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January 21, 2014

Jain Irrigation Systems Ltd.

…nature friendly

SKP Securities Ltd www.skpmoneywise.com of 19

CMP ` 69 Target ` 90 Initiating Coverage‐ Buy

Source: BSE

Analyst: Vineet P. Agrawal Tel No.: +91 22 4922 6006; Mobile: 9819510575 Email: [email protected]

Company Profile Jain Irrigation Systems Ltd (JISL) is a leading agri business company operating in diverse but integrated segments of agri value chain. It is the second largest manufacturer of micro irrigation systems (MIS) globally and largest in India. JISL is one of the largest manufacturers of the PE pipes and tissue culture banana plants in India. The company also has presence in hybrid and grafted plants, greenhouses, bio fertilizers and solar water heating systems. Investment Rationale

Focus on new business model – improving working capital cycle: JISL has floated a NBFC named Sustainable Agro‐commercial Finance Ltd (SAFL)

in 2012 which provides finance to the farmers. This new model helps in reducing its working capital cycle as the Company now gets the full amount on delivery of the product (MIS).

Earlier, JISL was getting about 50%‐70% amount from the farmers as and when the State Governments disburse the subsidies which took from six months to an year, which was resulting in to swell in outstanding Government subsidies resulting into working capital cycle as high as 270 days.

Now, with the advent of SAFL, the Company no longer has to wait for disbursal subsidies from the State Governments. JISL has able to reduce MIS receivables to ` 11.5 bn by H1FY14 from ` 17.2 bn in FY11. We expect it to bring it further down to ` 10.0 bn by the end of FY14.

Deleveraging Balance Sheet: Total loan book of JISL advanced to ` 38.91bn by FY13 from ` 24.4 bn in FY10

with the drawbacks of old business model in domestic MIS segment, of which short term loan increased significantly from ` 3.93 bn to ` 22.04 bn.

With the advent of new business model, the management of the company has tightened their belts to clean up their balance sheet with reducing government subsidies by aggressive procurement and repayment of long term loans.

We expect that the rupee term loan to come down by ` 1 bn and ` 500 mn during FY14 and FY15 respectively. JISL is expected to repay forex loans by USD 20 mn every year for next 10 years. Currently the Company has USD 220 mn forex loans in its books.

We also expect that the short term loans, which are about 40% of net operating income, to come down to 25% by FY16E with the reduced receivable days.

Debt to equity ratio of the company is also expected to improve to near about 1.2x by FY16E from the current 1.9x (in H1FY14) with the reduction of debt.

Healthy Order book of ` 12 bn plus: Recently, JISL bagged world’s largest integrated MIS project viz. ‘Ramthal‐Marol

Integrated Micro Irrigation Project’ from Krishna Bhagya Jal Nigam Ltd, Karnataka, valued at ` 3.85 bn.

This project is the major breakthrough in adoption of MIS with modern irrigation facilities, in India.

With this order the order book of the company crossed `12 bn mark as on January 1, 2014. MIS, agro processing, and piping (including sheets) comprises ` 6 bn, ` 4‐5 bn and ` 2 bn respectively.

Outlook and Recommendation At the current market price of ` 69, the stock is trading at EV/EBIDTA of 8.3x, 7.3x and 6.0x of FY14E, FY15E and FY16E EBIDTA of ` 8,079.4 mn, ` 9,238.8 mn and ` 10,685.9 mn respectively. We recommend BUY rating on the stock with a target price of ` 90/‐ (30% upside) in 12 months using the SOTP method of valuation.

Key Share DataFace Value (`) 2.0Equity Capital (` mn) 909.8M.Cap (` mn) 31389.152‐wk High/Low (`) 84/46Avg. Daily Vol 435832BSE Code 500219NSE Code JISLJALEQSReuters Code JAIR.BOBloomberg Code JI IN

Shareholding Pattern (as on Dec 31, 2013)

FIIs52%

Institutions2%

Promoters27%

Public & Others19%

Particulars FY13 FY14E FY15E FY16ENet Sales 50217.2 57300.9 65991.3 76327.8Sales Gr. 2.1% 14.1% 15.2% 15.7%EBIDTA 6318.7 8079.4 9238.8 10685.9PAT 30.8 3.3 3077.2 4477.0PAT Gr. ‐98.6% ‐89.4% 94187.2% 45.5%EPS (`) 0.1 0.0 6.8 9.8CEPS (`) 3.8 4.2 10.8 13.7

Financials (` mn)

Particulars FY13 FY14E FY15E FY16EInt Cover (x) 0.9 1.5 2.0 2.5P/E (x) 1019.1 9617.8 10.2 7.0P/BV (x) 1.4 1.5 1.3 1.1P/Cash EPS (x) 18.2 16.5 6.4 5.0M.Cap/Sales (x) 0.6 0.5 0.5 0.4EV/EBIDTA (x) 10.0 8.3 7.3 6.0ROCE (%) 8.2% 10.2% 12.3% 14.4%ROE (%) 0.1% 0.0% 12.7% 15.7%EBIDTM (%) 12.6% 14.1% 14.0% 14.0%NPM (%) 0.1% 0.0% 4.7% 5.9%Debt‐Equity (x) 1.6 1.8 1.5 1.2

Key Ratios

Price Performance JISL vs S&P BSE 200

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SKP Securities Ltd. www.skpmoneywise.com of 19

The Company: A snap shot

• Jain Irrigation Systems Ltd (JISL) is India’s one of the leading agri‐business companies with pan India presence. The Company has 28 manufacturing bases spread over five continents.

