Jain Irrigation system stock rating: Edelweiss says performance below par

Jain Irrigation’s (JISL) Q2FY18 revenue at Rs 16.0 billion jumped 10% y-o-y, but came 5% below estimate. On the segment front, while hi-tech agri grew 18% y-o-y to Rs 8.1 billion on account of US acquisition, standalone operations rose mere 5% y-o-y due to decline in retail segment. The agro processing division clocked strong domestic performance, but international operations underperformed. JISL’s net debt jumped by ~Rs 2.3 billion y-o-y to Rs 43.4 billlion, including Rs 3.2 billion related to the US acquisition. Despite a below par quarter, management has maintained FY18 guidance. However, given the steep growth expectation for H2FY18, we revise down FY18/19E EPS 16/6%. We value JISL on 15x FY19E EPS, yielding revised TP of Rs 129 (Rs 137 earlier). Maintain Buy.

Q2FY18: Key highlights

Hi-tech agri input segment: Consolidated revenue jumped 18% y-o-y to Rs 8.1 billion driven by additional revenue from US acquisition, growth in overseas market and higher exports to Africa. However, standalone revenue rose mere 5% y-o-y with growth led by project (up 129% y-o-y) and exports (up 99% y-o-y). Retail business declined 20% y-o-y to Rs 2.3 billion because of sluggish rural demand and GST impact.

Agro processing division: India operations (Jain Farm Fresh) grew a strong 17% y-o-y driven by domestic performance. However, because of weak international subsidiaries (impacted by currency appreciation), overall growth was again muted, rising only 2% y-o-y (Q1FY18: -12%).

Plastic division: Reported 8% y-o-y revenue growth driven by PE pipes and plastic sheet division, but PVC pipes remained muted.

Debt up on acquisition, but interest cost down

Net debt increased by ~Rs 2.3 billion y-o-y. This includes incremental debt of Rs 3.2 billion taken for the US acquisition. However, interest cost fell by Rs 76 million y-o-y on debt refinancing and JISL remains confident of further dip in interest cost starting Q4FY18.

Outlook and valuations: Guidance maintained; maintain ‘BUY’

In Q2FY18, akin to Q1FY18, despite a below par quarter, management has maintained FY18 guidance of revenues of Rs 84 billion with EBITDA at Rs 1.25 billion, implying H2FY18 growth in revenue/EBITDA of ~40/50% respectively. However, to factor in the muted H1FY18 performance we have revised FY18/19E EPS down 16/6%. We value JISL on 15x FY19E EPS, yielding target price of Rs 129. We maintain Buy.