Jain Irrigation Rs68 Systems Ltd. (JISL) OUTPERFORMERfalling from a peak of 6.4x to the current...

The Indian government has taken up development of agricultural infrastructure asa priority area. JISL, the largest integrated player in micro-irrigation, is the naturalchoice to play this theme. The company has put its troubled past behind, with itsprivate-equity partner providing financial and operational stability. Infrastructurecompanies have given multi-bagger returns after projects (in roads and powerprojects) picked up momentum. We expect a similar surge in JISL, which is tradingat a PER of 4.7 and EV/EBITDA of 2.7 on FY2006E. We initiate coverage with anOutperformer, and recommend buying with an 18-month price target of Rs150.

Huge opportunity in micro-irrigation... The government’s stated thrust on agricultureand micro-irrigation has thrown open an opportunity estimated at Rs615bn over thenext decade—about 300 times the industry’s current annual sales. The potential isevident from project plans of Andhra Pradesh and Maharashtra, which are expectedto translate to orders worth Rs20bn-30bn over the next three years.

…which JISL is best-placed to tap. JISL is the undisputed leader in micro-irrigation,with an integrated manufacturing capacity and an unmatched distribution network.Its 30-year experience in supplying a range of farming equipment has given it astrong franchise among farmers. Its other businesses, mainly plastic pipes & sheetsand food-processing, are also set for rapid growth over the next three years.

Attractive valuations, strong earnings potential. JISL has put its troubled past behind,after the induction of Aqua International as a private-equity partner with a 43%equity stake. This has brought in operational and financial stability, with gearingfalling from a peak of 6.4x to the current 1.5x. The company recorded revenues ofUS$100mn in FY2004, and we expect it to record a revenue CAGR of 30% over thenext four years. The company would return to profitability in FY2005, andsubsequently grow profits at an annualised rate of 104% over four years. We expectJISL to achieve zero-debt status in three years. The stock is trading at a PER of 4.7and EV/EBITDA of 2.7 on FY2006E—cheap, for a company delivering an RoC of27%. We initiate coverage on JISL with an Outperformer recommendation, andrecommend buying with an 18-month price target of Rs150.

Key financials

Year to 31 March 2002 2003 2004 2005E 2006E 2007E 2008E

Shares in issue (mn) 54 54 54 54 54 54 54

EPS (Rs) -0.4 7.8 1.4 8.8 14.9 18.9 24.0

EPS growth (%) -82.2 534.9 69.3 26.9 26.6

PER (x) -188.6 9.6 54.1 8.5 4.7 3.8 3.0

EV/ EBITDA (x) 12.9 13.0 9.3 4.7 2.7 2.0 1.2

EV/ Sales(x) 2.2 2.2 1.6 1.0 0.6 0.4 0.3

Book value (Rs/ share) -17 29 21 41 62 83 106

Price/ BV(x) -4.5 2.6 3.5 1.8 1.2 0.9 0.7

ROCE (%) 5.9 9.7 13.2 21.2 27.1 24.0 22.5

Jain IrrigationSystems Ltd. (JISL)More crop per drop

S.S. Kantilal Ishwarlal SecuritiesPvt. Ltd. (SSKI)701-702 Tulsiani Chambers,7th Floor (East Wing),Nariman Point,Mumbai 400 021.Fax: 91-22-2204 0282

Pathik [email protected] 38 3304

28 June 2004

BSE Sensex: 4,644

Rs68

OUTPERFORMER

Price performance

Mkt Cap: Rs3.7bn; US$84mn

Com

pany R

eport

Stock data

Reuters code JAIR.BO

Bloomberg code JI@IN

1-year high/low (Rs) 119/34

1-year avg. daily volume (shares) 223,665

Free float (%) 69

Performance (%)

3-mth 6-mth 1-year 3-year

JAIR.BO 27.1 (35.7) 17.7 331.1

BSE Sensex (12.3) (10.9) 31.3 37.0

Nikhil [email protected] 38 3308

JUNE 2004 2

SSKI INDIA

Contents Page No.