• Its products are supplied to 116 countries with the assistance of 5,485 dealers and distributors

worldwide. Most of these dealers have farming background and are influential in their respective regions.

• JISL is the flagship company with 14 subsidiaries with diverse businesses across the globe with

the aggregate revenue of over ` 50 bn.

• Business mix of the company can be broadly classified as follows:

Source: Company and SKP Research

1. Micro Irrigation Systems (MIS):

• Second largest MIS Company: JISL is the largest MIS manufacturer in India and second largest in the world. The company controls 55% market share with strong brand name in micro irrigation business and about 35% in sprinkler irrigation business, in India.

• Establishments: JISL has state of the art manufacturing facilities at Jalgaon, Tamil Nadu, Andhra Pradesh in India respectively. The company also has its facilities in Watertown USA; Fresno, USA and Naan, Israel.

JISL

Drip & Sprinkler Irrigation

PVC & PE Piping for Agriculture (90%) and

Industry (10%) Plastic Piping & Sheets

Dehydrated Onions and Fruit Puree & Concentrates

MIS

Others

Revenue Contribution: 46%

Revenue Contribution: 22%

Agro Processing Revenue Contribution: 20%

Solar Water Heating System, Solar Photovoltaic Systems,

Tissue Culture and

Other Operating Income

Revenue ContributionSolar: 4%

Tissue Culture: 6% Others: 2%


SKP Securities Ltd www.skpmoneywise.com

• JISL takes end‐to‐end water solution projects by transporting water, creating new water

reservoirs, creating irrigation systems and assisting with agronomy. The Company has successfully completed a few such projects.

• Major Contributor to the revenues: Contribution from MIS (domestic sales) has increased from

15% in FY04 to 46% in FY13. We expect the contribution from the segment to decrease to 37% by FY16 with the increasing contribution from other segments.

• The division has grown with the CAGR of 7% between FY10‐13 on consolidated basis and we

further expect it to grow with the similar growth rate in the next two years.

• The New Business Model: JISL has launched a new business model for MIS business in Maharashtra. The Company has formed an NBFC called “Sustainable Agro‐Commercial Finance Ltd” for the purpose. This new model is expected to reduce high working capital cycle of the company.

• Customized MIS products: MIS products of JISL are customized to assist the special requirements

of farmers in India. The company provides training to the farmers and introduces them to advance technologies and processes.

• JISL also provides soil and water analysis, crop planning, irrigation and fertigation scheduling, marketing assistance and other agronomical and technological support to the farmers.

• About 50% MIS revenues come from Maharashtra: JISL has dominant presence in Maharashtra.

The State contributes about 50%. Gujarat, Karnataka and Andhra Pradesh are the other states where the Company has stronghold.

• We expect that revenues from Maharashtra should grow by 20% in the coming few years

primarily led by sugarcane crop with the State Government has made use of MIS mandatory.

• Industry: The industry is broadly divided into the organized and unorganized segments in the country. The current industry size is estimated at Rs 33 bn and is growing rapidly.

• Currently, area of about 5 mn Ha of possible 69 mn Ha is covered under micro irrigation system in India, which makes just 7% coverage. As per Government task force 17 mn Ha of land can be easily bring under MIS in India by 2017.

• Almost 50% of the arable land in the country is still rain fed. The Government (Central and State)

provide 50%‐70% capital subsidy for promoting the use of Micro Irrigation by farmers.

• The prospect for global growth of MIS industry is strong. As per the estimates majority of developed countries will confront issues resulting from a scarce water supply, by 2025, resulting in switching of all the major economies to MIS.

• Although popularity of MIS continues to grow, high initial costs have hindered its wider

application. Despite this, over the last 20 years, there has been a six‐fold increase in the area under micro irrigation.

• North America and Europe have the highest rates of utilization, with the United States being the

first country to employ micro irrigation technology in its fields and achieving the highest micro irrigated area.

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• Asia is in the development phase in its use of the technology, with both India and China adopting the technology, albeit with low utilization rates. India and China both represent attractive growth opportunities for the MIS industry.

1. Plastic Piping and Sheets: Plastic piping and Sheets business of JISL can be divided in three segments viz PVC pipes, PE pipes and plastic sheets.

A. PVC Pipes: • PVC industry is integral to MIS industry. The PVC pipes business is driven in large

measure by demand for pipes used in agriculture, including agriculture unrelated to MIS.

• There are three major players in the organized segment of PVC piping. JISL is one of the major players in the segment with the market share of 15%.

B. PE Pipes: The applications of PE pipes are growing at a fast pace and yet new applications are being developed for the product.

• JISL is the only player to manufacture pipes above 1600 mm+ diameter: In water

transmission and distribution business there are around 200 firms registered with BIS, but there are only three national players and Jain Irrigation is the only player to manufacture pipes of up to 1600+ mm dia. Jain Irrigation, now, has developed the capability to provide a complete solution to Water Management, Waste‐water Treatment and judicious use of treated water.

