Jain Irrigation Systems Limited

February 4, 2009

www.dawnaydayav.com
BUY
CMP Rs 325 Target Rs 505

Initiating Coverage
Key Informations
Synony-MIS-ing Irrigation
Market Cap (Rs. mn) 23,522
NSE Code JISLJALEQS
BSE Code 500219 In an era where everyone talks about inclusive growth, agriculture has been
Face Value (Rs) 10
a laggard due to unavailability of resources, poor practices and erratic mon-
52 Wk High 767
52 Wk Low 227 soon. Jain Irrigation Systems Limited (JISL) has stepped up to develop a
52 Wk Avg Volume 189,607 better and cost effective solution to tackle the irrigation problems in India.

Revenue (in Rs. mn) EPS P/E

Micro Irrigation Systems (MIS) is the flagship business of JISL which, on a
FY 08 22,159 19.4 16.7 standalone basis grew by 66% CAGR (Compound Average Growth Rate)
FY 09 E 30,012 24.1 13.5
during 2003-08 period. With 55% market share in MIS division we see JISL
FY 10 E 41,660 35.0 9.3
as the best play to exploit the burgeoning demand.

Government’s ambitious plans

Shareholding Pattern Government of India (GoI) has an ambitious plan to bring 17 million hec-
tare (M Ha) of the arable land under MIS by the end of eleventh plan
MFs/UTI/FIs
FII (2012). Presently in India ~3 M Ha is covered under MIS. GoI has allocated
7.4%
41.1%
Rs 5,000 million for MIS in budget 2008-09. This opens up a Rs 350 billion
potential in Indian market within next three years. Given the size of the
market there exists a chance for each player to grow. Being the market
leader JISL definitely has an edge over its competitors.
Individuals
Promoters
Others 4.3%
32.4% Bodies
4.8% Corporate
10.0%
Stretching the subsidy net
Source: Company
Most Indian state governments have increased their subsidy contribution to
30%-35% from the earlier 10% levels. Central government provides 40%
subsidy to farmers who are adopting MIS for irrigation. These subsidies
change as per crop variations, farm area held by the farmer and resource
availability. Recently, GoI has decided to provide subsidies for the replace-
Historical Stock Performance
ment demand in MIS installation from FY09 onwards. This will further in-
JISL BSE MIDCAP INDEX

750 8100
centivize farmers to switch to MIS based irrigation systems.

640 7040

530 5980
Industrial Promotion Subsidy (IPS) for New Capex
Government of Maharashtra (GoM) has approved an IPS for JISL under
420 4920 which waiver of actual tax to be paid to GoM, which includes VAT/CST,
310 3860 Stamp duty, Electricity duty, to the extent of 100% of new capex done here

200 2800
onwards will be provided. Currently this tax rebate will continue for 7 years
Jan-08 Mar-08 Apr-08 Jun-08 Jul-08 Sep-08 Oct-08 Dec-08 Jan-09 for plastics business and 12 years for Agro Processing. Incidentally, JISL
Source: Bloomberg
generates 40% of its revenue from Maharashtra.

Analyst
At current stock price of Rs. 325 per share the stock is trading at 13.5
Rajiv Bharati times of FY 09 earnings and 9.3 times of FY 10 earnings. We initiate cover-
Varun Guntupalli age on JISL with a BUY rating and target price of Rs. 505 per share.

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About the Company

Incorporated in 1986, JISL is currently World’s second largest and India’s largest micro irrigation company. JISL is a diversi-
fied company with business interests in MIS, Piping systems, Plastic sheets, Agro processing and other products like Tissue
culture, Solar devices. Revenue contribution from each unit is shown in the pie-chart below. The company employs over
5,000 people and has about 20 manufacturing bases spread over 5 continents. JISL supplies products to about 110 coun-
tries through a network of 3,000 dealers and distributors.

Consolidated Revenue Distribution of JISL in FY08

Other Products
2% Micro Irrigation
Systems
49%
Agro Processed
Products
13%

Plastic Sheets
7%

Piping Systems
29%

Source: Company

The management of JISL is in the hands of the promoter and promoter group, who have good amount of experience in the
industry. The promoters’ shareholding was 32.4% as on 31 st December 2008. Mr. Bhavarlal Jain, who started the company,
is the current chairman and his sons hold key positions in the top management – Ashok Jain (Vice Chairman), Anil Jain
(Managing Director), Ajit Jain (Joint Managing Director) and Atul Jain (Director-Marketing).

