Jain Irrigation - Operationally weak show, lower tax led to better PAT - Prabhudas Lilladher

Lower tax resulted in better‐than‐expected Q4FY12 PAT: JISL's net sales grew by mere 0.1% YoY to Rs12,369m (PLe: Rs13,442m). Micro Irrigation business (MIS) sales growth has shown negative growth of 4.1% YoY on account of lower credit period to farmers and company's efforts to reduce high receivable/improve cash collection, primarily in Karnataka and Tamil Nadu. On the other hand, Rajasthan, Gujarat and Andhra Pradesh have shown strong YoY growth of 296%, 44% and 22%, respectively. Lower-than-expected MIS growth led to below estimate sales. Further, other businesses like piping and agro have also shown muted performance during Q4FY12. EBITDA de-grew by 5.2% YoY to Rs2,497m (PLe: Rs3,033m). Interest cost has gone up by 38.1% YoY to Rs965m (up 5.3% QoQ) on account of higher debt levels due to increased working capital requirement and higher interest rate. Company has taken tax reversal of Rs301m on account of tax holidays in some of the activities and got approval from competent authority as 'In-house R& D Centre' which is eligible for higher deduction. PAT grew by 34.9% YoY to Rs1,584m (PLe: Rs1,104m). JISL has taken reversal in forex loss of Rs151m in Q4FY12 (considered as exceptional item). Hence, reported PAT stood at Rs1,734m.

- Highlights of post result conference call: Management has indicated that company is focusing on cash flow/balance sheet improvement and it would lead to slower/muted MIS sales growth in the next two quarters. Company has already witnessed muted MIS growth during the quarter. Approval of NBFC is still pending and expected to be come within a month. As on March 2012, company's consolidated and standalone gross debt stood at Rs38bn and Rs28bn, respectively (v/s Rs37bn and Rs28bn as on December 2011). Management has guided for tax rate of 23-24% for FY13 (PLe: 25%). Company's MIS receivable stood at 343days (v/s 340days in December 2011 and 355 days in September 2011) and company is taking efforts to reduce it to 270 days in the near future. Company has loan repayment of Rs2.5bn during FY13.

What we expect in FY13 and FY14? We have assumed flat and 15% YoY growth during FY13 and FY14, respectively (v/s 43.8% in FY06-12) in MIS considering slower growth. It would ultimately lead to consolidated sales CAGR of ~10% during FY12-14E. We have considered jump in EBITDA margin by 30bps during FY12-14 on account of improvement in performance of global subsidiaries despite lower contribution from MIS business which is a higher margin business. It would lead to EBITDA CAGR of 11.3% during FY12-14E (v/s 42.9% during FY06-12). Considering the management indication of balance sheet improvement, we are taking working capital of 180/217/209/195 days during FY11/12/13/14, respectively. It is likely to result in positive operating cash flow of Rs9.5bn in FY13/14 that we expect would ultimately reduce the debt by Rs8bn in FY13/14. Hence, we expect PBT FY12-14 CAGR of 32.5% (v/s EBITDA CAGR of 11.3%) due to lower interest outgo. Company tax outgo was lower at 1.1% during FY12 on account of tax reversal v/s 23-24% in FY13. Hence, we believe that it would lead to lower PAT FY12-14 CAGR of 15.6% (v/s FY06-12 CAGR of 31.2%).

Maintain 'BUY' considering valuation comfort: Stock has already been corrected 50% plus in the past one year on account of balance sheet concerns, NBFC initiatives and expectation of slower growth. It has been sharply de-rated from one-year forward P/E of 25x to 8x and EV/EBITDA of 15x to 6x. We believe that the present valuation is comfortable, considering JISL's strong business model despite considering slower growth, going forward. We expect that increased focus on balance sheet would lead to improvement in earnings as well as re-rating of stock, going forward. We are downward revising our FY13/14 EPS by 10.7%/8.8% considering lower MIS growth (1%/15% in FY13/14 v/s earlier 15%/15%) and higher working capital days (209/195 days in FY13/14 v/s earlier 187/179). But, we maintain our 'BUY' rating with the revised TP of Rs107 (i.e. 7.6xFY13E EV/EBITDA and 11xFY13E EPS). Slower-than-expected growth in MIS or disappointment to improve balance sheet could lead to downward risk to our estimate as well as rating, going forward.

Source : Equity Bulls

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