• The replacement of cement/metal pipes by PE pipes is becoming very relevant, in applications like sewage & effluent disposal, due to the tougher environmental laws and stricter application of the same by the Government departments.

• Market Share: JISL’s presence in gas and cable duct segments of the PE pipe business is commanding with the overall market share is in excess of 30%.

C. Plastic Sheets: JISL manufactures plastic sheets in their state‐of‐the‐art manufacturing facility at Jalgaon, India.

• JISL is today, the only manufacturer of PVC & polycarbonate sheets under one roof in

South East Asia.

• Applications: Sheets manufactured by JISL finds applications in signs & graphic market and building material markets (BMI).

• The basic uses of PVC in BMI is in ‘Trim’, used as surrounds for windows and garage doors, corner boards, soffits and interior applications such as Wainscot and Bead boards.

• The inherent qualities of PVC such as impervious to water absorption; protection against insect attacks and a life term warranty promulgated the product over traditional Lumber.

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• The S&G market has been using PVC sheets in manufacturing sign and graphic boards, point‐of purchase displays and large print mediums. This industry has stayed with PVC for over three decades.

• This segment is serviced by five manufacturers. Some China products have attempted to penetrate the market.

• Second major Contributor to the revenues: The division (plastic piping and sheets) is

the major contributor to the revenues of the company after MIS division. It contributed 22% to the revenues in FY13.

3. Agro Processing: Agro processing business of JISL can be divided in two segments viz onion & vegetables dehydration and fruit processing.

A. Onion and Vegetables Dehydration: • Third largest producer: JISL has the overall capacity to produce around 28,000 MTPA of

finished product between its three plants in (Jalgaon & Baroda) India and USA. It is the third largest dehydrated onion producer in the world.

• JISL has acquired controlling stake in Cascade Specialities Inc. during FY07. With this acquisition the company has established presence in the USA, world’s biggest market for dehydrated onion. USA accounts for 65% of the world’s total production followed by European Union, Asia and South America etc.

• Supplies to Large MNC’s: JISL supplies dehydrated onions to large MNC’s based in above

geographies. These MNC’s consolidating the number of suppliers and trying to align with select few suppliers who can provide better traceability and sustainability.

• This puts the Company in a very good position due to its backward linkages, relationship

with farmers, contract farming programs, ability to supply from two different origins with different seasons and product quality attributes and Company’s sustainability in general. JISL’s dehydrated business has grown with quality oriented large multinationals over last few years.

• Contract Farming: The biggest challenge for any agro processing industry is the

availability of right quality material at right price and the required quantity. Poor monsoon, changing climate, competing crops pose risk in terms of availability of the raw material, which can result in lower production in a particular year.

• JISL mitigates this risk by undergoing contract farming with the farmers, under which

the Company secures 100% of its raw material for its US operation and a significant portion of the Company's raw material requirement for its Indian operations.

• Contract farming not only safeguards JISL but also the farmers as they get

predetermined contract price. • Market Share: JISL enjoys the export share of more than 50% dehydrated onions from

the country.

• Segment Contribution: This segment contributed 12% to the total revenues of the company in FY13 and has grown with a CAGR of 9% during last five years.

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• Global Industry size: Worldwide Onion dehydration industry is estimated to be around 180,000 MTPA. The industry is growing globally at 3‐5% per annum.

B. Fruit Processing: • Largest food processor: ISL established modern food processing plants, decades ago,

realizing the opportunity and potential of fruit and vegetable processing. Today, JISL is the largest processor of fruits and vegetables from India. The company has set up a most modern and largest pomegranate processing facility at Jalgaon.

• Extended contract farming to fruit processing: As mentioned earlier, the biggest

challenge in any agri processing business is the availability of required quantity of raw material at the right time and at the right price. The changing climatic conditions are adding uncertainty to the entire agriculture and horticulture sector with a year of plenty followed by severe scarcity.

• JISL is proactively working to expand its sourcing base to mitigate this risk. It 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.

• Ultra high density farming: JISL has also successfully evolved the concept of 'Ultra High

Density' plantation of Mango, which is expected to revolutionize the mango farming, making it one of the most profitable crops for the farmers.

• Segment Contribution: The Segment contributed slightly less than 8.5% during FY13 and

has grown with a CAGR of 16% during last five years.

• Industry Dynamics: The fruit and vegetable processing industry has a huge potential in India, with India ranking 2nd in the world in production of fruits and vegetables but is at the lower rung of the value chain in terms of processing.

• Despite the large production of fruits and vegetables, it is estimated that only

approximately 6% of total agro output of India is currently processed as against up to 60‐80% in some developed countries. India's share in the global food trade is only 1.5%.

• This implies that there is a great potential to grow this industry. An increase from 6% to 20% in terms of processing and increase in value addition from 20% to 30% will translate into quantum jump in the size of the processed fruit and vegetable industry.

4. Other Businesses: Other businesses of JISL include tissue culture, solar business.

A. Tissue Culture:

• JISL started with banana as the main crop for tissue culture in 1978. Today, JISL is also producing tissue culture of pomegranate plants, onions and mangoes. The Company has also been successful in developing citrus plants.