The company has been aggressive in making acquisitions overseas - (refer to Annexure I for details)
Chapin Watermatics (USA), NuCedar Mills (USA), Cascade (USA), Aquarius (USA), NaanDan (Israel), Thomas Machines
(Switzerland)

Jain Irrigation has an elite lists of clientele. It is one of the main suppliers of mango pulp to Coca Cola, which uses it in
Maaza drink. Hindustan Unilever Limited procures tomato concentrate from JISL for Kissan ketchup. Global players such as
Sun Juice (UK) and Langers Juice (US) also get the raw material from JISL. The company’s piping division caters to telecom
companies in India and overseas mainly for ducting. PVC pipes find major usage in Water Supply and irrigation pipes. PE
pipes are used for gas transfer, sewerage transport and effluent transfer.

Major Clients of JISL

Export Market Domestic Market
Coca Cola Schumacher Tata Group Powergrid L&T
Heinz Alcatel Nestle Hutch IVRCL Infra
Nestle Cargill Bharti Group Coca Cola Reliance Group
Mars GE HUL BSNL Aditya Birla Group
Gujarat Gas Company
Source: Company

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Opportunities Galore

Asia has the largest landmass under irrigation (148.6 M Ha) among all the continents. In contrast, it has the smallest
proportion of its land (5.8%) irrigated by the much advanced Micro Irrigation Techniques. Europe leads the way with
~58% micro-irrigated land of its 20.7 M Ha. A notable fact is that drip irrigation still have to find foothold in global market
as 75%-80% of the farmers using Micro Irrigation use Sprinkler Irrigation.

Proportion of Micro Irrigated area to Total Irrigated Area Proportion of Drip to Total Micro Irrigated Area

60%

48%

36%

24%

12%

0%
Asia Americas Europe Africa Oceania World Total

(in M Ha) Asia Americas Europe Africa Oceania World Total

Total Irrigated Area 148.6 38.0 20.7 10.3 2.5 220.1
Source: Global Scenario of Sprinkler and Miro Irrigated Area - S A Kulkarni, F B Reinders, F Ligetvari

Proportion of Micro Irrigated area to Total Irrigated Area Proportion of Drip to Total Micro Irrigated Area

100%

80%

60%

40%

20%

0%
India China United Russia Spain Brazil Japan Saudi Israel
States Arabia

United Saudi Ara-

(in M Ha) India China States Russia Spain Brazil Japan bia Israel
Total Irrigated Area 57.0 55.9 21.3 4.5 3.6 3.4 2.6 1.2 0.2

Source: Global Scenario of Sprinkler and Miro Irrigated Area - S A Kulkarni, F B Reinders, F Ligetvari

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India and China which hold ~76% of Asia’s arable land have a meager 3.9% (2.22 M Ha) and 5.4% (3.01 M Ha) land under
Micro Irrigation respectively. This gap represents a huge untapped market to be brought into the Micro-Irrigation network.
The biggest barrier to get this is educating the farmer to think in terms of benefit per hectare as compared to cost per hec-
tare. In India, a traditional irrigation system requires Rs 2,000 per Ha investment in contrast to Rs 45,000 per Ha in drip
irrigation and Rs 17,000 for sprinkler irrigation. This difference in cost acts as a massive deterrent for switching from tradi-
tional irrigation to MIS.

Interestingly, Israel has all its lands watered by micro irrigation techniques. Though they have very small arable land but
they are the largest producers of MIS equipments globally. Charts on previous page shows a comparison of the proportion
of micro irrigated area to the total irrigated area is made across some of the major countries in the world. This chart ex-
poses the potential of the two major Asian markets, where penetration of MIS has been rather dismal. Overall, a huge op-
portunity is waiting to be unleashed.

India’s need for advanced irrigation systems

The 1.1 billion population and the improving economic situation in India are driving the demand for food. India has 17% of
the world’s population but only 11% of the World’s farmland and the crop yields vary from 20% to 50% of crop yields in US.
This clearly indicates the necessity of improving the crop yields in India by the usage of technology in farming. India defies
generalization with respect to the rainfall it receives in various part of the country, its soil type and the amount of land held
by each farmer. With 80% of farmers in India holding less than two hectares of land and grapple with uncertain availability
of electricity, there is a mouth gaping demand for low pressure irrigation systems in the country. India’s overall arable land
totals to ~140 million hectare (M Ha), of which only ~50% get good rain fed irrigation. The rainfall varies from the record
levels at North-Eastern states to scarce waterfall in the Western and Southern belt of India. Micro-Irrigation as a concept
began with the farmers in the latter regions as the target customers. Government of India realizes the necessity for working
towards having food security for India and in this context, it has been encouraging the usage of technologies like micro irri-
gation techniques which would help in providing for irrigation to crops while minimizing the usage of water and increasing
crop yield.

