Ambareesh Baliga

Even after being a major source of livelihood for nearly 58% of the rural households and contributing 10% to GDP, agriculture has always been surrounded by dark clouds. It is a huge pain point for the government as the sector remains under constant pressure with unpredictable monsoons and an ever increasing number of farmer suicides. According to the National Crime Records Bureau, 2014 witnessed 5,650 farmer  suicides of which 38% was due to agrarian and financial crisis. Since 1995, 302,116 farmers have committed suicide, majority of them being from Maharashtra, Karnataka and Andhra Pradesh. 

One of the major issues that the agriculture sector has been facing for decades is lack of proper irrigation systems as the sector continues to be heavily dependent on the monsoon. Crop failure due to insufficient rainfall not only results in socio-political problems and food inflation, but also results in hapless farmers ending their lives. In such a scenario micro irrigation seems to be the only remedy to address the farmers’ monsoon-related woes as it consumes 30% to 70% less water. By conserving the ground and reservoir water to irrigate large tracks of farmlands, it minimises water consumption and reduces labor.

With 55% market share, Jain Irrigation Systems (JIS) is the world’s second largest micro irrigation solutions (MIS) provider manufacturing end to end of the irrigation chain. In addition, it is a formidable player in tissue culture, solar devices and food processing. Fifty percent of its revenue comes from its global operations via 26 manufacturing plants spread across five continents and 116 countries. 

Course correction

JIS has had a tumultuous price performance history on the bourses. In the 1990s unrelated diversifications that boomeranged took them back to the drawing board. The last decade has been quite eventful for the company. While the expansion plans resulted in tremendous institutional interest, its mounting debt — ₹4,268 crore — has been a huge load on its chest. However, the company has managed to cut debtor days by setting up a non-banking finance company about three years ago and is now targeting to reduce gross receivable days to 115 in FY16 which will ensure a debt reduction of ₹300 crore per year. 

It has recently raised equity of $120 million to strengthen the balance sheet and provide growth capital for newly formed Jain Farm Fresh Foods, under which its global food business will be organised. With this move the company is hopeful of getting annual interest savings of ₹70-80 crore coupled with reduction in debt-equity ratio to about 1:1 (from 1.8 in FY15) on a consolidated basis. For perspective, on a consolidated basis, for the six months ended September, interest cost, as a percentage of operating profit, was 62%.

Though the mainstay of the company is its MIS business, it has managed to diversify into agro, solar and related equipment and water-related areas to cushion the MIS business. JIS is the largest processor of mango pulp. They also process other fruits and their customers include top names among fruit-based drink producers. They are also the largest in tissue culture of banana plants with a capacity of 10 crore plants per annum and rank among the top three dehydrated onion and vegetable producers globally. JIS is promoting the concept of integrated development of agriculture and establishing backward linkages. The successful model of contract farming in onion and integrated development in case of banana is being extended to other fruit crops such as mango, pomegranate and tomato as well. The fruit processing business has been clocking a CAGR of 16% for the past five years.

 Second coming

Going ahead, JIS stands to be the key beneficiary under the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) under which ₹50,000 crore will be spent over the next five years. The creation of district-level plans for implementation of the scheme should be complete by CY15 and the benefits will be visible over the next few months. The issues related with the earlier subsidy scheme, such as leakages and delay in payments, too, are expected to be resolved with digitalisation.

As the government now has a renewed focus on irrigation, JIS could be at the forefront of the second Green Revolution in the country. Food processing is another focus area as India processes only 4% of its total produce compared with 60%-80% in developed countries. The government aims to increase it to 25% by 2025. An increase from 4% to 25% in terms of processing and increase in value addition from 20% to 30% will translate into a quantum jump in the size of the processed fruit and vegetable industry. Besides, the company has also undertaken solutions for town water supply which could be a huge growth area as civic services get organised and professionalised. Hubballi-Dharwad, Belagavi and Kalaburagi in Karnataka could be models for future projects.

 Back in favour

 For the second quarter of FY16, the company reported a moderate growth in consolidated revenue at 3.5% to ₹1,315 crore as the MIS business shrunk. Though the current numbers may not justify the valuation — 9x estimated FY17 earnings — but looking at the huge potential awaiting to unlock in each of the segments of JIS, I feel this could be the story of 2016. The recent strategic stake sale in the food business, valued the subsidiary at about ₹3,000 crore, an embedded value which is not fully discounted in the market valuation of JIS. Further, the fall in oil prices as well as polymers will improve the margins for JIS. Importantly, in the September quarter even though the MIS business struggled to grow, the food processing, pipes and other businesses grew by 20%, 26% and 9.2%, respectively. Given that the market is willing to assign a higher multiple for seed companies, Jain Irrigation, with its strong food processing and tissue culture businesses, eventually has to enjoy a higher premium. With an expected top line growth of about 15% to ₹8,000 crore in FY17 with an estimated earnings per share of ₹7.15, I expect a target price of ₹120 for the stock as its performance is rediscovered by the market over the next three to four quarters.

The author has an interest in the stock and has recommended it to his clients

This is Ambareesh Baliga's best pick for 2016, you might be interested in what he recommended for 2015