• Turnover: The sales in business crossed ` 3,039 mn during FY13 reflecting a contribution of over 6%.

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B. Solar Business: • JISL operates in various segments of solar business such as solar pumps, solar water heaters,

solar thermal systems etc.

• The Company also imports solar cells and converts it in to solar panels with the annual capacity of 100 MW.

• The segment is growing worth a CAGR of 84% for the last three years with the revenue

touched ` 2,203 mn during FY13.

JISL have acquired a number of domestic and international companies in the recent past with the purpose of getting excess to most advanced technologies and to set its footprints in the international markets. Acquisitions by JISL at a glance: Player Stake Country Segment

Tera Agro Technologies 100% India Food Processing

Food Processing Divison of Parle 100% India Food Processing

Chapin Watermatic 100% USA MIS

Nu Cedar Mills Inc 100% USA PVC Sidings

Cascade Speciality Inc 100% USA Dehydrated Onions

Naandan Jain Irrigation CS Ltd 100% Israel MIS

SQF 2009 Ltd 90% UK --

White Oak Frozen Foods 100% USA Food Processing

The Machines SA 100% Switzerland Plastic Extrusion Equip

Pro Tool AG 75% Switzerland Plastic Injection Mould Source: Company Annual Report

• JISL has recently sold non‐core wind power assets, with the capacity of 13.2 MW, to a

Coimbatore based company for ` 645 mn. The book value of the asset were about ` 550‐560 mn.

• We expect the Company to utilize this money to deleverage its balance sheet by repaying it debts.

Merger & Acquisitions

Recent Developments – Sold Wind Power Assets

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Investment Arguments

1. Focus on new business model – improving working capital cycle: • JISL has floated a NBFC named Sustainable Agro‐commercial Finance Ltd (SAFL) in 2012.

JISL and IFC (a member of World Bank Group) are the initial promoters of the venture. JISL and IFC holds 49% and 10% stake in SAFL. Jains holds 30% stake and balance by a private partner.

• The SAFL is focusing on farm and farmers only and operate in the rural & semi urban geographies of India. Thus, SAFL gets funds at attractive rates as this brings it in to priority sector lending.

• State Governments in India provides 50%‐70% capital subsidies for installation of MIS

systems in farm. Thus, earlier, JISL was getting about 30%‐50% amount from the farmers and they had to wait for balance amount till the State Governments disburse the subsidies which took from six months to an year, which was resulting in to swell in outstanding Government subsidies resulting into working capital cycle as high as 270 days.

• With the advent of this model in Maharashtra, the Company no longer have wait for disbursal subsidies from the State Governments. SAFL funds the farmer the subsidy amount at net interest rate of 12% (gross margin is 16% which is off‐set by JISL by forgoing 4% margin to NBFC from MIS business) which is paid to JISL on the installation of the product.

• MIS funding before and after SAFL at a glance:

Old Business Model New Business Model with SAFL

Source: Company

• The loan is repaid by the farmer to the NBFC as and when State Government disburses

the subsidy.

MIS Cost to Farmers

30%‐50% paid by farmer

50%‐70% paid by State Govt.

Paid to JISL by the farmer on

delivery

Credit Period by JISL/Dealers to

farmers

Payment from Govt subsidy in

6‐12 months

MIS Cost to Farmers

50%‐70% by SAFL loan to

farmer

Paid to JISL by the farmer on

delivery

30%‐50% paid by farmer

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• SAFL has successfully sanctioned ` 480 mn and disbursed ` 410 mn of loans in a very short span of time. We expect that it will end up sanctioning loans of about ` 1.5 bn by the end of FY14 and ` 2.5‐3 bn by FY15.

• The company, thus, has able to reduce MIS receivables to ` 11.5 bn by H1FY14 from ` 17.2 bn in FY11. We expect it to bring it further down to ` 10.0 bn by the end of FY14.

• Similarly Government subsidy stood at about ` 12.5 bn 18 months back, has come down

to ` 5.2 bn by H1FY14. We further expect it to come down to ` 4 bn and ` 3 bn in FY14 and FY15 respectively.

• JISL has adopted this model in Maharashtra which contributes 50% of the domestic MIS revenues. We expect that JISL will garner 70%‐80% domestic MIS revenues from this new model in next 2‐4 years, by pan India application of the model, barring a few states.

• Receivables and receivable days at a glance:

Source: Company & SKP Research

2. Deleveraging Balance Sheet: • Total loan book of JISL advanced to ` 38.91bn by FY13 from ` 24.4 bn in FY10 with the

drawbacks of old business model in domestic MIS segment, of which short term loan increased significantly from ` 3.93 bn to ` 22.04 bn.

• With the advent of new business model, the management of the company has tightened their belts to clean up their balance sheet with reducing government subsidies by aggressive procurement and repayment of long term loans.

• The Company has about USD 220 mn forex loans in its books which are repayable in

next 10 years with about USD 20 mn each year. We expect that the rupee term loan to come down by ` 1 bn and ` 500 mn during FY14 and FY15 respectively.

• We also expect that the short term loans which are about 40% of net operating

income in FY13 to come down to 25% by FY16E with the reduced receivable days. JISL is targeting it to bring it down to 10% of total operating revenues.