Drip irrigation and Sprinkler irrigation have received credence globally and have resulted in reduced cost of irrigation per
hectare. This concept of precise irrigation reduces the wastage of fertilizers (fertigation through soluble fertilizers), water,
labour and electricity. Such scientific irrigation procedures have improved the productivity for the farmers by ~200%. Also,
farmers in high terrains find it very useful on the account of usual flood irrigation techniques being highly inefficient.

Competing against time

Government of India (GoI) has allocated Rs 5 billion in budget 2008-09 for micro irrigation. GoI has set an aggressive target
of covering 17 M Ha arable land under Micro Irrigation System (MIS) by the end of eleventh plan (2012). In India, 74% of
farmers using MIS use sprinkler irrigation. At an average cost of Rs 25,000 per Ha, this makes a business opportunity of Rs
350 billion (another 14 M Ha of the 17 M Ha to be covered in by 2012) in three years. In addition to this there is a replace-
ment market as two-third of the deployed MIS needs replacement every 5 years. Jain Irrigation Systems Limited (JISL) gen-
erated Rs 11.27 billion revenue from MIS business in FY08, 3.2% of the estimated market of Rs 350 billion. We see ample
demand for all players and the main area of growth is to capture market share as quickly as possible. Moreover, Govern-
ment of India has incentivized farmers to adopt MIS by providing 50% subsidy for upto 5 Ha of land holding. Also, in a re-
cent development farmers can also avail subsidy for replacement of parts uses in MIS. In India JISL holds 55% market
share in MIS space and is strongly poised to exploit the growth.

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Flow of Subsidy in Micro Irrigation

A typical subsidy allotment process follows the course shown in the chart below. Implementing Agency (IA) plays a critical
role in the subsidy allocation. It usually takes a fair deal of time for estimation and release of funds which results in elonga-
tion of working capital cycle for the manufacturing units like JISL. Normally it takes 90-180 days to receive the subsidy
amount from the state and central government.

Source: Company, DDAV Research

Usually JISL takes 5%-10% of the estimated cost in advance from farmers through the dealers. Rest of the amount is col-
lected from the farmers in installments and from the government subsidy. Subsidies vary across states in a range of 50%-
75%. Ordinarily, 10%-35% of the total cost is borne by the States government as subsidy while the rest 40% is supported
from Central government’s exchequer. States like AP, UP, MP, Chhattisgarh, Punjab and Rajasthan offer 30%-35% subsidy
while rest of the states are in the range of 10%-15%.

Two-third of the drip/sprinkler irrigation material requires to be replaced in every 5 years. Hence a huge replacement mar-
ket exists for these products. Interestingly, GoI has decided to extend subsidy for the replacement of material as well from
the current fiscal onwards. Going forward, as the concept of micro irrigation gains momentum, multiple sources of revenue
for companies like JISL would emerge:

new farmers adopting to MIS influenced from the success of their peers
existing farmers bringing more land under Micro Irrigation
addition of new crops to the existing set of crops for which MIS is suitable
using MIS to cultivate on dry lands
replacement demand (2/3rd of the setup needs to be replaced)

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Micro Irrigation Systems

JISL is the largest player in the Micro Irrigation Systems market. This division comprises of two sub segments:
— Drip Irrigation Systems (refer to Annexure II for details)
— Sprinkler Irrigation Systems (bottom picture shows some of the part used in a Sprinkler system)

It has a 55% market share in the Drip Irrigation and about 35% market share in the Sprinkler Irrigation Systems. The indus-
try size of MIS is estimated to be Rs.12 billion and it is growing rapidly. JISL is currently the second largest player in the
global market with 20% market share. JISL has positioned itself as a complete solution provider with a host of products and
services. MIS systems consists of more than 1,000 items, of which over 95% are manufactured in-house by JISL. This scale
gives them expertise to provide all solutions under one roof. In FY08, the revenue from this segment stood at Rs.6,179
million, accounting for 35% revenues on a standalone basis and at Rs.11,276 million, accounting for 49% on a consoli-
dated basis. The CAGR in this segment has been about 66% for the period of 2003-08 on a standalone basis. JISL com-
mands 25%-30% operating margin in domestic market while in highly competitive international market it manages only 8%-
10%. In the next 3 years, we expect this segment to grow at 60-70% in India and at 15-20% overseas. The major competi-
tors for JISL in this segment are Israel based Netafim and a U.S. company, John Deere.

