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“Jain Irrigation Systems Limited’s Q1 FY’14
Earnings Conference Call”
August 16, 2013
ANIL JAIN: MR. ANIL JAIN – MANAGING DIRECTOR, JAIN
IRRIGATION LTD.
MR. MANOJ LODHA – GROUP CFO, JAIN IRRIGATION
LTD.
MR. PRADEEP TIBREWALA – SENIOR VICE PRESIDENT
FINANCE
MODERATOR: MR. NIKHIL VORA – MANAGING DIRECTOR, IDFC
SECURITIES
MS SWATI NANGALIA – AVP, IDFC SECURITIES
Jain Irrigation Ltd. August 16, 2013
Moderator: Ladies and gentlemen good day and welcome to Jain Irrigation’s Q1 FY’14 Earnings Conference
Call hosted by IDFC Securities Limited. As a reminder, all participants’ lines will be in a listen-
only mode. There will be an opportunity for you to ask questions after the presentation
concludes. Should you need assistance during the conference please signal an operator by
pressing ‘*’ then ‘0’ on your touchtone phone. Please note that this conference is being recorded.
I now hand the conference over to Mr. Nikhil Vora of IDFC. Thank you. And over to you sir.
Nikhil Vora: Thanks, Inba. A warm welcome to everyone on the call for the Q1 FY’14 earnings conference
call of Jain Irrigation. We have with us the senior management team of Jain, as always Anil ji --
Managing Director; Manoj Lodha – CFO; and Pradeep Tibrewala – Senior Vice President
Finance. I will hand it over to Anil ji first to make the opening remarks and a brief on the
numbers and then we can open the floor for Q&A. Over to you Anil ji.
Anil Jain: Thanks, Nikhil. Good afternoon everybody. We declared our results day before yesterday,
yesterday being holiday. We have in a sense turned around especially in Micro Irrigation
business, I remember almost 6 quarters ago we had said that as we change the business model
where we are more focused on cash and low receivable, it is going to take 4 to 6 quarters of
negative growth and we did have neutral to negative growth for 5 quarters and this was the 6th
quarter. In the current quarter we have grown 21% and that is in line with our estimation which
we talked about earlier. Now a lot of growth has come especially from Export market and that is
also we had predicted that current year as a Micro Irrigation business will grow more into project
and into Exports and the first quarter the Export in Micro Irrigation grew by 237% and Domestic
business was almost same as last year. Now while it is same as last year, it is important that for
the entire last year that business was almost 27% negative Domestic business. So considering
that it was negative for over four quarters for 27%, the fact that it has come to neutral is a big
jump. Now as we move along in the rest of the year we believe this combination will continue
that the Exports will continue to grow, we will have also projects coming in the second half of
the year which have been in pipeline and we believe in select states like state of Maharashtra, we
grew 11% in this quarter as well, and it is a very important state for us. In state of Gujarat also
we grew business significantly in this quarter more than 30% or so. We grew also business in
Karnataka. So the select states may be 4 or 5 states like this we will continue to maintain positive
growth while in some other states where we needed to collect the receivables and we did not
wanted to increase the exposure we might continue to see the degrowth which we have seen
even in the first quarter. But all in all we believe for the whole year Domestic business will be in
positive territory and along with the projects and Exports we are expecting business to grow
north of 20% in Micro Irrigation business. Now the next question in Micro Irrigation business is
while the business is growing what is going to happen to receivables. So in terms of receivables
especially about the Domestic business for the Micro Irrigation, end of March there were about
1222 crores and end of June they were at about 1180 crores so there has been that reduction
Jain Irrigation Ltd. August 16, 2013
there. Now business grew by almost close to I think 80 to 90 crores and receivables still did
come down by Rs.45 crore of an amount.
More important to note that this reduction in receivable has mostly come from the government
subsidy. So whatever growth we have has been through with the new business model and the
government subsidy has continued to come down and end of June now government subsidy
stands at about 640 crores. And we have to remember that this figure was in almost more than
double a year ago, so it has come down considerably. We expect that in the remaining three
quarters this will keep going down every quarter and we might end up the year that is FY’14 the
government receivables might be down to a level which may be close to just 300 to 400 crores
and those would be rotational that means new receivables created because in certain states we
have to do business through the government only so that is why that will be there, otherwise this
whole situation of the government receivables and long receivables I believe is behind us. It is
going to take another two quarters before in terms of days outstanding sales it comes down
drastically but absolute amount receivables have been coming down and now as the sales goes
up then automatically these outstanding sales will also keep coming down. Already this quarter
they were down about 20-25 days compared to March quarter and in March quarter also they
were further down. So that is a positive news that Micro Irrigation business is growing again and
growing at 20%. It is a positive news that we have been able to achieve that growth while we
have reduced the receivables and the receivables which have gone down are especially the
government subsidy receivables. So we are fairly confident that going forward this model will
work very well
And what is also important to underline here is that in these numbers still NBFCs contribution is
miniscule, their total loan portfolio is hardly about 25 to 30 crores over last 6-months. So as they
come into play more post October-November that would also further help us to bring down the
receivables. So what you see now what has happened is mostly due to our business model,
aggressive collection from the government and changing the strategy in terms of which states we
sell and which we do not.
In terms of underlying demand in Micro Irrigation business apart from the Export orders we
have as well as the projects which are in pipeline we especially see that Maharashtra will
continue to do very well especially on the back of sugarcane. Sugarcane, as some of you might
have read the notes or what we spoke may be once earlier, whereas government is very serious
about ensuring that most of the sugarcane grown in this state should be drip irrigated sugarcane.
