F I R S T C A L L BUY R E S E A R C H JAIN IRRIGATION SYSTEMS LTD. December 15, 2010 SYNOPSIS. 1 Year Comparative Graph.

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1 C.M.P: Rs Stock Data Sector Face Value (Rs) JAIN IRRIGATION SYSTEMS LTD 1 Year Comparative Graph JAIN IRRIGATION Plastic Products Rs wk. High/Low (Rs.) Rs / Volume (2 wk. Avg.) BSE Code Market Cap (Rs.mn.) Share Holding Pattern V.S.R. Sastry Equity Research Desk vsrsastry@firstcallindiaequity.com Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com Target Price: Rs BSE SENSEX SYNOPSIS BUY December 15, 2010 Jain Irrigation Systems Ltd (JISL) is India s one of the leading agri-business companies with pan India presence of twenty manufacturing bases spread over five continents. During the quarter has entered into an agreement to acquire controlling stake in Sleaford Quality Foods, a UK based industrial food ingredients supplier. During the quarter Jain Irrigation Systems bags Rs.1683 Million order of Karnataka Neeravari Nigam Ltd Micro Irrigation project. During the quarter Jain Irrigation inks MoU with International Rice Research Institute (IRRI) for collaborative research and adaptive field trials on paddy using micro irrigation. The Company plans to enhance its distribution reach by adding new dealers and distributors to penetrate into new domestic and international markets, particularly in Africa, the Middle East and the East and West coasts of the US. Jain Irrigation has earmarked a capex of Rs 4000 mn for FY11 of which Rs 600 mn will be maintenance capex, Rs 300 mn will be for the marketing and infrastructure and the rest will be towards increasing the production facilities. Net sales and PAT of the Company are expected to grow at a CAGR of 16.00% & 40.00% over FY09 to FY12E. Financials (Rs.mn.) FY10A FY11E FY12E Net Sales EBIDTA PAT EPS (Rs) P/E (x) F I R S T C A L L R E S E A R C H 1

2 Peer Group Comparison Name of the company CMP(Rs.) Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/BV(x) Dividend (%) Jain Irrigation Systems Supreme Industries Kemrock Industries and Exports Rungta Irrigation Investment Highlights Result Updates (Q2 FY11) Jain Irrigation Systems Ltd reported a rise in consolidated net profit for the quarter ended September During the quarter, the profit of the company rise 45.65% to Rs million from Rs million in the same quarter previous year. Net sales for the quarter rise 13.96% to Rs million, while total income for the quarter rise 14.03% to Rs million, when compared with the prior year period. Company posted earnings of Rs 8.13 a share during the quarter, registering 44.12% growth over prior year period. Jain Irrigation Systems board has approved split of equity shares from Rs 10 face value to Rs 2 face value. The board has also approved dividend of: (a) 4% preference shares and 1% preference shares outstanding; (b) equity Rs 4.50 per share of the company. Quarterly Results - Standalone (Rs in mn) As at Sep - 10 Sep - 09 %Change Net Sales Net Profit Basic EPS

3 Net Sales & PAT Growth During the quarter, Net sales rise by 13.96% to Rs million from Rs million in the same quarter last year and the Total Profit for the quarter ended September 2010 was Rs million grew by 45.65% from Rs million compared to same quarter last year. EPS Growth The basic EPS of the company stood at Rs.8.13 for the quarter ended Sep 2010 from Rs.5.64 for the quarter ended Sep

4 Segment Revenue (Q2 FY11) Acquires controlling stake in UK based co Jain Irrigation Systems Ltd. (JISL) has entered into an agreement to acquire controlling stake in Sleaford Quality Foods, a UK based industrial food ingredients supplier. This will help food division of Jain Irrigation to have direct access to a large market with value added products. Bags Rs Million order Karnataka s Neeravari Nigam Ltd, a division of Water Resources Dept has selected India s biggest Micro Irrigation Company and agriculture conglomerate, Jain Irrigation Systems Ltd for the prestigious Shiggaon Micro Irrigation project through the National Competitive Bidding. This integrated Micro Irrigation project involves survey, design, planning, supply and execution. The project involves formation of co-operative societies of water users in convenient blocks. The project also involves distribution system which uses the piping network and further installation of on-farm micro-irrigation on 9900 hectares of the command area. It also includes providing power transmission network. stock-spilt 4