Netafim, an Agri-Business pioneer and the world’s largest provider of MIS for agriculture, controls 15% market share in In-
dia. Annual global turnover for Netafim is nearly $450 mn (Rs 18 billion) while in India they do a business of ~Rs 2 billion.
JISL’s management is confident about surpassing Netafim at a global level, in net profit terms by FY09 and in revenue
terms by FY10. In the MIS segment, JISL made three major acquisitions – Aquarius, Chapin and NaanDan. The first two
companies are US companies which gave JISL the access to the North American market and a market share of 10%. The
acquisition of NaanDan (Israel Company) helps JISL to get strategic access to markets like Europe, South America, Australia
and Middle-East Asian Countries.

The MIS segment of JISL has been growing at a tremendous pace on the back of the projects in the states of Maharashtra,
Andhra Pradesh, Gujarat and Tamilnadu. Among the states, Maharashtra contributes the highest which accounts for almost
40% of the total standalone revenues for the company in the MIS segment. JISL added 12,690 MT of capacity to this seg-
ment in FY08, bringing the capacity to 40,080 MT, by spending of Rs.610 million. The company has plans to continue with
significant investments in this division to have the necessary capacity to capture the explosive potential in this segment. It
is investing about Rs.3,000-3,500 million in FY09 and FY10 in the MIS segment for adding additional capacities.

Source: Company

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Piping Division

Jain Irrigation is the largest manufacturer of plastic pipes in India. This division is comprised of PVC (Polyvinyl Chloride)
pipes and PE (Polyethylene) pipes.

PVC pipes are used in water supply, farm irrigation, plumbing and cable ducting. JISL has a domestic market share of 15%
in PVC pipes. The major competitors for JISL in the organized sector are Finolex Industries Ltd and Supreme Industries Ltd.
In FY08, this business accounted for about 16% revenues of JISL on a standalone basis. With the increased budgetary allo-
cation of government for water schemes, sanitation and water harvesting, demand is expected to be robust. In this context,
JISL added 12,995 MT capacity to PVC pipes in FY08 to have an overall capacity of 98,010 MT and it is adding another
15,972 MT in FY09.

PE pipes are used in water transport, sewerage transport, effluents transport, cable ducting and
gas distribution. JISL has a domestic market share of 35% in PE pipes with a commanding busi-
ness in the gas and cable duct segments. This business showed good revenue growth of 130% in
FY08 with increasing demand on the back of increasing infrastructure investments. Massive infra-
structure projects being undertaken as part of Bharat Nirman Yojana, plans for piped gas in cities
and increasing investments in telecom industry continue to provide good demand for this busi-
ness. Moreover, Jain is the only company in India which is manufacturing pipes of above 1,000
mm diameter. This provides an edge for the company over its competitors in servicing the de-
mand in this segment. To provide for the rapidly increasing demand for PE piping, JISL added Source: Company

24,036 MT capacity in FY08 to have an overall capacity of 81,360 MT.

In the Piping division, more than 90% of the revenue comes from India and the rest from exports. The revenue from this
division increased at a CAGR of 39% during the period 2003-08 and the standalone revenue from this division stood at Rs
6,585 mn in FY08. The operating margin in this division has been 10-11%. Though the operating margin has been low in
this division, the rationale for JISL to aggressively pursue this segment is the high Return on Capital Employed, which is over
20%. Furthermore, with the raw material prices coming off their highs in the last few months, this division is expected to
perform well with good margins. In the medium term, the prices of raw materials like PVC and PE are expected to be low
which would make the product more competitive and will help in getting additional demand from the substitute products
like metal pipes. The pipe division is expected to show revenue growth of about 15%-20% in FY09. We expect the growth in
this segment to increase to 30% by FY11, with the infrastructure industry picking up in India.

HDPE (High Density Polyethylene)

Contract prices in the US Polymer market began a downward
2000
trend in the September-November period (as shown in the
1730
graph below) due to falling feedstock ethylene and propylene
costs. Though the domestic demand remained intact the mar-
USD per MT

1460

gin took a serious jolt. However, the sharp correction in polymer 1190

prices improved the situation.

920

650
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

Source: Bloomberg

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Piping business of JISL would be riding on the infrastructure boom expected to happen in India in the next few years. The
following would be some of the major growth drivers for this division:
Rural water schemes
Rehab of existing drainage and sewerage network by municipal corporations
Increasing emphasis on sanitation through sewerage schemes
Extensive expansion of gas distribution networks in cities
Increasing infrastructure investments in SEZs, airports, construction etc
Huge investment by telecom companies in the context of increasing number of players, implementation of 3G and
4G technologies and also increasing rural connectivity
Pollution norms becoming stringent and thus requirement arising for proper pipelines for effluent disposal

Plastic Sheets

JISL manufactures different varieties of Polyvinyl Chloride (PVC), Poly Carbonate (PC) sheets like PVC Free Foam, PVC Ce-
luka, PVC rigid, PC compact, PC corrugated. These sheets are used in array of applications ranging from advertising bill-
boards, roofing, interior designs, sidings for home and shop, marine industry, transport, and greenhouses. Plastic sheets
scores over traditional Lumber on being impervious to water absorption and being resistant to insects & rotting.