• As mentioned earlier JISL has also sold its 13.2 MW non‐core wind power assets at ` 645

mn. We further expect that the company will utilize the money to reduce their debts.

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• We also expect that the interest to sales ratio of the Company will improve to 7%‐8% in FY14E and about 6% in FY15E with the reduction of debt. Currently, it is about 10%.

• Similarly debt to equity ratio of the company is also expected to improve to near about

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Source: Company & SKP Research

3. Maharashtra Water Resources Regulatory Authority made drip irrigation a must for cash crops

‐ MIS Demand is expected to rise • In its bid to prevent wastage of irrigated water and make irrigation system effective, the

Maharashtra Water Resources Regulatory Authority (MWRRA) has decided to make drip irrigation mandatory for farmers growing cash crops with effect from July 1, 2015 giving one–year time to farmers.

• More than 75% of the irrigated water is utilized by agriculture consumers. 15% water goes to domestic use while the remaining 10% for industrial use. It is the need of the hour for proper utilization of water as it is a scarce resource.

• The proposal is to charge only 75% of tariff from farmers growing cash crops like cotton, soyabean, sugarcane, and horticulture. The farmers will get 25% extra rebate if they adopt drip irrigation. But farmers will have to pay 150% tariff if they fail to set up drip irrigation in the prescribed time limit.

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• MWRRA has also proposed a tariff for Vidarbha based farmers which are as follows: − 75% of total worked out cost having less than two hectare land; − 50% tariff of the worked out cost will be will be applicable to farmers having

less than four hectare of land in Vidarbha and those who are covered under Prime Minister Scheme and hailing from Naxal–affected areas;

− No charges will be levied to farmers covered under tribal development schemes;

− The tariff for project–affected farmers will be 75% of the total worked out cost. Besides this; and

− The tariff would be 50% for paddy farmers of Vidarbha and Konkan.

• Furthermore, the MWRRA has proposed not to charge grape farmers for 2–3 years, orange growers for 4 years and 5–7 years for farmers growing mango, turmeric, coconut, etc. The exemption has been given according to time period required for production.

• This move by MWRRA looks to be positive for JISL as Maharashtra contributes about 50% of domestic MIS revenues. Earlier, State Government in Maharashtra has already made mandatory for the use of MIS in sugarcane crops. We expect that the Maharashtra will contribute 20% plus revenues to the MIS division of the company.

4. Topline to grow with a CAGR of 15% between FY13‐FY16E: • For FY13, consolidated net sales have gone up to ` 50,217 mn by registering a marginal

growth of 2% y‐o‐y basis. MIS, plastic piping & sheets, food processing and other businesses segments have contributed 46%, 22%, 20% and 12% respectively.

• MIS business of the company de‐grew by 14.5% from ` 26,798 mn in FY12 vis‐à‐vis ` 22,903 mn in FY13 mainly due to acute draught in major states in India and change in business model as a part of consolidation process of the segment. MIS export de‐grew by 6%.

• MIS export grew by 218%

during H1FY14. MIS revenue grew by 20% and 15.3% on standalone and consolidated basis respectively during H1FY14.

• On consolidated bases MIS segment has grown with a CAGR of 7% for the last three

years and we expect it to remain on the similar growth trajectory. Growth is expected to be higher in standalone basis from the states like Madhya Pradesh, Rajasthan. Maharashtra and Gujarat post general elections 2014 because of the change in product mix and re‐adjustment of various manufacturers, dealers and farmers with the new business model.

• Plastic piping and sheets business grew by 13% during FY13 on consolidated basis. Plastic PE piping business again saw phenomenal growth during H1FY14 by 81.4%.

Source: Company & SKP Research Desk

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• The massive infrastructure projects undertaken under the Bharat Nirman Yojana, increased investments by telecommunication industry for 4G layout and plans for piped gas in cities, continue to be the potential demand drivers for the PE pipe industry.

• PVC piping business grew by 24% during first half FY14 due to incremental demand from farmers partly because of draught and partly to assure proper water supply from limited reserves to their farms.

• Overall plastic piping business is growing at a CAGR of 10% and we further expect it to grow by about 20% between FY13‐16E accompanied by the growth in PE piping business.

• Agro processing

business has seen a growth of 23% during FY13 on consolidated basis due to the growing demand of finished products such as dehydrated onions and processed fruits. The former grew by 11% and later by 14% during H1FY14.

• Agro processing business has grown by 27% during FY10‐13 and we expect it to grow it further with a CAGR of 24% between FY13‐16E with growing demand of high value packaged food in the urban areas. Share of the business has risen in the total operating income from 14.5% in FY10 to about 20% in FY13.

• We expect that with the growing demand of the finished agro products of JISL and general upward movement of food prices, the company will be able to achieve further growth in terms of revenues and realizations. We expect the revenue from the business to grow with a CAGR of 24% between FY13‐FY16E.

• Tissue culture, solar businesses and other operating income of JISL grew with a CAGR of

35% during the last three years on the consolidated levels. We expect tissue culture and solar businesses of the company to grow with a CAGR of 20% and 15% during FY13‐FY16E.