And the time line available for sugar factories is hardly 3-years plus and we believe that large
business opportunity will convert into reality and already we have started receiving good amount
of interest from the sugar factories to buy more of drip irrigation. They have to get their
financing rights and once that happens we will also be aggressively pursuing that business. But
Jain Irrigation Ltd. August 16, 2013
regardless of that with good monsoon as well, we think general demand from farmers will also
grow. That is about Micro Irrigation business
About other businesses, PVC Pipe business did very well this particular quarter in line with the
fact that lot of farmers were buying the pipes partly because of the drought and partly because
they wanted to ensure whatever water they had they wanted to ensure that remains in field so
that they can save their farms. So PVC Pipe grew significantly in this particular quarter almost to
the tune of about 38%.
PE Polyethylene Pipe was a subdued business for us. Now in both the business PE pipe degrew
by just 1% almost same as last year of flat business. In both these businesses while we have
grown like PVC we have grown 38% and if you look at entire piping both put together we have
grown 25%. We have still brought down the receivables. Even though business grew by 25%
from 320 crores to 400 crores in Piping division receivables have been brought down further in
that division as well. We have received some additional order for Polyethylene Pipe business as
well now and therefore we believe together both of these businesses will maintain very high
growth rate for the remainder fiscal year for us. This is a business where usually there is a better
pass-through mechanism in terms of margin unlike Micro Irrigation business where there is a
seasonality and some other issues or the government contract but here it is a very efficient
mechanism for pricing transfer. So we believe we should ensure our normal margin in this
business despite the type of the growth and receivables will remain really at a very low level
where they are already in these businesses.
The Food business, Onion especially did very well this quarter in terms of growth, the Exports
grew from 28 crores to 50 crores so registering about 72% growth in Onion and the Fruit
business was down by about 15% partly depending on what product we were using, it was lower
priced raw material which was used in this product and partly the fact that the rains were early in
June in Northern parts of India where some of our customers the large beverage makers, they
have their market and there was a slow pick up because of early rain there, but we have just
finished our processing season for fruit pulp especially mangoes; season has gone well for us and
we have almost close to more than Rs.400 crore of orders in hand for the product which we have
made. So it is a product made and product sold and we have to just ship it to over next 12-
months or so. So based on those kinds of orders in hand even though this particular quarter Fruit
business was negative we believe that overall the business eventually would catch up and would
also have significantly high growth.
Our other businesses like Solar and Tissue Culture are doing well, I mean Tissue Culture on a
smaller base has grown 40%, Solar as well grew 10% and Solar business really picks up only in
the latter part of 3rd quarter and the 4th quarter, so annually we expect Tissue Culture and Solar to
maintain the earlier high growth rates of 30 to 50%. So all in all business has grown about 17%
Jain Irrigation Ltd. August 16, 2013
for us. Export grew 46%. Now that’s about what happened in the current quarter and where we
are going forward.
As you might have read into the results despite good show on the revenue growth despite the fact
that we brought down the receivables, inventory did go up in terms of working capital but most
of the inventory increase if you see between March and now has been either in Food division
where this is the processing season and you need to increase the inventory as you process the
goods and some amount of increase in inventory into Piping business where because of a very
special specific orders we are expecting a really strong quarter in 2Q in that business. So this
inventory will get winded down as we go along during the year and we expect inventory to come
down by almost close to 300 crores or so between now and March. And as I said, as this
inventory comes down and gets converted into cash, and as we further bring down the
receivables especially the government receivables as we have planned and as they are happening
together this is what will allow us to bring down our debt by 500 crores that is what we had
talked about at the start of the fiscal year. So while temporarily due to the FOREX mark to
market as well as this kind of inventory increase some debt has gone up but we expect that for
the whole year debt will go down by 500 crores, receivables are already far better compared to a
year ago, receivables are down by 750 crores and actually in absolute value will go down further
and because the sales will continue to grow, the impact on days outstanding sales would really
be significant and inventory should get normalized by then.
In terms of the FOREX which is another challenging and burning issue as we go along, last year
our overall Exports as a company were about 650 crores. We have targeted for the current year
that Export may be closer to 1,100 crores or so, so that way after repaying whatever the FOREX
liabilities which we have which is just about $20 million towards the loan liabilities and after
paying for the imports we should still have somewhere close to +300 crore of the net positive
foreign exchange. So while we are getting hit on mark-to-market notional basis for the long term
loans which are going to be repaid over 10-years, on short-term basis for the current year we
believe our product and services have enough global markets and actually this depreciation in a
sense is allowing us to open some new markets to grow more aggressively and most of these
Export markets have good payment terms as well, so that it is not going to impact our working
capital, in fact it does improve our overall profitability.