Acquisition of NuCedar in 2006 for $4 million was a step to enter the PVC building materials market. But unfortunately the
business hit a roadblock in the form of home mortgage crisis in USA. The current sub-prime crisis has had severe impact on
plastic sheet business of JISL. The affect of slowdown in new house construction in US has resulted in the de-growth of
plastic sheets business of JISL. Plastics business on a consolidated basis generated Rs 1627 million in FY08 against Rs
2205 million in FY07, which is a de-growth of 26%. The run-up in the Crude oil prices resulting in high resin prices has com-
pounded the problems for JISL further.

Margins should improve with sharp correction in Crude oil prices, but the wilted demand affecting the topline is showing no
signs of revival. Also with looming recession in most European countries is not helping the cause any better. Looking at the
deteriorating situation, JISL may be compelled to put the plastic sheets business on the block.

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Agro Food Processing

In the agro processing division, JISL has two subdivisions – dehydration of Onions and other vegetables; fruit processing
(fruit purees, pulp and concentrate). The dehydration subdivision is dominated by Onion dehydration while the dehydration
of other vegetables is just picking up. Jain Irrigation is India’s biggest producer of dehydrated Onions. Currently, JISL has a
market share of 20% in Onion dehydration globally and it is the 3 rd larg-
est Onion dehydration company in the world. The major part of the final
product is exported and is used for pizza toppings, cereal and soup
preparations. The adjacent figure explains the Onion dehydration proc-
ess. For dehydration, the company procures a ―White Onion‖ variety
which is more pungent and has higher Total Soluble Solid (TSS) contents
than the pink Onion variant. Onions are partly grown in-house through
contract farming (60%) and buyback arrangements via a fixed price con-
tract (subject to seasonal revisions) and the rest is procured from free
market. Jain Irrigation has an annual capacity of 25,000 MT for Onion
dehydration. The company scores over unorganized players in this subdi-
vision because of its backward integration to seed production & distribu-
tion and using it for contract farming. In addition to this, the acquisition
of controlling stake in Cascade Specialties Inc. in US has helped Jain to Source: Company, DDAV Research

maintain the supply of dehydrated Onions even in the lean seasons exploiting the variation in harvesting season in US and
India. Along with this it also gives JISL direct access to the US market.

The fruit processing subdivision is dominated by mango processing followed by little quantities in banana, pomegranate
and others like tomato, guava, amla, papaya. JISL is eyeing to replicate its success in mango business to other fruits like
banana and pomegranate. Currently, JISL has a market share of 40% in India in mango processing and it is the largest
mango processor in India. JISL supplies processed mango pulp to Coca-Cola which is used in Maaza. The fruit processing
industry in India is growing at a pace of 20% per annum. The demand for fruit juices, drinks and other processed food prod-
ucts is increasing at a stupendous pace in India with increasing health consciousness, urbanization and organized retail.

The agro processing division had a CAGR of 35% for the period 2005-08. The standalone revenue from this division stood
at Rs.2,417mn in FY08. Of all the businesses of JISL, the margin in this business varied drastically from as low as 6.5% in
FY07 to as high as 26.2% in first half of FY09. However, the margin for this business is expected to be in the range of 15%-
18% in the next few years. JISL is planning Rs 1,000 million capex in this business segment in FY09 and FY10.

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Other Initiatives

JISL has diversified into a host of other initiatives, some of them supporting the MIS segment while others are towards re-
newable energy
Solar:
Jain Solar Water heating System
Jain Jyoti - Solar Lantern
Others:
Plant Tissue Culture (refer to Annexure III for details)
Agri and Engineering Consultancy
Green Houses
Bio-fertilizers
Turnkey Projects
Biogas Plant - 1.5 MW plant with Rs. 12 cr investment to be completed within 5 years. This will use fruit processing
waste, dehydrated onions waste and other agri waste.

