Headquartered in the heart of India’s farmer suicide fields is Jain Irrigation Systems Ltd. (JISL), a company that earns a majority of its revenue from micro irrigation systems (MIS) that not only help increase water efficiency by almost 90%, but also crop yield by more than 100%. What’s ironical, however, is that despite the presence of an almost readymade market right next door, JISL earns almost half of its revenue from abroad. In fact, it’s trying to further increase the share of exports

Shakti Shankar Patra | @TheDollarBiz

Jain Irrigation Systems Ltd. (JISL) is the world No.2 in drip irrigation. India has drip irrigation penetration levels in single digits, as compared to 47% in Europe and a global average of about 14.2%. Reading these two lines together one cannot but get the feeling that this Jalgoan-based company must be laughing its way to the bank. The reality, though, is anything but it. For, although sustained domestic demand and rising exports have ensured a 30% topline compounded annual growth over the last 10 years, lower operating margins and servicing massive amounts of debt has meant that JISL, actually, ended up with a minor loss in FY2014. What’s more worrying is that FY2014 was not an aberration but the continuation of a trend that started five years back. In FY2010, JISL had an EBITDA margin of 27.5%, which has gone down in each year since then and is currently not even in the teens. Similarly, between FY2010 and FY2014, JISL’s total debt has risen by two-thirds, interest outgo has more than doubled and forex losses have mounted. In fact, in FY2014 forex losses and interest outgo ate up over 96% of JISL’s consolidated EBITDA! The only bright spot in this period has been a strong rise in exports, which have almost doubled from Rs.520.9 crore in FY2010 to Rs.981.6 crore in FY2014. This has also ensured that export incentives received by JISL have risen three-fold from Rs.28.5 crore in FY2010 to Rs.82.3 crore in FY2014 and probably have averted a major disaster.

Lip service

There’s actually a sad irony behind JISL’s poor performance in the last five years. One of the main reasons for its rising debt is its increasing dependence on short-term loans. Why? Because the various state governments that don’t miss any opportunity to propagate just how concerned they are about the poor financial conditions of farmers, and hence subsidise micro irrigation systems that JISL sells, are not very prompt in paying up, which results is high receivables and increasing dependence on borrowing. That JISL, in its Annual Report for each of the last several years, has been highlighting “continuous fund requirement due to long receivables” as its top risk, sums up just how disastrous these delays have been for the company. In fact, the situation had become so dire a couple of years back that JISL had to tweak its strategy and reduce its dependence on government subsidies, even if it were to come at the cost of lower revenue. The strategy also involved setting up a NBFC named, Sustainable Agro-commercial Finance Ltd., to help improve JISL’s cash flow. These efforts seem to have started paying dividends as JISL’s consolidated receivables have started falling in the last two years, from having risen every single year between FY2005 and FY2012. And this has not gone unnoticed by the market. In November 2013, India Ratings and Research, the Indian arm of Fitch Ratings, upgraded JISL’s long term rating to the investment grade BBB-, with a stable outlook, from BB+. While upgrading JISL, Ind-Ra observed, among other things, declining receivables, thanks to “increasing proportion of exports, implementation of cash-based sales in Maharashtra and a reduced exposure to southern states with a higher subsidy recovery back-log.” Similarly, highlighting another positive for JISL on the receivables front, brokerage house Motilal Oswal, in a recent research report, wrote, “There is no credit risk associated with receivables and concerns on the same are unfounded as MIS implementation by JISL is commenced only after it gets subsidy approval receipt from the state government.” In other words, even if receivables days for JISL don’t decrease in a significant way from current levels, the chances of them going bad are extremely low.    

Slow but steady

With receivables reaching dangerous levels a couple of years back, JISL took a conscious decision to change its MIS business model, which had receivables days close to a full year, and simultaneously focus more on exports. This not only made sense from a cash flow perspective, but also from a natural hedge against forex volatility perspective. This strategy bore fruit and between FY2012 and FY2014, while JISL’s consolidated revenue grew by 18.4%, exports grew by almost 46%. Why then did the company incur losses in FY2014?

