Buy Jain Irrigation For Target Rs.170 - Motilal Oswal

Government reiterates focus on MIS

Strong steps by Center can accelerate JI’s deleveraging process

Micro irrigation will be popularized to ensure ‘Per drop-More crop’

Indian President, Mr Pranab Mukherjee, addressing both the houses of Parliament, reiterated the new Government’s focus to develop the agricultural sector. The Government for the first time specifically mentioned on popularizing Micro Irrigation Systems (MIS) in a major pattern to ensure better yields through minimal water consumption. A key hurdle impacting MIS sector’s growth is the long delay associated with Government subsidy receivables. Even as a full road map of the Government’s initiatives on MIS is awaited, we believe potential steps in the form of direct credit of subsidy by the Center to farmers or replication of efficient models like the Gujarat Green Revolution Company (GGRC) can be major game changer event for companies like Jain Irrigation (JI). Our interaction with JI’s management suggests further clarity will emerge as it meets the agriculture ministry soon.

Strong emphasis on irrigation, food processing and solar energy

The speech also highlighted an increase in investment in agri-infrastructure, incentivizing setting up of food processing industries, prioritizing pending irrigation projects and launching the ‘Pradhan Mantri Krishi Sinchayee Yojana’ to promote irrigation, and expanding the national solar mission, which are positives for JI’s MIS, PVC piping, Food processing and Solar segments.

Food processing stake sale to aid deleveraging

JI is on track to organically improve its working capital situation over FY14-16 by focusing on progressive states and a switch to NBFC model. We expect gross receivable days in MIS business to decline from 257 in FY14 to 181 in FY16E, thus ensuring strong free cash generation, which should help reduce debt-equity from 1.8x in FY14 to 1.1x in FY16E. As per our interaction with the management, JI is likely to conclude the 25% stake sale in its food processing unit to a financial investor (likely to garner INR5b through stake sale) in 1HFY15, which should further lower debt.

Strong steps by Government can accelerate re-rating

We believe strong steps by the Government by direct credit of subsidy or replication of efficient models on the lines of Gujarat Green Revolution Company (GGRC) can be a game changer event for JI, which can accelerate the stock’s re-rating process. We upgrade JI’s target price from INR150 to INR170 (16x FY16E EPS) implying 35% upside. Maintain Buy.

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