Capacity Utilization
2006-07 2007-08 Capacity addition
100%

80%

60%

40%

20%

0%
Plastic
and Laterals

Photovoltac

Culture
Concentrate

Systems
Components

Dehydrated

Heating
Sheets
HDPE Pipes
and Fittings

Vegetables

Water

Tissue

Plants
PVC Pipes &

Fruit Puree
Onions &
Moulded

Products
Injection
Polytube

Fittings

&

Source: Company, DDAV Research

The above graph shows that a good part of production capacities in each business unit is underutilized. The encircled verti-
cals are the focus area for JISL. Clearly JISL is upbeat on Polytube and Laterals segment with 58% capacity addition in
FY08. In the Injection Mounding unit the company is concentrating on improving the utilization of the plant in addition to
appending more capacity. Stepping-up the capacities in HDPE pipes and Fittings vertical indicates JISL conviction in Indian
infrastructure growth story to which the GoI is very committed. Dehydration business is an export oriented business and has
fair bit of unutilized capacity which can be used for dehydrating other vegetables as well. JISL has aggressive expansion
plans for FY09 and FY10 with a total Rs. 5,000 million outlay in MIS (Rs 3,000-3,500 million), food processing (Rs 1,000
million) and piping (Rs 500-700 million) segments. This capex will be financed from ECB, Long Term suppliers credit and
Internal accruals.

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Valuation

JISL’s revenue in FY08 on a consolidated basis rose by 59.2% led by 64% rise in MIS (domestic) business and incremental
contribution from its subsidiaries. Piping and Agro segment grew by 55% and 35% respectively.

(In Rs. Million) FY08 FY09 E FY10 E

Revenue 22,159 30,012 41,660
Total Expenditure 18,717 25,060 34,474
EBIDTA 3,442 4,952 7,186
Depreciation 558 780 1,104
EBIT 2,884 4,172 6,082
Interest 1,327 1,943 2,728
EBT 1,557 2,228 3,354
Tax 540 582 822
Other Income 401 100
PAT 1,419 1,746 2,532
Minority Interest 25
Profit after Minority Interest 1393 1746 2532
Exceptional Item -34
Adjusted Profit after Tax* 1359 1746 2532
Sales Growth % 59.2% 35.4% 38.8%
Operating Margin % 15.5% 16.5% 17.3%
Net Margin % 6.1% 5.8% 6.1%
Net Margin* % 6.4% 5.8% 6.1%
* adjusted for Minority Interest and exceptional items
Source : Company, DDAV Research

Management has indicated to achieve 0.3 M Ha area under JISL’s MIS business by FY09, which is nearly twice the area
covered in FY08. This would propel the margins as MIS business is the highest margin business and the largest contribut-
ing business for JISL. Also, we expect a sharp rise in FY09 and FY10 EPS.

F Y 08 F Y 09 E F Y 10 E
EPS (Rs.) 19.4 24.1 35.0
CEPS (Rs.) 27.2 34.9 50.2
P/E (x) (Rs. 325) 16.7 13.5 9.3
Book Value per Share (Rs.) 116.2 131.5 156.5
P/BV (x) 2.80 2.47 2.08
RONW 22.6% 19.5% 24.3%
ROCE 15.3% 16.4% 21.0%
EV/EBIDTA (x) 10.3 8.0 5.6
Source: Company, DDAV Research

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Overall, We expect JISL to do well riding on the success of its MIS business with help from piping and agro processing units.
On a consolidated basis, in the next 5 years, we expect MIS would grow at a CAGR of 47%, Piping at a CAGR of 23% and
Agro processing would grow at a CAGR of 39%. At a FY10 EV/EBITDA of 5.7, we see JISL as the best play in the Indian mar-
ket to benefit from the increasing demand in the country.

Estimated Growth
EPS (LHS) Revenue (RHS)
155 120,000

124 96,000

Rs (in million)
93 72,000
Rs per share

62 48,000

31 24,000

0 0
FY08 FY09 E FY10 E FY11 E FY12 E FY13 E

Source: DDAV Research

Impressive third quarter results

JISL recorded a strong 30.6% YoY growth in Q3FY09. Operating margins improved by 180 bps on a YoY basis attributed to
fall in polymer prices and increase in contribution from MIS business. The company incurred Rs 109 million loss due to ex-
change rate fluctuation. The business has a seasonality with 35%-37% revenue generated in Q4 each fiscal. Looking at the
nine month performance we expect the company to post an outstanding result for a full year.