• JISL is well placed to cater the incremental demand in all of its business segments. Overall we see the topline of the Company to grow with a CAGR of 15% between FY13‐16E.

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5%

10%

15%

20%

25%

0

5000

10000

15000

20000

25000


`m

n

Plastic Piping Revenues % to sales


36%

17%

42%

23% 22%25% 25%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000


`m

n

Agro Processing Revenues % to sales

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5. Healthy Order book of ` 12 bn plus: • Recently, JISL bagged world’s largest integrated MIS project viz. ‘Ramthal‐Marol

Integrated Micro Irrigation Project’ from Krishna Bhagya Jal Nigam Ltd, Karnataka, valued at ` 3.85 bn.

• The scope of the project involves:

− survey, investigation, planning, designing, Supply & Execution of distribution system using HDPE/PVC piping network.

− formation of water users co‐operative societies in convenient blocks, − installation of on‐farm fully automated MIS in 30,381 acre command

area, − two years’ maintenance after commissioning and training capacity

buildings of farmers.

• More than 7,000 farmers comprising of 35 villages Bagalkot District, Karnataka, will be benefited from the project.

• This project is the major breakthrough in adoption of MIS with modern irrigation facilities, in India.

• With this order, the order book of the company crossed `12 bn mark as on January 1,

2014. MIS, agro processing, and piping (including sheets) comprises ` 6 bn, ` 4‐5 bn and ` 2 bn respectively.

6. Exports are expected to touch Rs 11 bn mark:

• JISL’s exports have grown from ` 489 mn in FY10 to ` 649 mn in FY13 with the increasing demand of MIS and processed food in the developed economies such as America and Europe.

• North America and European regions are the highest consumers for MIS products. As per the expert estimates it is expected that most of the developed countries to face acute shortage of water supply resulting in the incremental demand of MIS.

• The Company exported MIS products worth ` 1.3 bn in FY13 and ` 1.9 bn in H1FY14.

We expect that the MIS export to touch ` 3‐3.5 bn mark by the end of FY14E.

• USA again is the highest consumer of dehydrated onions followed by Europe, Asia and South America. JISL maintains all necessary quality standards for food products business, thus exports for the segment touched ` 310 mn by FY13.

• Overall, the exports have grown with the CAGR of 10% between FY10‐13. Export has

seen a growth of 60% during H1FY14. With the rising demand for MIS and processed food we further expect it to touch ` 11 bn by the end of FY14E.

489

492 66

2

649

1100 12

65

1454

.75

0

200

400

600

800

1,000

1,200

1,400

1,600


`m

n

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7. Unparallel soft infrastructure – biggest entry barrier: • JISL has built unparalleled soft infrastructure by maintaining strong networking with

farmers, which is helping it to continue its journey on the growth path especially in rural India.

• JISL provides extreme value addition to the prosperity of the farmers through:

Knowledge: JISL provides training to the farmers – in‐house and onsite. Assured Price: JISL is engaged in ‘contract farming’. It buys back farm

produce at pre‐determined prices from over 3,000 farmers. Increased Productivity: JISL increase productivity of Indian farmers through

water management and high tech agri inputs such as MIS/SIS, tissue culture, greenhouses, bio‐fertilizers etc.

Adequate and Timely credit: Spending and support towards agriculture has stepped up with the support of Government – both Central and State.

Farmers’ confidence and utmost faith is required to build such a model which places JISL on the driver’s seat and make the entry of competition difficult in this segment.

8. Diverse Revenue Streams – Insulates steady topline: • Apart from agri‐products, JISL also derives its revenues from non‐agricultural sources and

diversified industries such as piping systems to commercial, industrial and government entities, fruit pulp and dehydrated onion to large global food companies such as Coca

Cola etc. PVC sheets to construction industry etc.

• This diversification helps insulate the overall topline from adverse conditions affecting any

one or more of the business segments.

JISL’s integrated model at a glance:

Source: Company

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Key Concerns

1. Highly working capital intensive business: MIS segment of JISL is highly working capital intensive which makes continuous fund infusion necessary.

2. Seasonality in agriculture: JISL’s performance is highly dependent on the seasonality of agriculture sector.

3. Competition from unorganized sector: JISL faces competition from unorganized sector, which may put pressure on the performance of the company.

4. Forex Exposure: JISL has forex loans of USD 220 mn in its books which has to be repaid in next ten

years. The Company charged MTM forex losses of ` 2.3 bn during H1FY14 (when USD 1 = ` 62.77). Any further substantial volatility in Indian rupee may enhance the related forex effects in its books.

5. Change in Government Policy: Government policies are in favour of JISL at the current juncture. Any

change in policies by the government such as cancellation or reduction in subsidies may adversely affect the business of the company.

6. Highly dependent on monsoon: JISL’s agri‐input business which contributes 50% (approx.) to the

topline of the company is highly dependent on monsoon. Any drought like situation in one or more seasons may adversely affect the demand of agri products.

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Financial Outlook

Top‐line to grow at a CAGR of 15% between FY13‐16E

• For the FY13, consolidated net sales have gone up to Rs 50,217 mn by registering a growth of 2.2% y‐o‐y basis. MIS, plastic piping, agro processing and other segments have contributed 46%, 22%, 20% and 12% respectively.