Investment argument ............................................................................................. 3

Key risks ................................................................................................................ 7

Industry overview ................................................................................................... 8

What has changed: The Second Green Revolution............................................... 12

Advantages of Modern Irrigation technologies....................................................... 13

JISL- Management profile ................................................................................... 18

Business outlook ................................................................................................... 20

Micro-irrigation Systems (MIS): More crop per drop ............................................. 20

Polyvinyl chloride (PVC) sheets: Explosive growth ............................................... 22

PVC & PE Pipes: Low margins, but strong cash flows ........................................ 23

Polycarbonate (PC) sheets: Conversion margins ................................................. 24

Onion dehydration & Fruit processing: Potential value creation ............................ 25

Financials, valuation and recommendation ...................................................... 27

Valuation and recommendation .......................................................................... 32

JUNE 2004 3

SSKI INDIA

INVESTMENT ARGUMENT

India is set for a second Green Revolution*, driven by the government’s thrust onimproving agricultural productivity with heavy investments in micro-irrigationsystems. The government is likely to adopt the recommendations of the Task Forceon Micro Irrigation, which envisage an investment of Rs615bn in micro-irrigationsystems (MIS) over the next eight years. This amount is 300 times the industry’s currentannual sales. JISL, the undisputed leader in MIS, would be one of the biggestbeneficiaries of this boom. The stock is trading at a PER of 5 and EV/EBITDA of 2.8 onFY2006E—a very attractive valuation for a company delivering an RoC of 27%. Weinitiate coverage with an Outperformer, and recommend buying with a two-year pricetarget of Rs250.

The second Green Revolution

India is set for a second Green Revolution. The government is likely to adopt therecommendations of the Task Force on Micro Irrigation (hereinafter, ‘Task Force’) headedby Chandrababu Naidu, former chief minister of Andhra Pradesh. If implemented,these recommendations would bring about far-reaching changes in Indian agriculture.One of the key recommendations is to increase the area under irrigation by 3mn hectaresover the Tenth Plan period (2004-05 to 2006-07), and a further 14mn over the EleventhPlan (2007-08 to 2011-12). After 57 years of independence, India has just 1.2mnhectares under micro irrigation. This would entail an investment of Rs615bn(US$137bn) over the Tenth and Eleventh Plan periods (2004-05 to 2011-12). Weexpect new policy measures to bring about significant improvements in productivitywhile conserving land and water resources. Agri GDP has declined at an annualisedrate of 2.1% over the period 1971-2003, and its contribution to the country’s GDP isat 23%, the lowest ever. Implementation of the Task Force’s recommendations maywell drive a rise in this proportion.

* The term ‘Green Revolution’ is applied to the period 1967-1978. These years saw a surge in agricultural productivity, unlikethe earlier years, when efforts to achieve self-sufficiency in food were largely unsuccessful.Until 1967, the focus was mainlyon expanding farming areas. But starvation deaths were still being reported, as population was growing much faster than foodproduction. This called for radical measures to increase yield. These measures collectively came to be called the GreenRevolution. Note that the term is a general one, aplied to successful agricultural experiments in many third-world countries,and not specifically to India. But the Green Revolution was most successful in India.

Congress would pursue an ‘Agriculture First’ strategyin resource allocation. Public investment in agriculturewould be stepped up substantially, with focus oncovering irrigation and doubling credit coverage withinthree years.

Congress Manifesto, Common Minimum Programme

A campaign will be launched to encourage dripirrigation, sprinkler irrigation and greenhousetechnology. Land under these water-efficient systemswill be increased five-fold in five years. Our slogan forthis campaign would be 'More Crop per Drop'.

BJP Manifesto

Agriculture, creation of irrigation, infrastructure, growthof basic industry, reducing the cost of power generation,and focus on employment generation will be ourtopmost priorities. The state will spend Rs60bn-70bnon irrigation annually, and around Rs460bn over thenext 5-7 years.

YSR Reddy, Chief Minister of Andhra Pradesh

Sizeable expenditure will be reserved for undertakingrural welfare measures such as irrigation, where freshallocations of over Rs20bn will be made this year.

Sushilkumar Shinde, Chief Minister of Maharashtra

MIS: The right noises

Massive investments inmicro-irrigation will usher in a

second Green Revolution inIndia

JUNE 2004 4

SSKI INDIA

Potential for MIS

The commitment to implement the Task Force’s report is visible in the recent tendersfloated by the government of Andhra Pradesh (AP). Project worth Rs12bn relating tomicro irrigation are already under implementation in AP, and the opportunity is peggedat ten times as much. The Maharashtra government has already floated an Expressionof Intent (EoI) for a Rs20bn MIP project. We expect the pace of these projects toaccelerate as benefits to all participants become evident.