Standalone Performance
(In Rs mn) Q3FY09 Q3FY08 %Change Q2FY09 %Change
Revenue 5376.9 4117.2 30.6% 4758.9 13.0%
COGS 3305.4 2494.8 32.5% 2757.3 19.9%
Employee Cost 205.4 138.7 48.1% 172.5 19.1%
Operating Profit 1164.6 819.8 42.1% 957.6 21.6%
Interest & Finance Charges 381.4 295.9 28.9% 379.9 0.4%
Depreciation 111.8 102.0 108.2
Other Income 0.1 30.7 1.0
PBT 671.5 452.6 48.4% 470.5 42.7%
Tax 6.0 4.1 6.0
PAT 665.5 448.5 48.4% 464.5 43.3%
Exceptional Item -109.1 -219.5
Adjusted PAT* 556.4 448.5 24.1% 245.0 127.1%
Operating Margin % 21.7% 19.9% 20.1%
Net Margin % 12.4% 10.9% 9.8%
EPS(excl excep item) 9.2 6.2 6.4
*P A T adjusted fo r Exceptio nal Item
So urce : Co mpany , DDA V Research

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Fund Raising and Repayments

The future capex plans are to be mainly funded from ECBs. Funding for FY09 and FY10 capex is also secured and we ex-
pect future funding will be easier as the macro-economic situation and liquidity in the market will improve. Previously, Com-
pany raised $60 million through a FCCB issue in 2006 at a conversion price of Rs. 345.59 per share. Already $49.15 mil-
lion (82%) of it has already been converted and we expect the rest of FCCBs would also get converted in the future. The
company has a Rs 511 million debt repayment obligation for FY09.

Working Capital Cycle

Wor k i ng Capi tal Cy cl e F Y 08 F Y 09 E F Y 10 E
Days Sales of Inventories & Receivables 297 280 274
Days Sales of Payable & Bill Distribution 150 149 151
Days Sales Outstanding (DSO) 147 132 122
Source: Company, DDAV Research

On the working capital cycle front the company had a challenging fiscal year 2008 as polymer prices went up and invento-
ries got blocked due to less offtake in the sheets business. But now the prices have corrected sharply and are holding on to
the lower levels which has improved the situation. Also, as some new suppliers have opened their depots in Jalgaon, it
would help JISL to reduce the lead time to 7 days from the previous 30 days period. In the long run JISL aims to bring down
the Days Sales Outstanding (DSO) to 90-95 days.

Key Risks

The business propels on the subsidy provided by GoI. Any cut in the subsidy by GoI will have a direct impact on JISL’s
business
Piping and sheets business are very sensitive to polymer prices
Whole business is pivoted around micro irrigation technology and hence the company is vulnerable to the technology
becoming obsolete or it may lose out to a cheaper technology providing the same benefits
Convincing the farmers to switch from traditional irrigation to MIS usage is time consuming. Most farmers are averse
to be the first mover and tend to wait for their peers to switch first
In the context of the current global crisis, there is a slight possibility of various countries banning imports into their
countries which might impact the business of JISL

Outlook

The most monitorable criteria for JISL would be its scalability going forward and its consistency in maintaining the growth
momentum in the domestic market. We expect JISL’s revenue to soar up in coming years as the company's reach improves
further. This will also result in higher operating margins as we foresee contribution of high margin MIS segment to rise in
coming years. Also, reduction in cost front in piping and sheets business with fall in raw material prices will help a great
deal. In the next decade, GoM’s tax incentives would directly reflect in the bottomline. However, we expect the gross mar-
gins to reduce slightly by the end of eleventh plan as Netafim and other local competitors catch up. At current stock price of
Rs. 325 per share the stock is trading at 13.5 times of FY 09 earnings and 9.3 times of FY 10 earnings. We initiate cover-
age on JISL with a BUY rating and a target price of Rs. 505 per share.

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Annexure I (Back)

The company has been aggressive in making acquisitions in the overseas:

Chapin Watermatics, USA - JISL bought 100% of the company in Apr 2006 for $6.8 mn consideration. Chapin is a pioneer
and leading manufacturer of drip tape and is known as complete source for field crop, nursery and green house drip irriga-
tion systems. It generates annual revenue of $9 mn scalable to $15 mn if demand arises.
NuCedar Mills, USA - JISL acquired 80% stake in NuCedar for $4mn in Aug 2006. The company makes cellular PVC archi-
tectural siding which acts as substitute for sidings made of Lumber.
Cascade, USA - 80.17% of the company was bought for $7.8 mn in Dec 2006. With the acquisition, Jain Irrigation became
the third-largest dehydrated Onion producer in the world with a total combined capacity in excess of 25,000 MT.
Aquarius, USA - This debt free company was acquired for a consideration of $21.5 mn in Feb 2007. The Company provides
fittings, filters, air vents, tubing, emitters and accessories to the irrigation industry.
NaanDan, Israel - JISL took 50.001% stake in NaanDaan in May 2007 for $21.5 mn. It is an R&D focused company which
provide tailor-made cost effective irrigation solutions.
Thomas Machines, Switzerland - JISL acquired 69.75% stake of the company in Mar 2008 for a consideration of $1.5mn.
Thomas Machines is a manufacturer of specialist machines and equipment, including drip irrigation lines, quality control
and test equipment, automation equipment, laser machine centers and laser products.