• We expect the overall consolidated sales to grow at a CAGR of 15% over FY13‐16E, with the

maturing of new business model in MIS and incremental demand in piping and agro business.

EBITDA margin to be maintained around 14%

JISL has witnessed a decline in consolidated EBITDA margin of 12.6% in FY13 due to new business model in MIS and high polymer prices. The Company has clogged an EBIDTA of 13.7% during the first half. We expect the company to stabilize its margin at 14% on account of better revenue mix and low raw material cost.

PAT margin to improve to 5.8% by the end of FY16E

JISL has witnessed almost no profit no loss situation during FY13 due to high interest cost and have witnessed losses at PAT level during H1FY14 due to high mark to market forex losses. We expect PAT margin to stabilize around 5.8% gradually by FY16E with the Company’s serious efforts to deleverage its balance sheet and improving working capital cycle. EPS of the company is expected to grow from ` 0.1 in FY13 to ` 9.7 in FY16E.

3420

0

4152

8

4920

6

5021

7

5730

1

6599

1

7632

8

20%21%

18%

2%

14%15% 16%

0%

5%

10%

15%

20%

25%

0

10000

20000

30000

40000

50000

60000

70000

80000

90000


`m

n

Consol Revenues % GrowthSource: Company & SKP Research Desk

6805

7480

8155

6319

8079

9239

1068

6

19.9%18.0%

16.6%

12.6%14.1% 14.0% 14.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

2000

4000

6000

8000

10000

12000


`m

n

EBIDTA EBIDTA Margin (%)

2467

2807

2235

3077

4477

7.2%6.8%

4.5%

0.1% 0.0%

4.7%

5.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000


`m

n

PAT PAT Margin (%)


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At the current market price of ` 69, the stock is trading at EV/EBIDTA of 8.3x, 7.3x and 6.0x of FY14E, FY15E and FY16E EBIDTA of ` 8,079.4 mn, ` 9,238.8 mn and ` 10,685.9 mn respectively. We recommend BUY rating on the stock with a target price of ` 90/‐ (30% upside) in 12 months using the SOTP method of valuation details of which are as follows:

Segment Revenue (FY15E) EBIDTA (%) EBIDTA (Rs mn) EV/EBIDTA (x) Enterprise ValueMIS 26197.1 19% 4977.4 8.5 42308.2Plastic Piping 13384.8 7% 936.9 3.5 3279.3Agro Processing 15646.5 14% 2190.5 4.0 8762.0Others 8086.0 15% 1172.5 1.0 1172.5Total EV of JISL 55522.0Less Longterm Debt (FY15) 16330.6Less Prefrence Shares (FY15) 0.0Less Minority Interest (FY15) 0.0Add: Cash in Hand 170.2Implied market Value 39191.5O/S Equity Shares in FY15 435.6Price Per Share 90.0CMP 69.0Potential Upside (%) 30%

Valuation

Source: SKP Research Desk

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Income Statement FY13 FY14E FY15E FY16E Balance Sheet FY13 FY14E FY15E FY16ENet Operating Income 50217.2 57300.9 65991.3 76327.8 Equity Capital 909.8 909.8 909.8 909.8Operating Expenditure 43898.4 49221.5 56752.5 65641.9 Reserves 20608.0 20518.2 23340.6 27562.7EBIDTA 6318.7 8079.4 9238.8 10685.9 Net Worth 21517.8 21428.0 24250.4 28472.5Depreciation 1695.6 1901.5 1832.2 1759.9 Share Warrant 161.81 0.00 0.00 0.00EBIT 4623.1 6177.9 7406.6 8926.0 Loan Funds 34370.0 38911.2 36128.0 33672.5Interest 5165.6 4123.5 3791.4 3567.9 Deferred Tax Liab. 1841.3 1841.3 1841.3 1841.3Other Income 667.8 258.6 330.0 381.6 Other Long Term Liab 75.1 85.7 98.7 114.2Forex Diff/Hedging Cost 0.0 2308.8 0.0 0.0 Total Liabilities 57966.1 62266.3 62318.4 64100.5EBT 125.3 4.2 3945.1 5739.7 Goodwill on Consolidation 1759.49 1759.49 1759.49 1759.49Tax 80.1 0.9 867.9 1262.7 Net Fixed Assets 26098.1 25906.0 26101.3 25141.4PAT before Minority Int 45.17 3.26 3077.21 4476.96 Capital WIP 737.0 827.5 0.0 0.0Minority Interest 1.3 0.0 0.0 0.0 Investments 38.4 581.1 581.1 581.1PAT after Minority Int 30.8 3.3 3077.2 4477.0 Net Current Assets 28468.7 32088.7 32479.7 35159.0EPS (`) 0.1 0.0 6.8 9.8 Deferred Tax Assets (Net) 929.16 929.16 929.16 929.16

Total Assets 57966.1 62266.3 62318.4 64100.5

Cash Flow Statement FY13 FY14E FY15E FY16E Ratios FY13 FY14E FY15E FY16EPBT 125.3 2313.0 3945.1 5739.7 Valuation ratios (x)