Economic and commercial benefits for all

Widespread adoption of MIS would benefit all constituents—farmers, suppliers,bankers, and the nation at large. It would result in substantial savings on infrastructuralcosts of irrigation projects, water requirement, subsidised electricity supplied to theagriculture sector, and subsidies on fertilisers, among other things. For farmers, MISwould increase yields and cut payback time. Suppliers would gain from assuredpayments, and bankers from increased relations with farmers.

...with an RoI of 95%

Covering 17mn hectares under irrigation by the end of the Eleventh Plan would entailan investment of Rs672bn—and the project would yield benefits of Rs1,306bn, whichrepresents an RoI of 95% (see page 17). Adoption of MIS is the only way that agriculturalproduction and productivity can be increased in a sustained manner. The technologywill enable optimal synergies of the three components of the Green Revolution—improved seeds, water and fertilisers.

Agri reforms to drive a surge in market capitalisation of MIS companies

There is a clear correlation between the implementation of major reforms, and themarket capitalizations of companies affected by such reforms. Take the infrastructuresector, for instance. For almost a year after the government announced key reforms forthe sector (including the Golden Quadrilateral project), investors remained sceptical,raising questions on the commercial viability and payback periods of such a hugeprogramme. But then, as investors understood the need for such projects, almost allinfrastructure companies saw a sharp rise in their market capitalization—nearly 7-8xover the past three years.

The economic benefits ofadopting micro-irrigation

systems (MIS) are evident

There is a strong correlationbetween implmentation of

major reforms and themarket caps of companies

that stand to benefit fromsuch reforms

Strategic importance to all constituents

Government: Huge positive rub-off-an opportunity to boost rural economy not through raising subsidies, butspurring a rise in farm incomes

NABARD: Loans for micro-irrigation projects will be treated as priority-sector lending. Has an asset book ofover Rs500bn, and the agenda is to be the farmer banker.

Banks: In the words of one banker we met, "Not a single farmer having drip irrigation has defaulted to us."

Suppliers: Assured loans from banks. No risks of supplies to farmers. Huge economies of scale will aid profitabilityin due course.

Farmers: We met quite a few of them. Sample quote: “I will not add more acreage under cultivation unless Ihave drip irrigation.” Payback is within 18 months.

JUNE 2004 5

SSKI INDIA

Agri reforms, we believe, present an even bigger opportunity. JISL (market cap:US$80mn), which is the biggest player in the segment, would be the biggest beneficiaryof this opportunity.

JISL, with its market share of45%, is the biggest potentialbeneficiary of the growth in

MIS

Exhibit 1: Infrastructure companies - surging market capitalisation as reforms gather momentum

Market cap 2000 2001 2004 Multiplier (x)

(Rs mn) (Beginning of (1 year of (Huge performance

infrastructure reforms) non-performance) in next 3 years)Gammon 800 850 5000 6

HCC 800 800 2250 3

Jaiprakash Ind 6660 5210 20350 4

Larsen & Toubro 45000 47500 120000 3

Nagarjuna Construction 170 150 1670 11

IVRCL 600 400 3150 8

Source: Bloomberg, SSKI Research

JISL is the biggest potential beneficiary of agri-reforms

Jain Irrigation is India’s largest play on agriculture, with manufacturing operations inmicro irrigation systems (MIS), pipes, plastic sheets, and food processing. JISL has hada turbulent past since it raised money through a GDR issue in 1994. After the issue,JISL overdiversified, and its financial performance dived.

We believe that the worst is over, and JISL is now a focussed play on agriculture,particularly strong in MIS and plastics. The induction of Aqua International Partners,a private-equity investor, with a 43% stake has given the company financial andoperational stability. Business conditions have also improved significantly, with stategovernments of Andhra Pradesh, Gujarat, Maharashtra, and Rajasthan increasing theirthrust on irrigation. All of JISL’s businesses are now registering strong double-digitgrowth rates. We believe that JISL, with its market share of 45% in MIS, is the best beton agri reforms.