So Micro Irrigation, the debt, the FOREX and general environment I have talked about. You
know as a business person with whatever is happening in the country, the situation does not
seem to be normal and everyday one is facing more and more challenges, that is a true fact and
election or no election that is also going to cause issues but what we see is that in our business
with good monsoon, we expect continued good demand now in MIS and Pipe, the Food
continues to do well because we had a good season of production and already sales which we
have booked. So while economy might grow 4 or 5% and those kinds of things are there and lot
Jain Irrigation Ltd. August 16, 2013
of businesses are facing headwinds in terms of their growth plans, but we believe we should
maintain (+20%) growth as we had planned at the start of the year while we did 17% in the
current quarter. And as we go along we should be able to maintain that but while we are trying to
maintain and do what we have said we will we do not want to do that at the cost of the balance
sheet discipline and fiscal discipline, and that is where we will remain focused on our ability to
bring down the debt and as a part of that we took one decision in the interim related to sale of
our wind assets and that transaction will also get completed in the current quarter, and we will
continue looking for any other ways which are possible, where we can further bring down the
debt so that we just create that extra cushion if the things in economy or world economy or
Indian economy go from bad to worse that our business has to remain secure and have sustained
growth with better and better balance sheet as we go along. That is what we are internally
focused. So overall 1st quarter results were in line with our internal budget and there is not much
of a surprise, some people are comparing year-to-year EBITDA margin and those are down by
3.5% but EBITDA margin started going down after September once Polymer prices increased
drastically. So if you compare that to the March, EBITDA margin are not that significantly
lower. Also with the new business model in new Micro Irrigation where we are selling to the
farmers where our dealers more on cash basis that means we had also indicated that our
EBITDA level profitability will now go down but ultimately the net profitability should improve
because as the interest goes down. And as one can see the interest last year this quarter was
almost about 11% of revenue and now it is closer to 9% so there is that improvement in the
interest on basis points. But it is still not very satisfactory and we need to continue to work on
the debt to further bring down the overall interest which earlier used to be almost 6.7% of
revenue and we are targeting that by the end of this year at least on an annualized basis we will
try and hit that type of level on interest as well as we repay the debt, but I think monitoring the
debt as well as the FOREX will remain on our radar. This is the first time we have given
quarterly consol results and as one can see that our Overseas businesses have grown almost
about 9% and there has been slight improvement in their EBITDA as well. Our Overseas
businesses have added about Rs.42 crores of EBITDA in this particular quarter and with those
businesses now growing at 9 to 10% plus improved EBITDA, we hope as we go along they will
start doing some meaningful contribution to the balance sheet while last 3-years on a net basis
they were neutral but its positive that those businesses are growing and they have added small
amount of net profit to us during this quarter. Now the difference between the standalone result
and consol result is that we have about Rs.13crore of translational losses coming from our
Overseas businesses when we consolidate them into India. So before this whole FOREX long
term mark-to-market notional or translational losses we almost made 50 crores in this quarter but
without that as you can see in the reported numbers we have almost same amount of loss due to
this situation. So this is where we are and we believe underlying current especially in terms of
demand for our product they look good, management will remain focused on managing our
debtors as well as debt and focus more and more on Export as well.
Jain Irrigation Ltd. August 16, 2013
So with these opening remarks I would like to throw the floor open for any questions all of you
might have and this time we have also provided investor information pack, we have put that also
on our website and we believe we will also continue to focus on improving further delivery of
communication to investors, the way we did with this quarterly consol results and anything else
we can do to further improve and give right information to investors at right time we shall
continue to do so. Thank you. Me and my team would be happy to answer any questions you
might have.
Moderator: Thank you very much sir. Ladies and gentlemen we will now begin the question-and-answer
session. Our first question is from Viraj Kacharia of Securities Investment Management. Please
go ahead.
Viraj Kacharia: I just have two questions; first was on the new business model which we have implemented in
Maharashtra. Is it still only in Maharashtra or we have extended that to other states as well?
Anil Jain: That is in Maharashtra right now where we only sell through dealers and we are not dependant
on subsidy anymore. And Gujarat where another state we have grown, there the government
mechanism is very efficient, our receivables are hardly about 120 days there and these are the
two states we have grown, but slowly I think over next 2-years we will be pushing this model in
other places as well. But, some places that model is difficult to put places like Tamil Nadu but
that is why we are not growing there, but where we can push this model that is where we plan to
grow.
Viraj Kacharia: And what will be the sales of MIE total sales for the quarter how much will be in Maharashtra
itself?
Anil Jain: Out of about 289 crores, Maharashtra was almost close to 164.
Viraj Kacharia: And that has grown on a year on year basis, how much that would have been?
Anil Jain: Almost about 11%.
Viraj Kacharia: Second thing was on the debt reduction plan that you talked about. In the press release you said
that you are trying to aim on debt reduction through receivables and inventory deduction but
given the whole economic situation both of the fiscal end and also possible likely election, do
you see any early subsidy disposal from government because that is what the primary
receivables would be coming from?
Anil Jain: Yes, as I said, we have seen some of the other places like state in Maharashtra as well as some
other states government in the current year have already put through the funds and now those
will get disbursed at district levels and we will start recovering. So in the current quarter alone
Jain Irrigation Ltd. August 16, 2013
we expect it to go down by another 100 crores and so on going further. And you talked about
election uncertainty and fiscal problems at government level, but please do remember that even
in those situations the money towards rural India or towards farmers does definitely get released.
And some of these were earlier structural issues but as you see in over last 6 quarters we brought
it down by almost half the government subsidy amount, and we are fairly confident that with
whatever is already in pipeline where the governments have budgeted and approved the money,
which is now in process of disbursement we will be able to bring down the receivables.
Viraj Kacharia: Just one last question, sir if we go back in history, we had adopted a similar strategy back in
2004-2005 in terms of changing the whole credit policy and moving to the new model but that
somehow we got disconnected from that model only after 9-10-months. So what gives us the
confidence that we will be able to pursue and implement this particular model going forward?