P/E 1019.1 9617.8 10.2 7.0P/Cash EPS 18.2 16.5 6.4 5.0

Net change in WC, Tax, Int ‐3459.1 ‐5268.7 ‐4108.6 ‐3670.5 P/BV 1.4 1.5 1.3 1.1EV/EBIDTA 10.0 8.3 7.3 6.0EV/Sales 1.3 1.2 1.0 0.8

Capital Expenditure ‐3000.4 ‐1800.0 ‐1200.0 ‐800.0 Earning Ratios (%)EBIDTAM 12.6% 14.1% 14.0% 14.0%OPM 9.2% 10.8% 11.2% 11.7%NPM 0.1% 0.0% 4.7% 5.9%ROE 0.1% 0.0% 12.7% 15.7%ROCE 8.2% 10.2% 12.3% 14.4%B/S RatiosCurrent ratio (x) 2.4 2.5 2.2 2.1D/E (x) 1.6 1.8 1.5 1.2

Opening Cash Balance 3298.0 2358.9 3019.8 170.2 Debtor Days 154 135 133 126Creditor Days 163 161 160 164Inventory Days 132 137 133 126

Closing Cash Balance 2358.9 3019.8 170.2 441.8 FA/Turnover (x) 1.5 1.6 1.7 1.9

Cash flow from Financing Activities ‐946.0 162.8 ‐6829.5 ‐6278.2

Investments, Sales of FA, Dividend received and others ‐417.2 ‐771.2 ‐280.3 ‐47.3

Cash balance of acquired subsidiaries 0.0 0.0 0.0 0.0

Add: Depreciation, Interest & Other Exppenditure 6794.3 6025.0 5623.6 5327.8

Net Increase/Decrease in Cash & Cash equivalents ‐939.2 661.0 ‐2849.7 271.6

Cash Flow from Operating Activities 3460.5 3069.4 5460.1 7397.1

Cash flow investing Activities ‐3417.6 ‐2571.2 ‐1480.3 ‐847.3

Consolidated Financials (` mn)


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Notes:

The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call & Investext Myiris, Moneycontrol, Tickerplant and ISI Securities.

DISCLAIMER: This document has been issued by SKP Securities Ltd (SKP), a stock broker registered with and regulated by Securities & Exchange Board of India, for the information of its clients/potential clients and business associates/affiliates only and is for private circulation only, disseminated and available electronically and in printed form. Additional information on recommended securities may be made available on request. This document is supplied to you solely for your information and no matter contained herein may be reproduced, reprinted, sold, copied in whole or in part, redistributed or passed on, directly or indirectly, to any other person for any purpose, in India or into any other country without prior written consent of SKP. The distribution of this document in other jurisdictions may be strictly restricted and/ or prohibited by law, and persons into whose possession this document comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition. If you are dissatisfied with the contents of this complimentary document or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using the document and SKP shall not be responsible and/ or liable in any manner. Neither this document nor the information or any opinion expressed therein should be construed as an investment advice or offer to anybody to acquire, subscribe, purchase, sell, dispose of, retain any securities or derivatives related to such securities or an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment. Any recommendation or view or opinion expressed on investments in this document is not intended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this document are those of the analyst which are subject to change and do not represent to be an authority on the subject. SKP may or may not subscribe to any and/ or all the views expressed herein. It is the endeavor of SKP to ensure that the analyst(s) use current, reliable, comprehensive information and obtain such information from sources, which the analyst(s) believes to be reliable. However, such information may not have been independently verified by SKP or the analyst(s). The information, opinions and views contained within this document are based upon publicly available information, considered reliable at the time of publication, which are subject to change from time to time without any prior notice. The Document may be updated anytime without any prior notice to anybody. SKP makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or correctness of the information in this Report. SKP, its Directors, affiliates and employees do not accept any liability whatsoever, direct or indirect, that may arise from the use of the information or recommendations herein. Please note that past performance is not necessarily a guide to evaluate future performance. SKP or its affiliates, may, from time to time render advisory and other services to companies being referred to in this document and receive compensation for the same. SKP and/or its affiliates, directors and employees may trade for their own account or may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented in the supervisory board or on any other committee of those companies or may sell or buy any securities or make any investment, which may be contrary to or inconsistent with this document. This document should be read and relied upon at the sole discretion and risk of the reader. The value of any investment made at your discretion based on this document or income there from may be affected by changes in economic, financial and/ or political factors and may go down as well as up and you may not get back the full or the expected amount invested. Some securities and/ or investments involve substantial risk and are not suitable for all investors. Neither SKP nor its affiliates or their directors, employees, agents or representatives/associates, shall be responsible or liable in any manner, directly or indirectly, for information, views or opinions expressed in this document or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the document or inability to use or access our service or this document or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits or any loss or damage that may arise from or in connection with the use of or reliance on this document or inability to use or access our service or this document.

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Member: NSE BSE NSDL CDSL NCDEX* MCX* MCX‐SX FPSB *Group Entities INB/INF: 230707532, BSE INB: 010707538, CDSL IN‐DP‐CDSL‐132‐2000, DPID: 021800, NSDL IN‐DP‐NSDL: 222‐2001, DP ID: IN302646, ARN: 0006, NCDEX: 00715, MCX: 31705, MCX‐SX: INE 260707532

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