15 November 2016 2QFY17 Results Update | Sector: Others Jain Irrigation BSE SENSEX S&P CNX CMP: INR86 TP: INR99(+15%) BUY 26,305 8,108 Bloomberg JI IN Inline results; Outlook remain healthy for 2HFY17; Retain Buy Equity Shares (m) 443.1 Revenue & EBITDA inline, PAT beat estimates: JI reported overall revenue of M.Cap.(INRb)/(USDb) 29.3 / 0.4 INR14.4b (est INR14.34b) as against INR13.17b in 2QFY16 marking a YoY 52-Week Range (INR) 109 / 47 1, 6, 12 Rel. Per (%) -4/27/27 growth of 9.3%. EBITDA stood at INR1.91b (est INR1.86b) in 2QFY17 with Avg Val, INRm/ Vol m 401 EBITDA margins at 13.3% (est 13%), expanding 160bp YoY. Interest cost Free float (%) 69.3 increased to INR1.2b in 2QFY17 vs INR1.1b in 1QFY17 due to increase in debt in this quarter. Adjusted PAT for the quarter stood at a INR280m (est. INR135m) Financials & Valuations (INR b) as against loss of INR54m in 2QFY16. PAT beat our estimates due to tax Y/E Mar 2016 2017E 2018E reversal of INR174m vs our estimates tax outgo of INR35m. Net Sales 62.9 72.3 83.4 EBITDA 8.2 9.9 11.7 Healthy growth outlook for 2HFY17: On consolidated basis, overall Micro PAT 1.0 2.5 4.1 Irrigation Systems (MIS) grew by 13.6% yoy with healthy growth in key markets EPS (INR) 2.2 5.4 8.2 like Maharashtra, AP, Karnataka and Gujarat. Plastic division recorded a 1.3% Gr. (%) 17.7 146.1 52.9 growth YoY due to lower off-take of PE & PVC pipe. It has got orders worth BV/Sh (INR) 60.5 65.0 67.6 INR2.8b under AMRUT scheme for water supply project. Order-book of JI RoE (%) 4.0 8.4 12.6 RoCE (%) 8.2 9.3 11.2 stands at INR15b at end of 2QFY17 (INR11b orders in non-food business) in P/E (x) 39.3 16.0 10.5 Indian business. The management expects double-digit top-line growth for P/BV (x) 1.4 1.3 1.3 FY17 (led by 16%-18% in MIS segment and double digit growth in piping & agro segment) and believes de-monetization initiative by government may impact liquidity in value chain of business for near term (a month). Estimate change Inventory build-up expands working capital cycle: JI processed highest ever TP change level of mangoes in this season due to which inventory days were up by 8 days Rating change (cons level) QoQ to 130. It has already signed contracts for 90% of orders with shipping for those expected in 2HFY17. It intends to reduce debt by INR3b by reducing working capital in 2HFY17 with execution of orders and shipments. Overall, working capital cycle expanded by 12 days QoQ to 174days. Valuation and view: In view of better monsoon and Maharashtra government thrust on irrigation, we expect bounce back in MIS business. Overall, we expect 15% revenue CAGR to INR83.4b, and 20% EBITDA CAGR to INR11.7b over FY16- 18, translating into PAT CAGR of 101% to INR4.2b in FY18 mainly to lower interest outgo. We retain our Buy rating with a TP of INR99, 12x FY18E EPS. Niket Shah ([email protected]); +91 22 3982 5426 Chintan Modi ([email protected]); +91 22 3982 5422 Chitvan Oza ([email protected]); +91 22 3010 2415 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Jain Irrigation Revenue and EBITDA inline, PAT beats estimates JI reported overall revenue of INR14.4b (est INR14.34b) as against INR13.17b in 2QFY16 marking a YoY growth of 9.3%. Hi-tech Agri Input Products Division registered the growth of 2.8% yoy. This was however, on account of slower 1QFY17 and attributed to lower water tables during early part of the year in the key markets of the Company such as Maharashtra and drop in project revenue on account of execution being pushed into the subsequent quarters. Otherwise, in 2QFY17 it registered yoy growth of 13.6% primarily driven by better performance by micro irrigation business in India and Israel. Plastic Division improved by 11.3% which was driven by continued strong growth demonstrated by PE Pipe division ~21.4% till date in the domestic market catering to institutional customers and infrastructural solutions. Agro Processing Division expanded by 5.9% lead by stellar performance by overseas operations as comparatively Indian operations had muted performance in the same period especially due to lower off-take of fruit pulp by Indian customer resulting into deferred supply. EBITDA stood at INR1.91b (est INR1.86b) in 2QFY17 with EBITDA margins at 13.3% (est 13%), expanding 160bp YoY. Interest cost increased to INR1.2b in 2QFY17 vs INR1.1b in 1QFY17 due to increase in working capital and inventory buildup in this quarter. Consequently, adjusted PAT for the quarter stood at a INR280m (est. INR135m) as against loss of INR54m in 2QFY16. PAT beat our estimates due to tax reversal of INR174m vs our estimates tax