Firstly, JISL has a strategy as per which, it doesn’t hedge its foreign currency loans that stand at $220 million. So, any adverse movement in the rupee, leads to mark-to-market forex losses, which were as high as Rs.230 crore in FY2014. Secondly, despite the Ind-Ra upgrade, the cost of debt for JISL is still in double-digits. And thirdly, the new MIS model that the company has implemented in the last couple of years means its EBITDA margin is bound to be lower. For, instead of waiting for government subsidies, JISL has started encouraging farmers to buy drip irrigation systems by either paying cash or opting for loans. But to sweeten the deal, JISL has started offering cash discounts. Although this will lower margins, cash flow will improve significantly and consequently, debt and interest outgo. In fact, while speaking to The Dollar Business, Anil Jain, Managing Director, JISL, sounded very confident about the future and claimed that the company’s debt-equity ratio should be down to 1:1 by March 2016, thanks to reducing receivables which would allow at least Rs.300 crore each worth of debt reduction in FY2015 and FY2016.   

For a greener P&L

JISL is the global leader in a business, which is bound to grow over the years as cultivable land and water become scarce resources. Other than MIS, it is also the world No.1 in tissue culture production of banana and pomegranate & mango processing. It is also among the global leaders in onion and vegetable dehydration and can count global majors like Nestle among its clients. Today, the company has manufacturing plants across five continents and exports to over 100 countries. Its PVC pipes segment, which contributes almost a fourth to the topline, also draws a lot of synergy from its MIS business. With all these positives in place, what ails the company is its finances. But with receivables on their way down, which has ensured no significant rise in debt in the last three years, the worst seems to be over.

On a much more brighter side, topline growth has never been an issue for JISL. Its revenue had grown by 27.13% even in FY2009, when the whole world was grappling with the Great Financial Crisis. The only reason for revenue growth being flat in FY2013 was that the company chose to not grow. So, once debt is pared back on the back of better cash flows and the company starts refocussing on even the topline, JISL could be one of the greatest turnaround stories in the years to come. One just wishes it soon gets its dues from the various state governments.

JISL invests heavily in R&D to maintain its position as a world leader in tissue culture

“We don’t hide MTM forex losses in the balance sheet”

Heading a company that earns a big chunk of its revenue from the politically sensitive farm sector is not an easy job. Things hot up more if you have to continuously answer shareholders why a spectacular rise in the topline is not translating into profits. To understand how he deals with such issues and his strategy to turnaround Jain Irrigation Systems, ­we caught up with its MD, Anil Jain

Interview by Sachin Manawaria | @TheDollarBiz

Anil B. Jain, Managing Director, Jain Irrigation Systems Ltd.

TDB: Give us a brief breakup of your various business segments and exports.

AJ: Micro Irrigation Systems (MIS) is the largest business of Jain Irrigation, which accounts for more than 50% of our topline and primarily includes drip irrigation and sprinklers. A fourth of our business is pipes, which mostly caters to the domestic market. Similarly, around 20% of our business comes from the food processing segment, which includes onion dehydration, fruit puree, concentrations, juices etc. A small chunk of our revenue also comes from the solar and plastic sheets business. The food processing segment accounts for more than 40% of our export revenue. Last year, around Rs.300 crore worth of exports came from the MIS business, around Rs.200 crore from PVC sheets, Rs.50 crore from plastic pipes, and the rest from our food processing business. Total exports last year were about Rs.975 crore. As far as the geographical spread is concerned, we do MIS business directly from India into Africa. In other countries, we export through a dealer network or through our subsidiary companies, who in turn, sell to their own dealers. We have subsidiaries in almost all continents and a wide distribution network.

TDB: The fruit processing segment is one of the highest margin businesses among all your segments. Are you taking steps to increase its share in your overall revenue?