5 Jain Irrigation Systems board has approved split of equity shares from Rs 10 face value to Rs 2 face value. The board has also approved dividend of: (a) 4% preference shares and 1% preference shares outstanding; (b) equity Rs 4.50 per share of the company. Inks MoU with International Rice Research Institute (IRRI) Jain Irrigation Systems Ltd. (JISL), one of the world s largest Micro-Irrigation manufacturers signed a Memorandum of Understanding (MoU) with the International Rice Research Institute (IRRI). Jain Irrigation will closely work with IRRI s scientists to determine optimal irrigation and fertigation systems for irrigated rice and wheat. Under this MoU, JISL and IRRI will study the relevance of different irrigation and fertilizer delivery systems for paddy cultivation in India and other south Asian countries wherever IRRI is planning research or adaptive trials. The aim is to find ways to reduce water consumption in rice cultivation while increasing crop productivity. Jain Irrigation will provide sprinkler and drip systems to experimental plots either acquired by IRRI or to participating farmers fields selected by IRRI. Plans to take agricultural projects on turnkey basis The Company is planning to work with its agri customers by taking their agricultural projects on turnkey basis providing services such as engineering, soil and water analysis, water recourse estimation, crop planning, irrigation and ferigation scheduling, marketing and other agronomic support. The Company also intends to achieve further vertical integration of the activities in agrisupply chain such as expansion of upstream contract farming arrangements to support its downstream agro processed products business. Government focus on water management Almost 50% of the arable land in the country is rain fed. The Government both Central and State provides 50-70% of capital subsidy for promoting the use of micro irrigation systems. Some of the state governments are even providing subsidies up to 75-90%. Recently, Andhra Pradesh government has announced that approximately 2.5 mn Ha of irrigation land will be brought under MIS by Haryana Government has increased its subsidy on MIS from 50% to 90%. Subsidies provided by other State Governments at a glance. Increasing domestic capacities JISL is expanding its capacity aggressively to maintain its leadership in India. It has increased its installed capacities of MIS from 18,205 MT in FY06 to 121,160 MT in FY09 with the CAGR of 88%. JISL has plans for capital expenditure to the tune of Rs 6.5 bn, spanning in next three years, of which Rs 3.9 bn (60% of total 5

6 capex) is allocated for MIS. The Company invested Rs 1.19 bn to increase the capacity of the MIS division, last year. Expanding into new growth products and markets Company plans to further penetrate the urban and commercial applications for its PVC Piping Systems, focusing on India s increasing need for housing, sewerage, water supply, telecommunications and other infrastructure. The Company plans to enhance its distribution reach by adding new dealers and distributors to penetrate into new domestic and international markets, particularly in Africa, the Middle East and the East and West coasts of the US. Furthermore, there are plans to foster strategic alliances with global players so as to have access to their distribution reach for marketing the Company s products Company Profile Jain Irrigation Systems Ltd (JISL) is leading agri-business Company, operating in diverse but integrated segments of the agribusiness value chain. It is the second largest micro irrigation Company globally and is largest manufacturers of irrigation systems in India. Globally its leadership position is not restricted to irrigation alone, it is the largest manufacturer of Mango pulp, puree and concentrate in the world and also third largest manufacturer of dehydrated onions. Jain Irrigation Systems Ltd (JISL) is India s one of the leading agri-business companies with pan India presence of twenty manufacturing bases spread over five continents. Its products are supplied to 110 countries with the assistance 3,000 dealers and distributors worldwide. Subsidiaries: 1. JISL Overseas Ltd. 2. Jain (Americas) 3. Jain (Europe) Ltd 4. Jain Irrigation Inc., USA 5. Cascade Specialties Inc. USA 6. NuCedar Mills Inc. USA 7. NaanDan Jain Irrigation C.S. Ltd. 6

7 Business Areas: Products: 7

8 SWOT Analysis Strengths Weakness Strong marketing and distribution network. High Debt Margins are very high Strong management Strong brand portfolio Unparalleled soft Infrastructure Flexible and Scalable Production Facilitie Opportunities Apart from agri-products, JISL also derives its revenues from nonagricultural 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. Threats Change in Government Policy Competition from unorganized sector Seasonality in agriculture Highly working capital intensive business Highly dependent on monsoon The penetration level of micro irrigated area should grow strongly with various Government efforts. This will improve the revenue mix of JISL. In FY04 majority of revenues were coming from plastic piping segment (about 47%), whereas, MIS contributed only 18%. The Company is planning to work with its agri customers by taking their agricultural projects on turnkey basis providing services such as engineering, soil and water analysis, water recourse estimation, crop planning, 8