Exhibit 2: JISL’s business mix

Segments (FY04) Revenue yoy growth (%) % of salesMIS & SIS 911 84 22

PVC/PE pipes 1482 16 35

PVC/PC sheets 955 15 23

Onion dehydration/Fruit processing 739 36 18

Total (Rs mn) 4179 30 100

Source: Company, SSKI Research

JUNE 2004 6

SSKI INDIA

JISL: Set for all-round growth

MIS represents the biggest opportunity for JISL, but we also see merits in its otherbusinesses. Pipes (both PVC and PE) yield good cash flows, although margins are low.Part of the business is a proxy for the growth in MIS. There is also an opportunity touse PE pipes for gas transportation, in addition to replacement demand. Pipes currentlyaccount for 35% of JISL’s revenues and 16% of its EBITDA.

We are optimistic on the growth prospects of JISL’s PVC and PC sheets business. Thecompany has sold its PC sheets business to GE. The unit has been leased back to JISL,which is free to sell its products in Europe and the US. We expect rapid growth in JISL’sPVC sheet business on the back of exports. In the US, low cost and ease of use areleading foam sheets to increasingly replace lumber. PVC sheets accounted for 16% ofJISL’s revenues in FY2004. In FY2005, we expect this share to rise to 23%, while itsEBITDA contribution rises to 30%.

We expect significant improvement in the performance of the onion-dehydration plant.Dehydrated onions are used as inputs for pizzas and ketchups, among other things.The plant is a 100% EoU, and the company aims to triple its production capacity overthe next three years. JISL is currently operating with two additional plants taken onlease to cater to the increased demand for dehydrated onion products. The companyalso has a fruit-processing plant, and supplies to Coca Cola. This segment accounts for18% of JISL’s revenues.

Exhibit 3: Contribution to EBITDA (%)

(%) 2001 2002 2003 2004MIS & SIS 62 46 22 31

PVC pipes 17 10 9 12

PE pipes 5 -1 7 3

PVC sheets 7 15 23 20

PC sheets 3 4 10 7

Onion dehydration -2 9 8 7

Fruit processing -1 5 6 7

Total 100 100 100 100


Attractive valuations

JISL reported revenues of US$100mn in FY2004. We expect the company’s revenuesto grow by 62% in FY2005, and record a CAGR of 30% over the next four years. Weexpect an EBITDA of Rs1.37bn in FY2005, and a margin expansion of 350bps overthe next four years. We expect JISL to cut its leverage from the current 1.55 to zero inthree years. The stock is trading at a PER of 4.7 and EV/EBITDA of 2.7 on FY2006E—cheap, for a company delivering an RoC of 27%. We initiate coverage on JISL with anOutperformer rating, and recommend buying with an 18-month price target of Rs150.

Its other business are alsoset for robust growth

The stock is cheap—buy witha price target of Rs250

JUNE 2004 7

SSKI INDIA

KEY RISKS

Delays in government orders

The key risk in the business is the timing of government orders. We have conservativelyassumed only 10% of the opportunity identified by the Task Force over the next fouryears. All the same, there could be delays in the implementation of projects by stategovernments, which would have implications for our sales forecasts, and lead tosignificant variation in quarterly earnings. All things considered, the government’s thruston agriculture reforms means that there is no serious risk to our forecasts.

Management’s patchy track record

Another risk is the management’s track record. JISL has had a turbulent past since itraised money through an EDR issue in 1994. After the issue, JISL overdiversified, andits financial performance dived, leading to defaults on loan obligations. The companygot into a cash crunch, and had a leverage of 6.4x. The company did not record profitsover the period FY1997-FY2003. It has just managed to turn around in FY2004, withmarginal profits.

We believe that the worst is over, and JISL is now a focussed play on agriculture,particularly strong in MIS and plastics. The induction of Aqua International Partners,a private-equity investor, with a 43% stake has given the company financial andoperational stability. Business conditions have also improved significantly, with stategovernments of Andhra Pradesh, Gujarat, Maharashtra, and Rajasthan increasing theirthrust on irrigation. All of JISL’s businesses are now registering strong double-digitgrowth rates. We believe that JISL, with its market share of 50% in MIS, is the best beton agri reforms.

JISL, with its market share of 45% in MIS, and strong franchise with farmers, is ourplay on the structural upswing in agri reforms. We expect MIS to contribute 35-40%of the company’s revenues and EBITDA over the next three years.