Anil Jain: Four reasons for that; one is that we have been now in Maharashtra on this model for more than
12-months full last fiscal, and it was quite successful, yes, we did lose the sales, and the sales
reduction last year in Maharashtra was not just related to let us say this change in business model
but because of the severe drought was there, where almost farmer had no water to drink, forget
about any irrigation. And now in the first quarter we are seeing more and more demand from the
farmer. Second, we are backing this up with launch of this NBFC, and they will be able to take
care partly the change which is taking place. Third, the farmers are making more money with
higher agriculture produce, so their paybacks are much shorter. Fourth reason, RBI is pushing
really banks to do this 18% more direct agricultural lending and they would prefer to lend to a
drip irrigated farmer who can produce more, make more money rather than typical other farmers.
So with additional support from capital market our own NBFC higher prices for the farmer and
our resolve in terms of which we are going, as a combination we feel fairly confident that this
time it is a irreversible scenario, we are not going to go back simply there is no way we can go
back to the new model, and also if you see No.2 company in India, they have already launched
their NBFC. So this is a new way of doing things and most of the industry is going to follow this
route now.
Moderator: Thank you. Our next question is from Abhijeet Akela from IIFL. Please go ahead.
Abhijeet Akela: Just wondering if you could give us the EBITDA breakdown by the line of business because that
was not there in the investor communication?
Anil Jain: Yeah, that becomes difficult to give that out because of also competitive reasons, but as we have
said now that with the changed business model, with the polymer price issues, the EBITDA
margin related to Micro Irrigation now at a lower level of our band. Earlier, it used to be closer
to 30, as we have moved and when we talked end of May, we said that it could be around 24-
25% now. Our other businesses like Pipe, etc. are in higher single digit, they are at the similar
Jain Irrigation Ltd. August 16, 2013
level, and fruit and Onion; Onion is on the lower side because of higher Onion prices due to
drought last year, but the fruit continues to maintain very high level of margins which are closer
to where our irrigation margins used to be. So all in all lower irrigation margins around 24-25%,
rest of them are in the similar band or range we have always had historically.
Abhijeet Akela: So fruit business would still be in the (+20%) kind of range?
Anil Jain: Actually it goes quarter-to-quarter change while Onion is around 20%; fruit because of the
processing during this quarter actually goes up closer to 30%.
Abhijeet Akela: Within the MIS any color on how the retail versus the projects business margin versus the
Export margins would be?
Anil Jain: Exports would be as you know typically higher margin, and we did not have too much of project
business in the current quarter and Domestic margins because of all the polymer price and so on
have been on the lower side so that is how it is averaging 24, but earlier also when we had
overall X amount of margin it was always combination of Export project as well as Domestic
margin, so that situation has not dramatically changed as of now.
Abhijeet Akela: Leaving aside the Export basically, this quarter the rest of it was mostly retail sales itself; we did
not have too many projects?
Anil Jain: Yeah, mostly did Export and retail sales. We had some projects but very small. Projects were
hardly 10% of our overall.
Abhijeet Akela: So the Export margins would be closer to 25 to 30% band?
Anil Jain: Yeah on the higher level.
Abhijeet Akela: Just the receivables breakup, of the 1200 crores of receivables out there in MIS now, what would
the breakup be now between the dealers and the sugar factories and the government projects?
Anil Jain: Approximately from what is now there it is about less than 200 crores is the dealers, institutional
would be close to about 100 crores, projects are about 250 crores and the remaining is
government subsidy.
Moderator: Thank you. Our next question is from Girish Acchipalia of Morgan Stanley. Please go ahead.
Girish Acchipalia: Just two of them; firstly on margins what is the expectation for the full year?
Jain Irrigation Ltd. August 16, 2013
Anil Jain: On the full year I believe we should maintain where we are already there. Would the more
challenges come, with the rupee depreciation, would polymer prices further go and how much of
that will be able to transfer to farmers in a election year that remains a question mark in my
mind, but with the additional sales coming off the Exports in the second half as well as projects
coming through we think we should be able to maintain what we have already achieved in the
first quarter.
Anil Jain But with the additional sales coming of the Exports in the second half as well as projects
coming through, we think we should be able to maintain what we have already achieved
in the first quarter.
Girish Acchipalia Is there any thought about any further price hikes, take the margins up in MIS or we are
happy with 24% to 25% margin?
Anil Jain Government of Gujarat recently agreed to hike prices because raw material prices went in
and based on that it has happened. In Maharashtra it is a retail business, we are looking to
increase prices as we move into the busy season. Till June we could not do it because of
the draught which was there and now it is rainy season, but once busy season starts in
October, we are looking to increase prices. So all of these price increases will allow us to
improve margin, but I am just keeping that in my mind that things in economy generally
and everything else could go worse than what they are today, so we are just keeping that
cushion and saying that as of now we believe we will be able to maintain what we have
already achieved. If we can do better, nothing like it, but as of now I would say that this
is what one should say that company will be able to achieve.
Girish Acchipalia Also mention that Piping mix is going to be strong this year. So in that context would it
not be fair to say that the margins would actually dip on a YOY basis even more from
where they are in Q1?
Anil Jain As a combined entity is what you are saying?
Girish Acchipalia Yes.
Anil Jain Yes, that is possibly feasible. Up to now the discussions we had in the earlier question
now, I was talking about Micro Irrigation margin, and I also said that individual margins
what we have achieved in this quarter in different, different segments, those we are
confident will maintain through the year. Now based on the product mix at the end of the
year, the average might look somewhat different that one has to wait and see how that
will work.
Jain Irrigation Ltd. August 16, 2013
Girish Acchipalia Second question was on the debt, I understand that there is a mark-to-market impact, but
how much receivables is decreasing to that extent, and payables are also decreasing. So
there is no material change in the net debt that is happening apart from the seasonal
buildup in inventory that has happened. So how do we target to address addition?