9 irrigation and ferigation scheduling, marketing and other agronomic support. Financials Results 12 Months Ended Profit & Loss Account (Standalone) Value(Rs. in million) FY09A FY10A FY11E FY12E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Reserves Face Value Total No. of Shares EPS

10 Quarterly Ended Profit & Loss Account (Standalone) Value(Rs. in million) 31-Mar Jun Sep Dec-10E Description 3m 3m 3m 3m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Face Value Total No. of Shares EPS

11 Key Ratios Particulars FY09 FY10 FY11E FY12E EPS (Rs.) EBITDA Margin (%) 17.72% 23.86% 23.17% 23.57% PAT Margin (%) 5.51% 9.98% 9.66% 9.78% P/E Ratio (x) ROE (%) 13.36% 19.74% 17.76% 16.51% ROCE (%) 15.08% 18.54% 17.67% 17.36% EV/EBITDA (x) Debt-Equity Ratio Book Value (Rs.) P/BV Charts: 11

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13 Outlook and Conclusion At the current market price of the stock Rs , the stock trades at a P/E of x and x for FY11E and FY12E respectively. Company has approved split of equity shares from Rs 10 face value to Rs 2 face value. The EPS of the stock is expected to be at Rs.7.83 and Rs.8.72 for the earnings of FY11E and FY12E respectively. The top line and bottom line of the company are expected to growth a CAGR of 16% and 40% over FY09 to FY12E. On the basis of EV/EBDITA, the stock trades at 11.87x and 10.61x for FY11E and FY12E respectively. Price to Book Value of the stock is expected to be at 5.06 x for FY11E and 4.22 x for FY12E. Almost 50% of the arable land in the country is rain fed. The Government both Central and State provides 50-70% of capital subsidy for promoting the use of micro irrigation systems. Some of the state governments are even providing subsidies up to 75-90%. The penetration level of MIS in the matured markets such as American continents and Europe is 36% and 47% respectively. Overall global average is 14%.Penetration level in India is as low as 4%. JISL is increasing capacity of MIS in India to take advantage of huge opportunities present in the segment. 13

14 The penetration level of micro irrigated area is growing rapidly with various Government efforts. The segment is growing at a CAGR of 40% for last few years. This will improve the revenue mix of JISL. MIS contributed 42% to the total revenues in FY09, which we expect to reach 45% in FY11. With this improvement, EBIDTA margins of the company overall should improve from 17.72% in FY08 to 21.05% in FY11. The company is also likely to witness an improvement in its EBITDA Margins, as the performance of its subsidiaries begins to improve. We believe that segments like MIS will continue to grow at a healthy pace we expect the MIS Segment to post a CAGR of 30% over the next two years. In case of the Pipe Segment, we expect it to post a CAGR of 13% over the next two years, on the back of demand from the Infrastructure Segment (Water and Waste management). JISL is expanding its capacity aggressively to maintain its leadership in India. It has increased its installed capacities of MIS from 18,205 MT in FY06 to 121,160 MT in FY09 with the CAGR of 88%. Outlook for vegetable dehydration industry in general and dehydrated onion industry in particular looks very good. The Company has successfully continued to get large supply contracts with multinational companies for supply all over the world as a preferred supplier with very encouraging revenues. The massive infrastructure projects undertaken under the Bharat Nirman Yojana, increased investments by telecommunication industry and plans for piped gas in cities, continue to be the potential demand drivers for the industry. In view of the increasing area under MIS in terms of hectares, healthy demand for the company s products and current order book, we remain positive about the growth of the company. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. Industry Overview Micro and sprinkler irrigation The industry is broadly divided into the organized and unorganized segments in the country. The Company is the largest player in the organized sector. In view of the involvement of a large number of components in a system, all of which are not available with a single manufacturer, it is difficult to hazard a guess about the exact size of the industry as most of the figures are derived on the basis of information available from different sources. While the Company controls 55% of the Micro 14

