Water drips from an irrigation pipe on a cotton farm. (Photographer: Simon Dawson/Bloomberg)

Can Jain Irrigation Emerge From This Debt Trap?

Jain Irrigation Systems Ltd. has lost nearly half of its value in the last one year as the world’s second-largest micro irrigation equipment maker grapples with mounting debt and weak cash flows.

The company’s debt has more than doubled to Rs 5,112 crore in the past eight years, according to Bloomberg data. That’s because the company continued to borrow to fund expansion as well as meet its working capital requirements.

Shares of Jain Irrigation, controlled by Ashok Jain and his family, tumbled about 50 percent over last year and are down close to 80 percent from their all-time high in August 2010.

Can Jain Irrigation Emerge From This Debt Trap?

Working capital and interest payments have been eating into the company’s operating cash flows, leaving negligible amounts for repaying debt, Amit Murarka, analyst at Deutsche Bank, wrote in a note. He said the company is in a debt trap as leverage continues to rise.

The research firm, which urged its clients to sell shares of Jain Irrigation, said the net debt-to-earnings before interest, tax, depreciation and amortisation is estimated to have increased to 4.1 times in the year ended March 2019. That’s higher than the management’s guidance of 3 times after the third quarter. The ratio, Deutsche Bank said, is unlikely to decline in the medium term unless the company resorts to asset or stake sales.

Rising Leverage

As on December 2018, Jain Irrigation had a total debt of Rs 5,112 crore. Over the last eight years, the company raised funds for capital investments, working capital and to refinance expensive debt. The company attributes the increase in its debt to short-term debt.

Since the business is capital-intensive, short-term debt at one time constituted 50 percent of the total borrowings, the company’s management said in an emailed response to BloombergQuint. It now accounts for 38 percent of its debt.

While Ebitda has been growing, the higher finance costs ate into the company’s margin. It now hopes to replace short-term debt with long-term loans at lower costs.

Rising Capex

The company used most of its loans to expand capacity, modernise operations and on maintenance. It added nearly 3.2 lakh metric tonnes capacity over eight years in three key verticals—micro irrigation system, plastic and tissue culture.

No major capex will be incurred in the coming years, except for maintenance and packaging, the company said in its response to BloombergQuint. The overall capex would be Rs 200-250 crore a year, which would be financed through internal accruals, the management said. “The company doesn’t have any major plans for expansion or modernisation in the pipeline currently.”

Longer Cash Cycle

Higher finance cost wasn’t the only reason for depleting cash flow. Stretched receivables, or payments from clients, too, impacted Jain Irrigation’s operating cash flow.

The company’s micro irrigation system, a part of its hi-tech agricultural input products segment, has an elongated cash cycle—that begins with payment of raw materials and ends with receipt of cash on goods sold. The segment, which contributes nearly half of the company’s consolidated revenue, was impacted by delayed subsidy on irrigation products by the government.

It took nine to 12 months after delivery of products to receive the government’s incentives, according to the company’s 2018 annual report. That led to higher demand for cash infusion or working capital, the report said.

Increasing working capital requirements raised finance costs, putting further pressure on profit and margin.

Free Cash Flow

Jain Irrigation reported negative free cash flow for seven straight years before it turned positive in the year ended March 2018 as it repaid some high-cost loans and acquired two distribution businesses in the U.S. The numbers for 2018-19 are still to be disclosed.

The company is optimistic about generating substantial free cash flow in the coming years. Without giving details, the company said it’s taking initiatives to improve performance and operational efficiencies and better working capital management. The company expects an annualised growth rate of 15 percent over the next three years, and the free cash flow would be used to pare debt. Jain Irrigation’s net cash flow from operation, according to Bloomberg data, stood at Rs 846 crore as of March 2018.

Analysts’ View

CARE Ratings Ltd. downgraded the company’s debt in April. Its long-term bank facilities worth Rs 2,433.20 crore were assigned a BBB+ rating compared to A-. Its lowered the short-term bank facilities of Rs 2,220 crore to A3+ rating from A2.

Reduction of debt level, according to Mrinalini Chetty, research analyst at Centrum Broking, is a key monitorable for the Jain Irrigation stock. While the management guided for a debt-to-Ebitda of three times in the fourth quarter, Centrum Broking expects the level at 3.3 times in the ongoing financial year and 2.8 times in the next fiscal. But it remains positive on the company.

Kiran Shankar Prasad, analyst at Karvy, said the company’s decision to expand proved to be “painful” for stakeholders as better part of earnings is going toward meeting finance cost, leaving little room for value creation.

What’s Next

Jain Irrigation expects to lower debt in the next two years as it’s working on “unlocking value” in each of its three business verticals—hi-tech agricultural input products, plastic and agro processing divisions—and plans to “monetise” assets.

The management after the third quarter said they aim to reduce debt by Rs 600-700 crore in the fourth quarter. Historically, it generates a lot of cash flows in the fourth quarter which will be used to reduce debt. The company plans to lower the debt-to-Ebitda to 3 times in the fourth quarter from 3.6 times as of December. The current level of earnings, it said, is enough to service the debt and there’s a “good chance” to increase earnings substantially.

The company also intends to raise long-term debt in the ongoing financial year to reduce the refinancing risk inherent in the short-term loans and improve the debt coverage ratios, it said in the emailed response. The long-term debt, according to Jain Irrigation, would be serviced through internal accruals. Also, the working capital loans need not be repaid as these are credit lines issued by the consortium of banks, it said.

Besides, it’s exploring an initial public offering or stake sale of its subsidiary Jain Farm Fresh Foods. The company aims to expands its presence in Europe and Asia and the U.S.