Anil Jain We have made supplier payment etc. and that is what you rightly said that as receivables
come down payables also come down but going forward now in terms of payables we are
at a comfortable level where we need to be, so it is kind of bottomed out. And as we go
into the busy season we should be able to get some more credit from our suppliers, etc.,
and while receivables will keep coming down and that is why I said that in the future the
reduction in receivable and the inventory combo will be able to push toward debt
reduction rather than reduction in payments to suppliers.
Girish Acchipalia About 150 crores of inventory related debt that you would have seen in the quarter, we
are targeting about 500 crores reduction, so that is a delta of Rs. 650 crores, and
approximately half of it you are saying is coming through inventory and the balance part
is coming through debtors if payables remain flattish?
Anil Jain Yes.
Moderator Our next question is from Amit Murarka of Deutsche Bank. Please go ahead.
Amit Murarka Just wanted to understand we have been hit by raw material or cost pressures. So how
does the price reset in MIS across the various segments that you have?
Anil Jain Within Micro Irrigation, as I said in some places, like Gujarat or Andhra we have this
pricing context of the state government which goes through reviews. Unlike Gujarat we
recently had a review and they have increased the prices upward. Because of the current
situation in Andhra, right now review is not taking place, and we hope that once things
stabilize in a month or two that review will take place. In other places, it is mostly we as a
company, decide the pricing. Now pricing typically in this business one changes through
the seasons. So post rainy season this is the time we will change the price before we get
into the busy season.
Amit Murarka Just recently Onion prices have increased, so will that impact you also?
Anil Jain The Onion we buy is typically White Onion not the Red Onion which is eaten on the
table by most of the people in India. So this is grown especially in given regions of
Maharashtra and Gujarat only. Most of the price increases you have seen from Lasalgaon
Mandi or whatever else, our product Onion does not come from there. That is one part.
The second part, with the good monsoon rains, the Kharif products which comes out in
Jain Irrigation Ltd. August 16, 2013
January-February is looking to be a bumper crop and that is when we will start buying,
and the second crop we buy is between April to June is Rabi crop which is when they do
their sowing between November to December. So what happens between now and kind
of up to November due to too many rains and Onion stock getting going bad or whatever
else, we believe these are temporary issues and in fact what happens as you would know
is that when prices do go through the roof like they have gone recently, as we speak right
now, lot of farmers are planting more and more Onions and suddenly it creates
oversupply when this crop will come up.
Amit Murarka Value of inventory in rupees million…
Anil Jain About 1,300 crores total inventory with all the products.
Amit Murarka Just one last question, this quarter employee cost has also risen, so any reason for that?
Anil Jain This was the pay increase which we had given to the employees, and we do this
periodically every two to three years. So traditionally all along our overall employee
costs have been about 5% of our revenue and when you will see the whole year result, for
standalone India I am talking about, we should be in that range, but in the first quarter
when you provide you would always see a little bit of a jump there.
Moderator Our next question is from Arya Sen of Jefferies. Please go ahead.
Arya Sen I just wanted to understand the absolute revenue in MIS in this quarter and last quarter
and if you could break that into Domestic versus Export?
Anil Jain Total revenue this year in Micro Irrigation was 400 crores in the first quarter, and out of
which Domestic was about 304 crores and Export was 96 crores. Last year, the revenue
was 331 crores and Export was 28 crores and Domestic was 302 crores.
Arya Sen Secondly, just wanted to understand on your FOREX mark-to-market losses for the full
year, do you pay lower taxes because of the losses or how does it work?
Anil Jain Yes, this will be adjusted from the taxable income.
Arya Sen So, on the losses that you have reported there will be some tax benefit as well, right?
Anil Jain Yes.
Arya Sen Finally, the EBITDA for MIS, you are not giving the exact numbers, is that right?
Jain Irrigation Ltd. August 16, 2013
Anil Jain We just talked about EBITDA range which is there about 24, 25%.
Moderator Our next question is from Tanuj Makhija of Ambit Capital. Please go ahead.
Tanuj Makhija My question is regarding PVC Pipes. We have seen a very strong growth of 34%. Did we
add any capacity during the year or it is just because of strong demand?
Anil Jain It was a strong demand, and in fact we saw that very strong demand into January to
March as well, and if you would have seen results of some other companies in this
business also you would have seen that they have also grown strongly, and in fact we did
not have enough capacity, we could have sold more if we had more capacity in this
particular period. If we had more capacity this would have been at least 60% higher
rather than 35% higher. It was that kind of a demand. So we are building some capacity
in the second half so that come next busy season post December, January to May is when
maximum Pipes gets sold, we would be ready to have a level and it is important because
this business in working capital it is a negative working capital cycle, so we are adding
some capacity and also capacity to revenue in this business is very good like if you spend
rupee, you easily create may be Rs. 7 of sales or Rs. 8 of sales.
Tanuj Makhija What are your capacity expansion plans, how much do you plan to add and in which
state?
Anil Jain I think that will decide depending on the local demand in various locations. As you know
we have five manufacturing locations in India and PVC pipes; one is of course we are in
Maharashtra, we are in Andhra, we are in Tamil Nadu, and we are in Rajasthan and
Gujarat. So we will see how things pan out over the next 2 to 3 months. These are
modular capacities, we already have kind of land and building, and you need to merely
add the equipment, so you can decide that at a kind of last minute. So depending on
where we see good growth that is where we will put up the capacity.