15 Irrigation business in the country, it has a market share of 35% in the Sprinkler irrigation business in the country. The current estimate of industry size is Rs. 17 bn. and it is growing rapidly. Currently about 3.0 to 3.5 million ha of possible 70 million ha area is covered under the micro and sprinkler irrigation in the country. However, as per Government task force 17million Ha of land can be easily brought under micro irrigation coverage in the country in the near future, say in next 5 years or so. The world over the MIS/SIS industry is undergoing a consolidation phase with M & A activity at its highest in the last 30 years or so. The Company has secured a firm foothold in the mature North American market with two significant acquisitions to gain a 10% market share. The JV with Naandan gives it strategic access to markets the world over, specially in Europe, South America & Australia while it faces a demand explosion in the fastest growing Indian market. PVC Piping During the year the Indian industry used 1373 KT of PVC Resin, achieving a growth of 13% over previous year. Out of this about 70% i.e. 972 KT was consumed for pipes & fittings. For the year Indian PVC industry in general looks forward to consume 11% more and looks forward to a CAGR of 10% up to the year , matching the Global pace. Jain Irrigation, with a 15% share, is one of the handful major players in the organized market. Rest of the industry, being small and medium scale in nature, is unorganized, fragmented and scattered near the user belts in the country. However, there are 3 major players in the organized sector. Increased micro irrigation spends; push for urban infrastructure by government agencies and Command Area Development Programme will improve the demand situation for the industry. PVC & PC Sheets The market is divided into two segment; Graphics Market (GM) and Building Materials Market (BMI) In the BMI segment, Lumber the traditional building material was being replaced by PVC. The basic uses of PVC in BMI was in Trim, used as surrounds for windows and garage doors, Corner Boards, Soffits and interior applications such as Wainscoat and Beadboards. The inherent qualities of PVC such as impervious to water absorbtion; protected against insect attacks and a life term warranty promulgated the product over traditional Lumber. Further, availability of good quality wood was a problem as resources were drying up and cost of processing was escalting. The market is serviced by 7 manufacturers and some Chinese imports. The GM 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 3 decades. This segment is serviced by 5 manufacturers. Some China products have attempted to penetrate the market. Polycarbonate Sheets have been traditionally used in Glazings, Roofing, Security windows, some Sign and Display applications in the general purpose segment. At the high end, Aeronautical applications, Eyeware, Compact Discs have been its niche markets. 15

16 PE Piping The applications of PE pipes are growing at a fast pace and yet new applications are being developed for the product. In applications like Sewage & Effluent disposal the tougher environmental laws and stricter application of the same by the Govt. departments, the replacement of cement/metal pipes by PE pipes is becoming very relevant. Such possibilities are huge, especially since the larger diameter PE pipes are now indigenously available within the country itself. The Company s presence in gas and cable duct segments of the PE pipe business is commanding and hence the overall market share is 30%. The Company is operating in all segments of the industry like cable duct, sprinklers, gas distribution, water conveyance, house service connection, Sewage conveyance, Effluent disposal, sand stowing, dust suppression etc. Fruit processing India is the world s second largest producer of fruits next only to China and has the potential of becoming the largest producer. India also ranks second in the world in the production of fruits and vegetables. Despite the large production of fruits and vegetables, fruit and vegetable processing was limited to only 2% of the produce till This sector has been accorded a very high priority by the Government of India and fruit & vegetable processing industry has been encouraged. Further, with the economic developments taking place in India, increasing health consciousness and with the coming of organized retail trade, the food industry is poised to grow rapidly. The Indian fruit processing industry is growing currently at the rate of 20% p.a. The demand for fruit juices and fruit drinks and other processed fruit products is growing rapidly in India. Further, Indian mango and other processed fruit products are getting popular in developed markets overseas. There are 4,000 fruit processing units in the country with an aggregate capacity of 1.2 million tones per annum. It is estimated that 20% of the output is exported and the rest caters to domestic consumption. Realizing the opportunity and potential of fruit and vegetable processing, the Company established modern plants a decade ago for processing fruits and vegetables. The Company has also added new capacities, acquired a number of plants and also increased the product portfolio. Jain Irrigation is now the largest processor of fruits and vegetables from India. Apart from growth in mango pulp and the concentrate business, the Company has set-up the most modern and largest Pomegranate processing facility at Jargon. The rationalization of manufacturing locations was completed by the Company in the year under review by deciding to process the mangoes in season only at two locations. The IQF and BF fruit products have further diversified the basket of fruits being processed by the Company. 16

17 Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 17

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