This article appeared in the February, 2009 Issue of Wealth Insight.
Someone moved your water. From free, to priceless. The commodity has transformed, in a very short span of time, from its erstwhile mundane position of mass abundance to one of widespread scarcity. Sourced by anyone and used freely for any purpose till now, water is no longer a viable certainty as it impacts innumerable interests, none of whom is willing to forego the benefits. After all it’s a life and death situation. And taking advantage are the water-carriers.
Pursuing interests in this space is the Bhavarlal Hiralal Jain-promoted Jain Irrigation (Jain), India’s largest and world’s second-largest micro irrigation system (MIS) player. Powering a strong compounded annual growth rate (CAGR) of 43 per cent over FY07-09, Jain has justifiably moved from the periphery of the corporate, and stock market, arena to its centre. And what is likely to keep it there is its well-diversified profile.
Unquestionably, at its current price-to-earnings (PE) ratio of 36.86x (January 25, 2010), Jain is not cheap, but considering its fundamentals and the hugely growing importance of water for commercial use, the company deserves a look. After all, unlike oil, water cannot be replaced.
Formidable Control: Jain has played a pioneering role in bringing the benefits of micro irrigation systems (MIS) to Indian farmers. Jain dominates the drip irrigation segment with a 55 per cent market share and in sprinkler systems it controls 35 per cent. While organic growth is on automatic, Jain has aggressively embraced inorganic growth, effecting six overseas acquisitions over the last few years. Jain’s 15 per cent global market share is beaten only by Israel’s Netafim at 20 per cent.
Jain has thereby made competition irrelevant, forcing rivals like Rungta Irrigation, EPC, and Parixit, fighting for leftovers.
The biggest shareholder is Jalgaon Investments at 25.59 per cent. Family members though have pledged shares amounting to 9.81 per cent of promoter holding (3.05% of company).
Future Secure: Jain’s globalised reach is likely to keep it at the forefront of both the technological and marketshare race. The pie is huge in India (due to the under-penetration of MIS here), but globally too the opportunity is mouth-watering. The world average for irrigation penetration is 14 per cent, with the Americas and Europe leading at 36 per cent and 47 per cent levels respectively, while Asia and Africa are at a minuscule 4 and 18 per cent respectively.
Advantage Added: Jain has not put all its eggs in one basket. It is looking to benefit from an increase in disposable incomes and changing lifestyles that have shifted consumption patterns from basic fare to conveniently-available foods. It has also added a non-agri-based revenue stream.
Fruit processing: Jain is well-placed to benefit from the Rs 15 billion Indian fruit processing industry’s expected 20 per cent per annum growth as demand for fruit juices and other processed fruit products is expected to continue growing. Jain manufactures puree, pulp and concentrate and thereby caters to the huge global demand for mango, pomegranate and other fruit juices, with mango products making up 86 per cent of fruit processing revenue — the balance is accounted by banana, pomegranate, and guava. Rising revenues are assured as 70 per cent of Coca Cola’s mango pulp requirement for Maaza is supplied by Jain, and Coke expects to triple its sourcing over the next 5 years.
Another diversifying effort is to reduce dependency on one company and product, thus it is adding fruits like orange and lime to its portfolio, thereby widening its revenue base.
Non-agri diversification: A significant portion of revenue, 50 per cent in FY09, is from non-agricultural sources. It sells piping systems to commercial, industrial and government customers and PVC sheets to the construction industry.
Not Risk-Free: While Jain has adequately de-risked most factors under its control, it left some to mother nature — like weather. But, government and farmers’ mindset may have unpredictable impact on earnings.
Commodity concerns carry negative impact connotations too. Most of Jain’s raw material prices are linked to crude oil and therefore, any excess volatility in price movements is going to create a huge whiplash.
Working capital concerns exist too. As MIS is a capital intensive business, its rising share in overall portfolio means Jain’s needs will rise, especially as this is a business segment led by longer receivable days.
Jain’s varied experience, expertise, an integrated business model, and a strong relationship with farmers is likely to mitigate uncertainties, especially as it has the bandwidth to pass on price changes to end consumers, thereby protecting margins.
This article appeared in the February, 2009 Issue of Wealth Insight.
This article was originally published on March 06, 2010.
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