Tanuj Makhija Can you give me a split of your sales by client in terms of agriculture and commercial
buildings and infrastructure?
Anil Jain I would say 90% of our sales is to rural parts of India, partly going to agriculture, partly
going into for drinking water or portable water. We have little sales I would say maybe
(+10%) or in that region which will go to I would say the building construction or other
applications.
Tanuj Makhija Which states have seen good growth in the last 6 months, is it the West, North, East or
South?
Jain Irrigation Ltd. August 16, 2013
Anil Jain We have grown at various places. Maharashtra of course has been one of the very strong
states. We have done very well in Karnataka as well. Traditionally, over two decades our
retail sales have been mostly in Maharashtra, MP and Karnataka, but over the last couple
of years, we have started focusing to build retail dealer network in Tamil Nadu, in
Andhra, in Rajasthan as well. So apart from original Maharashtra, MP and Karnataka,
now we are doing retail sales in Andhra, Tamil Nadu as well as Rajasthan, these 6 states,
and we have opened some very good possibilities into Punjab as well. So we believe this
business as we grow our retail network will continue to grow and as I again said because
of the negative working capital cycle, if ROC works out closer to 25% or so, we believe
in this business and we think its growth is going to be good for the company.
Tanuj Makhija Regarding the rupee depreciation, I believe your margins were close to 8% for FY13 in
PVC Pipes. So have we seen margins increase or decrease in this quarter? Have you been
able to pass on the price increase to your customers?
Anil Jain Yes, as I said earlier in Piping business price transfer mechanism is fairly efficient, you
kind of get raw materials price increase in the morning and by noon you do increase your
prices of Pipes that is how it works. So our margins are stable despite higher raw material
prices.
Tanuj Makhija What would be the approximate price increase?
Anil Jain That would depend on average inventory, etc., about 6 to 7% increase has taken place.
Tanuj Makhija Have you seen any impact on the demand as a result of the price increase, whether
demand continue to be good or strong?
Anil Jain In April to June quarter, PVC Resin prices were at their lifetime high. Not in dollar term,
but on rupee basis, I have not seen that level of price in the last 30 years till we sold more
than we ever sold in the quarter.
Moderator Our next question is from Shiv Nanda of Axis Capital. Please go ahead.
Shiv Nanda I just wanted to know how much growth are you looking at in MIS Exports for the year?
What is the nature of this growth, is this project business in Africa and where exactly and
could it sustain going into ‘15?
Anil Jain Last year, our overall Exports in Micro Irrigation were 132 crores and we already did 96
crores in the first quarter and so growing by 237%. We are targeting as we speak right
now that our Export this year should be about (+350) crores or in that region. So again we
are almost looking at 2.5 times to 3 times level of Exports. These Exports are coming
Jain Irrigation Ltd. August 16, 2013
from 3 different floors, revenue streams. One is our traditional Exports, which we have
been making to various places which are smaller projects, 2 million here, 3 million there,
those kinds into Africa, into Middle East, into Asia, Latin America various places. The
second stream of Export is the Exports we make to our subsidiaries who further onwards
sell those to their end customers, because we have built larger production capacities and
we are more cost competitive out of India in certain product lines. As our Overseas
businesses are growing especially in places like Latin America, etc., our Exports are
growing through them so that they can further sell into those growing markets. And third
is specific larger projects. While we are in the process of executing one large project
between last quarter and the current quarter in northern parts of Africa, there are similar
projects already in pipeline where we are quite advanced in the way we are going. Now,
all these projects put together we are talking of $200 to $300 million. So even if may be
20% or 15% comes through that will take care of our need for this year and similar let us
say next year and so on. So I gave you all these details to tell you that directionally we
believe as a company we have now a platform through which we can deliver product and
services where Exports will be a very important part of what we do out of India in terms
of Micro Irrigation. Africa is going to play a very important role and we spoke about
Africa already two years ago and it takes some time some of these large projects to come
through, but the one which we are executing now is a very nice project and similar
projects we are seeing a lot. And this is not a one-time scenario or one-year scenario. We
are hardly operating in 5 countries and we have invitation from another 10 to 15 countries
to come and work there, but we just do not want to stretch ourselves too much. So we
believe there is going to be sustained demand and lot of capital whether it is from IFC or
Bill & Melinda Gates Foundation or other development financial institutions is moving
into Africa for sure as well as commercial capital is moving. Agriculture is a big problem
in those countries, lack of product, technology, knowledge and we think we are well
suited to cover that. We feel this has sustained higher level of Export growth will become
part of our normal business model going forward.
Shiv Nanda Of this 96 crores how much is Export to your other Overseas subs, if I could get that
number?
Anil Jain I do not have that number right now, but maybe 25% will be to Overseas, 75% will be
direct.
Shiv Nanda Nature of these project businesses that you have said during the second half, what exactly
are these, are they confirmed?
Jain Irrigation Ltd. August 16, 2013
Anil Jain These are integrated agricultural projects where we bring water up to the farm level,
provide drip irrigation on to the farm, provide some knowledge to the farmer, etc., etc., it
is a combined integrated project.
Shiv Nanda Is it confirmed like we are going to do in the second half?
Anil Jain We are at quite advanced level where we feel confident to say that our export this year
will be 350 crores because some of them which are already confirmed those are already
in hand with us.
Moderator Our next question is from Siddharth Mohta of Principal India. Please go ahead.
Siddharth Mohta As you mentioned that going forward the Export will be the main focus for MIM. So can
you just tell how does the working capital cycle look in that Export segment?
