The story of a leading co reeling under investor ire

Just over 10 million hectares in India are equipped with micro-irrigation systems, according to the ministry of agriculture. That is just 15% of the area that could potentially be covered in a country where 16% of the gross domestic product comes from agriculture, according to the National Statistical Office.One company that is well-placed to tap that growth opportunity is Jain Irrigation Systems Ltd ( JISL), which has more than a 50% market share in the micro-irrigation sector. The company’s top line and net profit in 2018-19 grew 9% and 15%, respectively, to Rs 8,577 crore and Rs 254 crore.Despite this optimistic outlook, investors are not finding any reason to be excited about the company. Its shares have tanked 68% over the past 12 months to Rs 25.80 on June 28, though the S&P BSE 500 index has risen 7% during the period. A key reason for this poor show, experts say, is the company’s growing debt. This has led to rating downgrades by India Ratings and Fitch Ratings in the past couple of weeks. The company’s net debt rose from Rs 3,891 crore in March 2018 to Rs 4,954 crore in March 2019.“We see Jain Irrigation as being caught in a debt trap, as working capital and interest payments have been eating into operating cash flows, leaving negligible amounts for debt repayments,” wrote Amit Murarka, an analyst with Deutsche Bank Research, after JISL announced quarterly results in May.On June 20, JISL informed the stock exchanges it was taking efforts to pare its debt. “One must note that there is no pressure while servicing existing debt, as repayments are spread out over the next 5-6 years and aligned with expected normal cash flows based on company’s growth plan,” it added.The Jalgaon, Maharashtra-based company attributed the rise in debt to delays in receiving payments from the government in its micro-irrigation business. 70006021 Some assembly polls and the general elections were the reasons the payments have not been cleared, it said. Anil Jain, managing director of JISL, says the release of payments has already started as the elections are over now.Hi-tech agri inputs, which includes micro-irrigation, account for more than half of JISL’s revenues, with the rest coming from plastic pipes and food processing. Around 46% of the receivables in micro-irrigation as on March 31 was in government turnkey projects.The government subsidises installation of micro-irrigation systems, which include drip and sprinkler irrigation, by 50-80%, depending on the state where the project concerned is being implemented.“Majority of JISL’s debt is in working capital because of the nature of business,” said Kiran Shankar Prasad, an analyst with Karvy Stock Broking, in a June 6 report. “Further, the company has consistently been acquiring assets, impacting overall debt.”JISL had in February 2018 acquired Belgium-based Innovafood — an importer and distributor of food ingredients — and in September 2018 purchased US-based ET Water Systems — a smart irrigation tech company. It has not disclosed the deal values.JISL, founded by Anil Jain’s father Bhavarlal in 1986, has said it would reduce its debt by Rs 2,000 crore in a year or two. Among the options being explored is divesting its stake in its food, plastic and overseas micro-irrigation businesses. 70006027 But investor reaction has eroded its market capitalisation twothirds over the past year to Rs 1,280 crore. Its market cap had peaked at Rs 9,827 crore in 2010. “Market cap has no connection to reality. We have created value in each of our businesses,” says Jain.The company has strongly denied market rumours about its inability to repay its debt. “Company has not defaulted on any of it debt obligations (sic). Company is a growth oriented, profit making, dividend paying entity (sic),” JISL told the exchanges on June 13. Karvy’s Prasad, too, is confident there won’t be a default. “With the thrust this government has put on irrigation, the company should benefit.”The BJP’s election manifesto had vowed to bring micro-irrigation, which is more water- and energy-efficient than traditional irrigation methods, to 10 million more hectares. Rajasthan had the highest area under micro-irrigation as of March 2018, with 1.8 million hectares (1 hectare = 2.5 acres), followed by Andhra Pradesh and Maharashtra, with 1.6 million hectares and 1.5 million hectares, respectively, according to the ministry of agriculture. In March 2018, the government had also set up a Rs 5,000 crore micro-irrigation fund with the National Bank for Agriculture and Rural Development to extend loans to states to expand micro-irrigation coverage. Among JISL’s competitors are Israel’s Netafim and Mahindra EPC.In addition to the government focus on micro-irrigation, JISL’s prospects are also influenced by the monsoon. The Indian Meteorological Department has forecast a normal monsoon evenly spread across regions this year. “Farm incomes have been under pressure in the last few years due to low crop prices as well as adverse weather. Any improvement in farm incomes can provide a boost to micro-irrigation demand,” said Murarka in his report.Beside JISL’s debt and receivables, investors are also worried about the rise in the promoters’ pledged shares. Over 48% of their shareholding was pledged as of March 2019, up from 17% a year earlier; the promoters own around 29% of JISL.The company will have to spend the next quarter or two assuring investors that it is serious about deleveraging its balance sheet and is in good financial health to make the best of the government’s renewed attention on micro-irrigation.

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