JAIN IRRIGATION Systems (JISL) - Long term Investment pick

JAIN IRRIGATION Systems (JISL) is one of the leading agri-business companies in India, with a wide presence in irrigation systems and food processing. JISL is likely to emerge as one of the key beneficiaries of the government’s thrust on boosting agricultural output and productivity in the country. Being integrated with agriculture, JISL’s growth is unlikely to be hit due to the current market turmoil. JISL’s expansion plans, diversified business model and improving efficiencies make it a good long-term bet for investors.

BUSINESS: Incorporated in 1986, JISL is today India’s largest irrigation systems manufacturer with a plastic processing capacity of 255,000 tonnes per annum (tpa). It is also India’s largest producer of mango pulp and dehydrated onions with a total capacity of little over 2 lakh tonnes. The company’s product range includes micro irrigation systems consisting of drip and sprinkler irrigation systems; piping systems comprising PVC and polyethylene pipe products; plastic sheets consisting of PVC and polycarbonate sheets; agroprocessed products consisting of dehydrated onion and processed fruit purees and concentrates. The company is also a producer of other products such as agricultural tissue culture, solar water heaters and solar lighting systems.

In the recent past, the company made a series of acquisitions in the domestic and international markets. It recently acquired Thomas Machine of Switzerland, which manufactures PVC pipes. Today, the company has 21 manufacturing plants and is present in 110 countries through its network of over 3,000 distributors.

GROWTH FACTORS: Only 3 million hectares of irrigated area is under micro irrigation compared to a total irrigated area of 69 million hectares. The government’s emphasis on increasing micro irrigation bodes well for JISL, the largest provider of micro irrigation services in the country.

JISL has embarked upon a major expansion plan with an investment of more than Rs 600 crore spread over the next three years. As per a memorandum of understanding (MoU) with the Maharashtra government, the company will invest Rs 550 crore to set up two mega projects to expand its agro and related products businesses. The company is currently expanding its Jalgaon plant to expand its micro irrigation equipment, PVC pipes and food production by 20-30% by end FY09. FINANCIALS:The company’s net sales have witnessed a compound annual growth (CAGR) of 51% since FY04 to reach Rs 2,215 crore for the year-ended March ’08, on a consolidated basis. Its net profit has grown at a faster pace of 56% to touch Rs 134 crore in FY08. Its standalone topline grew at 45% in Q1 FY09 to Rs 474 crore. The net profit was just 5% up at Rs 29.6 crore, mainly due to a forex loss of Rs 22 crore in accordance with Accounting Standard 11.

JISL’s consolidated operating margins have risen consistently over the past three years to touch 15.1 % in FY08. Further, its return on capital employed (RoCE) has also improved to 8.7% in ’08 from 3.2% in ’04.

The company had an order book of more than Rs 600 crore as on September ’08, representing around 27% of its FY08 consolidated net sales. Its consolidated operating cash flows turned negative in FY08, as JISL went on stocking raw materials in the last two quarters, when the prices were low. The company’s debt to equity ratio has come down to 1.5 in FY08 after staying above 2 in the preceding two years.

VALUATIONS: Since the company’s business is integrated with agriculture, it is unlikely to face much pressure from the current turmoil in the global financial markets. We believe JISL’s net profit will grow 35% during FY09 to Rs 182 crore, led by the rising irrigation initiatives in India.

The company’s pipes business will also derive strong growth from natural gas and telecommunication industries. At the current market price of Rs 262, the scrip trades at 13.5 times its standalone net profit for trailing 12 months ending June ’08 and is around 10.4 times the estimated forward earnings for FY09.