Anil Jain Just to correct you I think Domestic market will also grow as well in terms of what we
are doing. In terms of Exports, some of the Exports like one get paid on site, so you have
hardly 60 days working capital, you produce, you ship and you get paid. Some places you
might have letter of credits which have 60 to 90 days, but you can always discount your
Exported bill. So all in all between inventory and receivable, working capital cycle on
Export project is typically less than 3 months, it could be as low as one month.
Siddharth Mohta Second thing with respect to Pipes, you said that in Q2 you have received some good
orders in PE Pipes, if you can just quantify what will be the amount?
Anil Jain Let me say that last year our total PE business was about 300 and odd crores. The order
which we have is almost two-thirds of that in hand today, which is to be supplied now.
And we expect similar level of orders going forward in future, but it is subject to certain
things happening at a customer level. So all in all we believe the momentum we have and
again the type of the quotes we have given to our customers for even tenders, for larger
projects, telecommunication projects in India, overall we feel fairly confident that our PE
business this year shall double from where it was last year and already you will see by
end of Q2 that we have already jumped a lot.
Siddharth Mohta One more question with respect to MIS, we have heard from other players that the Cotton
acreage was down by 10 to 15% and Cotton being one of the main crop for MIS business,
and so has there any impact?
Anil Jain Lot of Micro Irrigation gets sold on Cotton, but Cotton gets planted in the early summer
before the monsoon, sometimes in May or so. Good parts of Maharashtra this season the
farmers had no water. In fact compared to earlier years we had lower business of cotton
Jain Irrigation Ltd. August 16, 2013
and we made up that by giving more products to sugarcane and others. We think the next
year now with good monsoon sometimes between March to June we will expect very
bumper sales for Cotton-related drip irrigation.
Siddharth Mohta What will be the CAPEX plan for FY14?
Anil Jain FY14 our CAPEX plan is approximately going to be on a standalone India basis closer to
I would say about 125 to 130 crores.
Moderator Our next question is from Arya Sen of Jefferies. Please go ahead.
Arya Sen I just wanted to understand on the Export issue, do you have any Exports to developed
country?
Anil Jain Yes, we have Exports to US, we have Exports to parts of Europe, and as you know we
have our Overseas manufacturing and operating companies in places like Israel, in places
like US, in places like Turkey, in Australia and Spain, so our products get Exported and
sold all over the world, ultimately product reaches almost in 100 countries, developed and
nondeveloped or developing.
Arya Sen If there is a proportion of sales that you could give to developed markets out of the
Exports?
Anil Jain We do not really calculate it that way to be honest.
Moderator Our next question is from Atul Rastogi of CIMB. Please go ahead.
Atul Rastogi Just had one query on the NBFC; the progress has been a little slow. So just could you
throw some light and just a related thing that if your NBFC is not giving credit, so are
there farmers using some other NBFCs or it is purely cash payment, how is it working
on?
Anil Jain As I said that NBFC we have launched in Maharashtra effectively January of this
calendar year and it was a time period of a huge draught in the state, so our sales were
also low, and we expect NBFC to pick up from October-November. In terms of where we
are collecting, we have also tied up with few banks, so farmers are able to get partly
funding from the normal banks, but I do not think many farmers have gone to any other
specific NBFC, so either it is the cash of the farmer or the cash being invested by the
dealer or the support of the capital markets in terms of the commercial banks.
Jain Irrigation Ltd. August 16, 2013
Atul Rastogi Could you give us some guidance on how big will be the book of NBFC by the end of
this year or next year?
Anil Jain I think I would say this year I will put the range to be broader, it could be lower side 150
crores, on higher side it could cross 200 crores, and by March 15th, I am sure it would be
about (+300) crores.
Moderator Our next question is from Girish Achhipalia of Morgan Stanley. Please go ahead.
Girish Achhipalia Just a quick on subsidiaries investment plan and standalone, what is the CAPEX here?
Anil Jain The CAPEX in India I talked about 125 to 130 crores. The subsidiaries would be about
40 and odd crores.
Girish Achhipalia I think I missed this part, did you mention that the Fruit processing margins will be 12 to
13% for the quarter?
Anil Jain No, we talked about 2 different levels of margins; Onions closer to 20% and Fruit closer
to 30%.
Moderator Our next question is from Manoj Bahety of Edelweiss. Please go ahead.
Manoj Bahety If you can help me with gross and net debt level as on quarter end?
Anil Jain There was about 1.2 billion cash in the books for standalone and about 1.7 billion on the
consolidated.
Manoj Bahety And debt?
Anil Jain Debt was, of course you can have access to that investor communication on the website,
but it was about Rs. 30 billion for standalone and Rs. 40 billion for consolidated.
Manoj Bahety We are planning to have a debt reduction of around 500 crores during FY14, so have we
repaid some portion of the debt using the cash which we have generated from our
receivable side?
Management Most of the cash this quarter was used to create a seasonal inventory like our Food
business. So per se there is actually an increase in the net debt position for this quarter,
but as Mr. Jain said that this inventory would get liquidated over the next 3 quarters, plus
the reduction plan of the receivable that all put together we expect March ‘13 to March
‘14, we are targeting a debt reduction of about 5 billion.
Jain Irrigation Ltd. August 16, 2013
Manoj Bahety Out of this 40 billion how much is the FOREX portion, I believe it is close to $230
million?