Annexure II (Back)

Drip irrigation is an irrigation method which allows water to drip slowly to the roots of the plant, either on the soil surface
(Surface drip irrigation) or directly in the root zone through buried pipes (Subsurface drip irrigation). This kind of irrigation is
achieved by a network of main lines, sub-main lines and lateral lines with emission points spaced along their lengths. The
emitters/drippers allow us to have a uniform and controlled supply of water directly into the root zone of the plant. This al-
lows the plant to absorb the required quantity of water, saving the plants from water stress and thus increasing quality and
yield of the plants. Due to this drip mechanism, drip irrigation helps in minimizing the usage of water. Drip irrigation also
provides the option of having a fertigation unit which would help in supplying growth nutrients like fertilizers to the plants in
a controlled fashion, helping the yield of the plants and also in saving the wastage of fertilizer. The most suitable drip irriga-
tion system and the components to be used for a particular customer should be determined by careful study of the factors
like land topography, soil, water, crop and agro-climatic conditions.

Source: Company

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Components

Pump
Water Filter
Fertigation Systems
Backwash Controller
Main Line (larger diameter Pipe and Pipe Fittings)
Valves
Sub-main lines
Polytubes /Laterals
Poly fittings and Accessories (to make connections)
Emitting Devices at plants (Emitters/Drippers)

The pump is connected to the water source which pumps water into the water filters. Though water filters are optional de-
vices, they are recommended in order to have cleaner water which would help in increasing the yield as well as in protect-
ing the tubing from clogging thus decreasing the maintenance cost. The water then enters into the fertigation system to
take up the fertilizers fed into this unit and then enters into the main lines. From the main line, there would be few sub-
main lines which are further connected to polytubes/laterals. These laterals run parallel to the rows of plants and would be
having emission points along their lengths where the drippers/emitters are arranged for the purpose of dripping of water.
There are two kinds of dripper arrangements – online (external emitters are used) and inline (drippers are fitting on the
inside of the pipe).

Inline drip irrigation – systems are suitable for places where recycled municipal waste water is used for irrigation. Another
variant of inline drip irrigation is Sub-surface drip irrigation. In this, water can be directly given to the roots of the plants.
Duration of service for such piping is longer as pipes are not directly exposed to Sun.
Drawbacks
Clogged emitters cannot be cleaned and becomes unusable
Emitter distances are fixed and cannot be varied as per spacing of different crops
Longevity suffers as the tube is exposed to Sun in case of Inline on surface tubes

On-line drip irrigation – provides another level of customization as farmer can use external emitters wherever required. Also
extenders can be plugged from one outlet and the reach can be increased. The biggest advantage of on-line emitters is that
they can be unclogged manually and thus provides higher duration of service.

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Annexure III (Back)

Tissue Culture

In the process of becoming a complete solution provider, Jain Irrigation has setup an extensive nursery to develop high
yielding disease resistant varieties of fruits and vegetables. The chart below explains a typical tissue culture process for
Banana plantation. This process provides a host of benefits to the farmers:

Farmers save time in developing the seedlings

The crop is more disease resistant
Average yield is 30 kg per banana plant against 16 kg per plant in traditional varieties
Uniform age of all plants helps to improve productivity and also requires less management. Additionally they all can
be harvested at one time rather than having scattered harvesting cycle
Three crops in a 30 months period against one in 18 months
Selling to farmers for Rs 11-12 per banana plant

Banana Tissue Culture Process

Source: Company, DDAV Research

At present banana tissue culture is commercialized while prototype testing for other fruits and vegetables is under process.
JISL lately has put a lot of stress on tissue culture with heavy capex directed towards the same. Various programs are in
process for last 3-5 years and are expected to be completed in another 4-5 years. With the completion of these projects,
JISL would be expanding its business by venturing into more and more plant varieties and also the company would be hav-
ing a full fledged integrated model for each variety of plant. JISL sells the plants developed by tissue culture to farmers and
buy’s back the farm produce from them which is later processed and sold to the customers of JISL.

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Contact

Dawnay Day AV India Advisors Private Limited.

B-1, G-01, Marathon Innova, NextGen, Opp. Peninsula Corporate Park, Off G. K. Marg, Lower Parel (W), Mumbai - 400 013.

 Mumbai: Tel: +91.22.6617.2222

Fax: +91.22.6617.2099

E-mail : research@dawnaydayav.com

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