTA margin of 11.5%.
Recent US acquisition topline accretive
In the US home building market, PVC sheets are replacing lumber and the company has been placing itself in a prime position to benefit from this change. It is investing in product development and expanding distribution network, which is highly underdeveloped in the US. Further, it has acquired a controlling 51% stake in NuCedar Mills Inc, a US-based company, operating in the custom home building market to add momentum to its growth trajectory. This business contributed 19.5% of revenue in Q3FY06 with EBIDTA margin of 21.3%. Will see explosive growth going forward as demand from the US and UK is likely to increase over the coming years.
Food processing outlook positive
The company is also involved in onion dehydration and fruit processing activities that contributed 9.1% or Rs 19.96 crore to topline in Q3 FY06. The company's customers for the dehydrated onions include the soup, ketchup and fast foods manufacturers. In the fruit processing business, the company caters to Coke and Nestle among other manufacturers. The company plans to expand this business in the coming years with exports gaining more importance from a strategic point of view. EBIDTA margins were in the range of 12% for the combined business segment. The recent acquisition of the mango fruit processing plant of Parle will add to its strength in this segment going forward.
Inorganic growth to enhance global presence
As the NuCedar Inc acquisition begins to contribute more to the bottom line, the company may look for more acquisitions in the domestic and overseas markets. Domestic acquisitions started two years back with buying of a fruit processing plant near Hyderabad and continued last year with the acquisition of Terra Agro Technology Ltds facilities near Coimbatore . As the company develops critical mass, it may look to gain market share quickly using the inorganic route.
Key Concerns
Dependence on the agricultural economy
The company's overall business prospects are dependent on the agricultural sector performance and the overall macro economic situation. Consequently, performance is subject to seasonality in the agricultural sector, which could be a dampener on one segment of the business. In addition, the companys growth hinges to a large extent on governmental policies which leaves it open to risks arising out of changes in governmental policies.
High Fuel Costs
The company plans to expand capacity in its onion hydration and fruit processing businesses to address growing demand for these products. Dehydration is an energy-intensive industry. Furnace oil is used for heating the air required for drying. With rising global oil prices, the energy cost for dehydration is also bound to go up, which may impact margins.
Outlook
The company appears to be a on a good footing as far as growth is concerned over the next two years. Positives include thrust on the agricultural and infrastructure sector as well as more incremental revenues from new line of business. Expected PAT to grow at a clip of 20% CAGR over the next two years to Rs 1250 crore and Rs 100 crore in FY08E respectively.