Management For standalone out of 30 billion net debt about 50% is in foreign currency. For our
Overseas entity because their assets and liabilities are all in local currency so that
normally do not consider as a foreign exchange liability, but because of India rupee as a
functional currency we have about 50% debt of 30 billion is in dollar denominated.
Manoj Bahety Are there any plans to include additional fund into subsidiaries this year?
Management There are two levels, one is the operating subsidiary and one is the holding company, so
in operating companies we are not expecting any infusion, for our holding companies we
have financed some of the acquisitions there we may put partially some equity, but that
would be just part of our overall debt repayment, so it will not have any specific impact.
Manoj Bahety How much that will be?
Management Right now there is not much because in this quarter also we have not put any major
chunk.
Moderator Our next question is from Jiten Doshi of Enam Asset Management. Please go ahead.
Jiten Doshi My question relates to the consolidated CAPEX this year, what would that be?
Anil Jain Consolidated CAPEX would be close to about 175 crores.
Jiten Doshi The other thing is that all your Exports are not hedged, right?
Anil Jain Yes, very limited amount.
Management Very limited like 10% of our Exports for the next 2 to 3 years.
Jiten Doshi So basically all your positions being open, you will get the advantage of a weak rupee?
Anil Jain Yes.
Jiten Doshi Alright, so what would that translate to approximately in dollar terms, your total Export?
Anil Jain Exports current year are going to be close to about 175 million, then next year we expect
if I have further growth in that it could be (+200) million and then next year may be 250
million. If we look at over a period of time between current year as well as those two
Jain Irrigation Ltd. August 16, 2013
years you are looking at about 650 million or somewhere close to that total level of
Exports. In this period, we have about $60 to $70 million of long term loan repayment
and on an average we should have about closer to $100 to $120 million of imports of raw
materials, polymers, etc. So when you will take off the imports as well as the foreign
currency payment towards loan repayment, I think our overall net foreign exchange
earning shall be at least equal to the total FOREX liability I have over 10 years of loans.
Jiten Doshi So basically it should help you improve your margins?
Anil Jain Yes, it will definitely help us to improve.
Jiten Doshi So on a consolidated basis, where do you see the MIS margins?
Anil Jain Overseas margins is around 8 to 9%, we said about 24, 25% and roughly it is a 60:40 mix
at least for this quarter, it is a 17, 18% kind of a global irrigation margin.
Jiten Doshi In the standalone with the Export margins improving, you can go back to 26, 27% over a
period of time?
Anil Jain I would not hazard that guess right now looking at whatever is happening with Polymers
and everything else under the sun, I would say that we have a chance to increase it, but
right now if somebody asks me how much you are certain you will do, I will say that I
will stay where I am, but if we can improve that is what we are planning to do.
Jiten Doshi And your wind assets which you are trying to unlock, what would be that value?
Anil Jain: 64.50 crores.
Jiten Doshi When would that transaction get consummated?
Anil Jain: During this quarter.
Jiten Doshi So that will mean debt reduction to that extent?
Anil Jain: Yeah.
Jiten Doshi And would you try to sort of unlock any other assets over a period of time?
Anil Jain: If there is good opportunity we will explore because debt reduction is a very important
target for the management. While we are trying to do it mostly through working capital
efficiency, but if there is anything else we are open to it, but looking at current very
Jain Irrigation Ltd. August 16, 2013
volatile market environment one cannot be sure of what can happen, what may not
happen. So I think we are very much focused on making business efficient, but if we get
any other opportunities we would look at those.
Moderator: Thank you. The next question is from the line of Kirti Dalvi of Enam Asset Management.
Please go ahead.
Kirti Dalvi: Just a couple of questions. In this FOREX loss, what you have mentioned in exceptional
items, how much of that would be actual cash flow wise FOREX loss, no M2M in that?
Anil Jain: This is all M2M, and mostly coming from the long-term loans.
Kirti Dalvi: Because certain repayment or the interest payment must have happened. So that is part of
your interest cost?
Anil Jain: Yes.
Kirti Dalvi: So everything is M2M in that?
Anil Jain: Actual losses we suffered in the quarter are already into P&L.
Kirti Dalvi: So this 131 crores loss which you have shown in consol is everything is M2M?
Anil Jain: Yes.
Kirti Dalvi: And second question, just a clarification, you did mentioned that PE business you expect
to double in this current year, am I right on that, so we did almost 300 crores, so that will
go to 600 crores approximately in FY14?
Anil Jain: Right.
Moderator: Thank you. I would now like to hand the floor back to Mr. Nikhil Vora for closing
comments. Over to you sir.
Nikhil Vora: Thanks, Inba, thanks Anil ji and the entire management team at Jain, and all the
participants for being on the call. Anil ji, in case you want to make any closing remarks?
Anil Jain: Nikhil I think we have fairly discussed it well. While we are fairly confident of our
business model and the demand for underlying product, our ability to produce and sell
and make money despite undertones which are quite weak and very volatile and negative.
Some of these things depends on where rupee ends up, where the oil ends up can go
Jain Irrigation Ltd. August 16, 2013
through certain changes but we are seeing really good demand for most of our products
and we hope that this monsoon which has been good up to now it tapers down over next
few weeks will create good rural demand scenario which shall further help our efforts and
really we would like to improve our debt-equity eventually over next year or so to take it
to one-to-one, that is what we want to focus on.
Nikhil Vora: Thanks a lot, Anil ji.
Moderator: Thank you very much sir. Ladies and gentlemen, on behalf of IDFC Securities Limited
that concludes this conference. Thank you for joining us. You may now disconnect your
lines.