outgo of INR35m Exhibit 1: Consolidated revenue trend (INR m) Consolidated Revenue (INR m) Growth (YoY) % 11.4 10.2 9.3 4.4 2.7 3.8 6.7 3.8 12,919 -1.6 15,534 12,702 -6.0 20,425 15,950 13,178 13,785 20,100 16,558 14,406 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 Source: Company, MOSL Exhibit 2: EBITDA trend (INR m) Exhibit 3: PAT trend (INR m) EBITDA Margins (%) PAT Growth (%) 38.6 884 13.7 14.3 14.1 12.9 12.4 12.5 13.3 11.5 11.7 11.1 0.0 -265 585 0.0 0.0 1,029 144 -54 0.0 0.0 0.0 0.0 2,806 2,876 280 2,006 2,335 1,912 203 -145 1,572 1,492 1,544 1,527 -64 -14.1 2,000 -29.0 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 Source: Company, MOSL Source: Company, MOSL 15 November 2016 2 Jain Irrigation Healthy growth expected in 2HFY17 On a consolidated basis, MIS grew by 13.6% which is primarily driven by 14.3% growth in Indian micro irrigation business and similar double digit growth by Israel subsidiary - NaanDan Jain (“NDJ”). NDJ signed a contract with Ministry of Agriculture and National Development, Eritrea for supply and installation of Solar Powered Drip Irrigation Systems of value Euro18.7m. The growth pick up was seen on account of improved agro climatic conditions and sentiments. The management expects 16-18% growth in MIS for FY17 led by favorable rabi season due to normal rainfall and improvement in key markets like Maharashtra, Andhra Pradesh, Gujarat, Karnataka etc. Pipe division grew by mere 1.3% (PVC sheet business grew by 12.6%) on account of lower PVC pipe sale and slower off-take of PE pipe during 2QFY17. JI has secured an order worth INR2,844m under AMRUT Scheme (Atal Mission for Rejuvenation and Urban Transformation) for Hi-Tech 24*7 city water supply project. Agro-processing business in India grew by 12.6% to INR1,940m in 2QFY17. JI processed highest ever level of mangoes in this season due to which inventory level increased. As per the management, it has already signed contracts for 90% of orders with shipping for those expected in 2HFY17. Order-book of JI stands at INR15b at end of 2QFY17 with INR11b orders in non- food business in Indian business. The management expects double-digit top-line growth for FY17 led by favorable rabi season due to normal rainfall and increase in off-take in key markets. Inventory build-up expands working capital cycle JI processed highest ever level of mangoes in this season due to which inventory days were up by 8 days (cons level) QoQ to 130. It has already signed contracts for 90% of orders with shipping for those expected in 2HFY17. Net working capital cycle increased by 12 days qoq to 174days due to increase in inventory and receivable days. It intends to reduce debt by INR3b by reducing working capital in 2HFY17 with execution of orders and shipments. Currently, long term debt stands at INR18.6b & short term debt stands at INR24.3b at the end of 2QFY17. Exhibit 4: MIS business growth by segment MIS business contribution by segment Segment 2QFY16 2QFY17 YoY Segment 2QFY16 2QFY17 YoY Retail 2,367 2,897 22% Retail 75% 81% 5% Project 498 349 -30% Project 16% 10% -6% Export 274 341 24% Export 9% 10% 1% Total 3,139 3,587 14% Total 100% 100% 0% Source: Company, MOSL Exhibit 5: Break-up of MIS receivables (INR b) MIS -Receivables FY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 Dealer and Institutional 3.5 3.3 2.9 2.7 2.8 2.1 2.4 2.6 2.4 2.1 2.3 Project 3.4 4.0 4.4 3.4 3.0 3.0 3.1 3.3 3.2 3.0 3.1 Govt. Subsidy 3.9 3.4 2.6 2.7 2.7 3.7 2.9 3.0 3.4 3.7 3.8 Export 1.0 0.8 0.6 0.7 0.8 0.7 0.6 0.5 1.2 0.7 0.5 Total 11.9 11.5 10.5 9.5 9.3 9.5 9.0 9.4 10.3 9.5 9.6 Source: Company, MOSL 15 November 2016 3 Jain Irrigation Exhibit 6: Hi-tech(standalone) working capital trend Exhibit 7: Plastic (standalone) working capital trend Segment 1QFY17 2QFY17 Segment 1QFY17 2QFY17 Inventory days 96 104 Inventory days 47 55 Debtor days (Gross) 199 195 Debtor days (Gross) 121 117 Net WC days 226 234 Net WC days Capital 55 110 Source: Company, MOSL Source: Company, MOSL Exhibit 8: Consolidated segment-wise Revenue contribution Exhibit 9: Standalone segment-wise Revenue contribution Segment Contribution Segment Contribution Hi-tech Agri inputs 48% Hi-tech Agri inputs 55% Plastics Division 22% Plastics Division 39% Agro processing division 26% Others 6% Others 4% Source: Company, MOSL Source: Company, MOSL Exhibit 10: Consolidated Geographical mix Standalone Geographical mix Segment 2QFY16 2QFY17 YoY Segment 2QFY16 2QFY17 YoY India 50% 49% 6% Domestic 89% 90% 6% Rest of World 50% 51% 12% Export 11% 10% -3% Total 100% 100% 9% Total 100% 100% 5% Source: Company, MOSL Exhibit 11: Cons.