AJ: Firstly, we want to cater to more and more markets. For example, when it comes to mango, we sell to around 40 odd countries, but there are far more countries where mango pulp products can be exported to. Secondly, we want to grow new product lines like banana, tomato pulp, guava etc. Thirdly, until now, we have only entered fruit pulp and juices business, but going forward, we want to get into ready-to-eat frozen cubes and frozen/dried fruits business. As part of our strategy, we want to replicate our business model in the vegetable segment too – in onion, garlic etc. We also want to grow more in the B2B category. For example, we currently supply mango pulp to Coca Cola, which they use to make Maaza. We also sell dried onion to Nestle. On the other hand, in the Middle East, we have started B2C as well, wherein we directly reach consumers through our frozen 1 kg pack of sweetened mango pulp, which has a lot of demand from expats. So, the whole idea is to increase the product line, with the same raw material, apart from reaching more and more categories of consumers to increase the revenue from this segment.  

TDB: Your MIS segment has been growing at single digits over the last five years. Do you expect the current government to push the current drip irrigation penetration levels to the global average of about 14%?

AJ: This product category will continue to grow for the next several years as firstly, farmers like it very much, and secondly, water is increasingly becoming a very scarce resource. The growth of this segment doesn’t even require the government to do a lot because it not only saves water, but also increases productivity. So, in a way, it’s a necessity for farmers in India.

TDB: With the new government making all the right noises on solar energy, do you have the capacities to benefit in a big way if there is a big push in this direction?

AJ: Solar business is still a very small component of our overall business and contributes just 2.5-3% to our turnover. But we do have the capacity to scale up. The main growth in this segment will come from solar water pumps, which can be very useful to farmers. But it might take a year or two before we see healthy momentum in this segment.

TDB: Not only has your total debt been consistently rising, but also the cost of debt is in double digits. What are you doing to reduce debt and also lower the cost of it?

AJ: We have already started reducing our high debt burden by changing our business model, apart from improving our working capital efficiency. We plan to reduce our debt by Rs.300 crore this year and will further reduce it by a similar or bigger amount in the coming year too. Further, we have given a guidance to the market that by March 2016 our debt to equity ratio would be around 1:1, which I think is reasonable. To make this happen, our debt should come down to around Rs.3,000 crore and our net worth should rise to that level. Once we achieve this, our company will be re-rated on the credit front and, subsequently, we would be able to borrow at a much cheaper rate than what the case is now.

TDB: In the last two years, about 2/3rd of your EBITDA has been spent in servicing debt. What can we expect over the next few years?

AJ: This year, we are expecting our EBIDTA to be around Rs.950-1000 crore and the interest outgo to be around Rs.450 crore. So, this fiscal will certainly be better than FY2014 and only 40-45% of our EBITDA would go to service debt.

TDB: Can we expect your EBITDA margin to rise to the mid-20s as was the case in FY2009 and FY2010? If yes, by when?

AJ: Our EBIDTA margins were high in FY2009 and FY2010 due to higher EBIDTA margins enjoyed by the MIS business in the old model. In the new model EBIDTA margins in MIS are lower because we provide upfront cash discounts to customers. Therefore, EBIDTA margins now appear optically lower. However, as the interest reduction kicks-in from next year, the overall net margins will certainly go back to the levels of earlier periods.

TDB: You have been badly hurt by forex losses in the last three years. In what way(s) are you trying to check this?

AJ: Our forex losses are just MTM losses or book losses, and not cash losses, that occurred primarily because of the sudden and significant rupee depreciation in the last couple of years. On a cash basis, we are a net foreign exchange earning company. Moreover, being a prudent company we take these losses in our P&L account, unlike others, who show them in their balance sheet. We have long-term foreign currency loans of around $220 million, which are going to get repaid in the next 10 years or so. As a part of our strategy, we have kept most of them unhedged.

TDB: One of your strategies to fight rising cost and rupee depreciation is to focus more on exports. Which new geographies are you eyeing to expand to in the near future?

AJ: We are currently focusing on regions like Central South America and North America, apart from Africa for our MIS business. MIS will continue to grow globally because of increasing water scarcity, besides more funding being available for drip irrigation through various multilateral agencies. We feel that with these factors in place, we will continue to outpace the industry’s growth and hence witness decent exports growth going forward. Food processing business will also continue to grow in markets like US and Europe. So, the new hot spots for our product line would be Central South America, Southern Europe, Central Asia and Africa.