Jain Irrigation - An Agri Infra Play

Jain Irrigation - Raised $60 mn. Through FCCB

Jain Irrigation Systems Ltd has raised 60 million dollars from the international market through the issue of 60,000 Foreign Currency Convertible Bonds (FCCBs). The company has raised the amount by way of 60,000 FCCBs of $1,000 each, having a conversion price of Rs 345.50 per share, it informed the Bombay Stock Exchange. The bonds, to be listed on the Singapore Stock Exchange, have a yield to maturity of 6.75 per cent and a tenure of five years, it added. Also, the company would issue 77 lakh equity shares of Rs 10 each, if all the FCCBs are converted into equity shares. Jain Irrigation has signed a purchase agreement with the book running lead manager Morgan Stanley International, subject to necessary approvals.

Jain Irrigation Systems Ltd (JISL) is a diverse play in the agri-related sector. The company is set to enter into a high-growth trajectory on the back of increased government thrust on agriculture, its leadership position, a well-diversified portfolio and a de-risked business model. I expect the company to sustain its growth going forward with revenues and profits likely to grow at a CAGR of over 20%. Incorporated in December 1986, JISL is a one-stop integrated agricultural equipment manufacturer. The company manufactures and supplies micro-irrigation systems (MIS) that encompass irrigation through strip tubing, emitters, jets and mini-sprinklers. The company also makes polyethylene (PE) and polyvinyl chloride (PVC) pipes and sheets and is scaling up its business in a big way. The company has two main divisions -- agri input product division which consists of products such as drip irrigation and sprinkler irrigation systems, PVC pipes, biotech tissue culture plant materials and other agri inputs. The other division mainly manufactures PVC sheets, polycarbonate sheets and PE pipes. It is also involved in fruit processing, onion and vegetable dehydration.

The company operates in diverse, but integrated segments of the agri equipment business. In each segment, the company competes in the domestic and export markets with global players. While India accounts for 16% of world population, it has only 2.4% of land area and 4% of global water resources. The country has to manage growth in the agricultural sector through these scarce resources. The economy is poised to grow at around 8% going forward and agricultural sector is likely to provide impetus for this growth. Use of modern irrigation equipment to increase productivity will be the only way to achieve robust growth in the agriculture sector. The total domestic industry size for drip and sprinkler irrigation is more than Rs 200 crore, out of which the company has more than 50% market share. Projected investments in the agricultural sector during the 10th and the 11th plan stand at Rs 6200 crore, and most of this investment is beginning to reach the implementation phase, which would propel revenue growth for companies operating in the agricultural sector. This implies a positive business outlook for the industry in the short and long-term.

The contribution of the agricultural sector to overall GDP has drastically come down over the last 10 years. Although this is partly because of the rising share of the industrial and service sector, inefficiencies that plague the agricultural sector also play a role. Only about 1.2mn hectares in India is under the micro-irrigation program (MIP). The task force on micro irrigation has recommended covering 67mn hectares under MIP in a phased manner. Since investment in such equipment is huge for the average Indian farmer, the government has decided to subsidise it by 50%. The company's MIS segment, with a 50% market share, contributed 23.6% to revenue in Q3FY06 with EBIDTA margin of 25%. I expect this segment to be the growth driver for the company in years to come. Initiatives by the Andhra Pradesh and Gujarat state government are already under implementation, while other states are looking forward to implementing the same. The finance minister had announced a budgetary allocation of Rs 350 crore in the budget last year which was spent on subsidising the cost of drip and sprinkler irrigation systems. PE pipes are used in telecommunications, sprinkler irrigation systems, gas distribution and water conveyance. Since all these areas are likely to witness robust investment in the coming years, I believe this segment will contribute significantly to the topline. In Q3 FY06, this segment contributed 42% to the topline with EBIDTA margin of 11.5%.

In the US home building market, PVC sheets are replacing lumber and the company has been placing itself in a prime position to benefit from this change. It is investing in product development and expanding distribution network, which is highly underdeveloped in the US. Further, it has acquired a controlling 51% stake in NuCedar Mills Inc, a US-based company, operating in the custom home building market to add momentum to its growth trajectory. This business contributed 19.5% of revenue in Q3FY06 with EBIDTA margin of 21.3%. I believe this division will see explosive growth going forward as demand from the US and UK is likely to increase over the coming years.

The company is also involved in onion dehydration and fruit processing activities that contributed 9.1% or Rs 19.96 crore to topline in Q3 FY06. The company's customers for the dehydrated onions include the soup, ketchup and fast foods manufacturers. In the fruit processing business, the company caters to Coke and Nestle among other manufacturers. The company plans to expand this business in the coming years with exports gaining more importance from a strategic point of view. EBIDTA margins were in the range of 12% for the combined business segment. The recent acquisition of the mango fruit processing plant of Parle will add to its strength in this segment going forward.

As the NuCedar Inc acquisition begins to contribute more to the bottom line, the company may look for more acquisitions in the domestic and overseas markets. Domestic acquisitions started two years back with buying of a fruit processing plant near Hyderabad and continued last year with the acquisition of Terra Agro Technology Ltd’s facilities near Coimbatore . As the company develops critical mass, it may look to gain market share quickly using the inorganic route.