Jain Irrigation Bets on Lending Unit to Reduce Risk

Indian Prime Minister Manmohan Singh
Manmohan Singh, India's prime minister’s government is encouraging the use of drip irrigation in a country where 55 percent of the farmlands are rain fed. Photographer: Pankaj Nangia/Bloomberg

Jain Irrigation Systems Ltd., Asia’s biggest irrigation-equipment maker, is banking on its new lending unit to attract cash-strapped farmers to its products and revive sales growth that has slowed for seven years.

The non-banking financial company, scheduled to start operations in October, will help cut the parent’s interest burden, Managing Director Anil Jain said in a phone interview from Mumbai. Government subsidies used to fund the purchase of pipes and sprinklers may take as long as 18 months to collect, forcing Jain to resort to short-term loans at about 14 percent, he said. The unit will be able to borrow at a lower rate.

“We found that this way, it won’t be sustainable for us to continue,” Jain said. “It is difficult for me and my balance sheet to finance for more than six months. With an NBFC, funds are cheaper, I get all the money upfront and I don’t have to pay for working capital.”

Reviving sales growth will help boost cash flows and cut finance costs, said Ronald Siyoni, an analyst at K.R. Choksey Shares and Securities Pvt. Rising interest payments have eroded profit, causing the company to report its first quarterly loss since 2004 in the three months through June. Shares of the Janus Investments LLC-backed company have declined 15 percent this year, while the benchmark Sensitive Index has gained 16 percent.

Raising Funds

“One can see sales growth starting next quarter,” said Siyoni at K.R. Choksey, a Mumbai-based brokerage that rates the stock a buy. “With receivables coming down, more of the cash flow will be used to repay debt.”

The Jalgaon, Maharashtra-based company is also close to raising $200 million from a combination of private equity investment, debt and convertible bonds to revamp its debt and lower finance costs, Jain told analysts in a conference call on Aug. 16.

Jain Irrigation fell 2.7 percent to 73.50 rupees at the close in Mumbai. The shares last week fell 9.5 percent after the company reported a loss of 169 million rupees ($3 million) for last quarter because of a 32 percent reduction in its micro-irrigation business and held-up subsidy payments. Sales fell 9.5 percent to 8.43 billion rupees.

“We expect the year-on-year decline in earnings to continue for the next two quarters,” Abhijit R. Akella, an analyst at Mumbai-based IIFL Ltd. wrote in a note to clients today. “It is difficult to estimate the extent to which it could further weigh on revenue growth and margins,” he said, referring to the lending unit.

Twelve of the 18 analysts who cover the stock recommend buying it, while four favor selling. Janus owns 6.9 percent of the company, according to data compiled by Bloomberg.

Technology Switch

Starting in 1963 as kerosene vendors, the Jain family has diversified into trading, manufacturing and food processing in subsequent decades. The company will probably post a decline in sales in the current quarter because of continued delay in payment of subsidies, Jain said.

Prime Minister Manmohan Singh’s government is encouraging the use of drip irrigation in a country where 55 percent of the farmlands are rain fed. A switch to the technology helps more efficient use of water, and improves yields of fruits, vegetables, sugar cane and cotton.

Farmers that opt for drip irrigation equipment get subsidies from state governments, with the amount differing from state to state. The government of Maharashtra state subsidizes half the value of the equipment. Jain Irrigation sells equipment to farmers and then collects subsidies from the governments.

Interest costs more than doubled to 3.47 billion rupees in the year ended March 31 from 1.61 billion rupees in fiscal year ended March 31, 2010. Its net income margin fell to 7.2 percent from 10 percent in the same period, according to data compiled by Bloomberg.

IFC Partnership

While Jain Irrigation does not have access to cheaper funds marked for agriculture, the lending arm will be able to borrow at about 10 percent, Jain said. In the first two years, the unit expects to extend 10 billion rupees of loans, he said.

“By improving the irrigation business, which is higher margin business and by reducing the interest cost, earnings will increase,” said Jain.

Jain Irrigation will own less than half of the lending unit and the rest will be owned by investors including International Finance Corp., Jain said. Last month, the company won regulatory approval for the non-banking lending venture with IFC.

The company will take help from its equipment retailers to get business for its lending company, he said.

IFC will play a role in helping raise the $200 million, Jain told analysts, adding the funds will be used to replace short-term borrowings with long-term loans. The average cost of servicing its debt is 11 percent, Jain said.

The company, which had 11 billion rupees of pending subsidy receivables at the end of the last fiscal year, plans to cut the amount by 5 billion rupees by March 31, 2013, he said.

“Financing is a critical input in agriculture, which farmers don’t have access to at the right price and at the right time,” said Jain. “And once that becomes available it can help anybody sell agricultural equipment.”