JUNE 2004 8

SSKI INDIA

INDUSTRY OVERVIEW

The agriculture sector has suffered from counterproductive policies for decades now.Heavy subsidies have constrained the government’s ability to invest in irrigationsystems and other productivity-improvement measures. This is beginning to changenow, with the government thrust on promoting productivity in agriculture. Some states,among them Andhra Pradesh and Maharashtra, have already drawn up plans to investRs12bn-13bn in micro-irrigation systems (MIS) over the next three years.

Counter-productive agriculture policies

The agriculture sector has been virtually ignored for a long time now, and suffered fromwhat we believe are counter-productive policies, among them:

(1) Provision of minimum support prices for rice and wheat,

(2) Heavy subsidies on inputs like fertilisers, water and power and

(3) Limited and declining public investment in the sector.

These policies have produced adverse results, in our view.

l The government’s guarantee of minimum support prices (MSP) for wheat and ricerequires it to procure these grains directly from farmers at pre-determind rates.Political compulsions have led to such a rise in MSP that since the mid 90s, domesticprices have been higher than international prices. This has hit the country's exportcompetitiveness, and at the same time taken away farmers’ incentive for cropdiversification. What’s more, the level of procurement is almost completelyindependent of demand, resulting in excessive stockpiling-saddling the governmentwith high warehousing costs.

l Heavy subsidies on inputs like fertilizers, water, and power eat up funds that couldotherwise be invested in irrigation systems and rural roads. The result is that onlyaround 40% of India's gross cropped area is irrigated. This proportion will have tobe increased if the growing population’s need for food is to be met.

l Limited irrigation, coupled with a subsidy-induced overuse of fertilisers has adverselyaffected the agriculture sector’s productivity. Differences in agricultural yields inIndia and China validate this view.

Exhibit 4: Agriculture - declining investment (% change yoy)

Source: CMIE, SSKI Research

FY71

FY76

FY81

FY86

FY91

FY96

FY01

6

12

15

18

9

Heavy subsidies and lowpublic investments in

agriculture have hamperedgrowth in the sector

Cropped area underirrigation will have to beincreased if the growing

population’s need for food isto be met

JUNE 2004 9

SSKI INDIA

Exhibit 5: Crop productivity (low yields in India) - kg/ha

Source: FAO, SSKI Research

Tardy agri growth

Agriculture, which was the Indian economy’s mainstay for decades, has of late beensuperseded by the fast-growing services and industry sectors. Agriculture’s share in thecountry’s GDP has declined from 45% in the 1970s to the current 23% (see chartbelow). The services and manufacturing sectors have been nurtured with concertedpolicy measures to promote their growth. But the agriculture sector has been neglected,except for indiscriminate subsidy doles to farmers.

India, which accounts for over 16% of the world’s population, has only 2.4% of itsland mass and less than 4% of water resources. This underscores the crucial significanceof water in sustaining and growing agricultural production.

Exhibit 6: Agri GDP - sustained underperformance


FY71

FY72

FY73

FY74

FY75

FY76

FY77

FY78

FY79

FY80

FY81

FY82

FY83

FY84

FY85

FY86

FY87

FY88

FY89

FY90

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

15

25

35

45

55

15

25

35

45

55Agriculture Industry Service

Wheat Maize Rice Groundnut0

1,500

3,000

4,500

6,000

2578

3667

1613

5210

2890

5950

1025

2584

India

kg/ha

China

JUNE 2004 10

SSKI INDIA

Exhibit 7: Sharp fall in Agri GDP vis-à-vis Industry and Services (33-year CAGR)


Water scarcity

The agri sector’s demand for water is set to grow rapidly, on account of the growingneed for food, horticultural products, and raw material for various industries. But theshare of water allotted to the agri sector is likely to fall because of increasing demandfrom other sectors.

Exhibit 8: Water demand pattern In India (cubic km)

Area 1985 2000 2025EFor Agriculture 470 630 770

For Non-Agriculture use 70 120 280

Source: Task Force report, SSKI Research

Exhibit 9: Per-capita water availability (cubic metres): On a sharp decline

Source: Ministry of Water Resources, SSKI Research

We expect the share of water for agriculture to fall from the current 84% to 69% by2025. The sector’s demand for water, on the other hand, is projected to increase from470BCM in 1985 to 770BCM by 2025. Over the same period, demand for non-agricultural use of water will multiply four-fold, from 70BCM to 280BCM.

-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

-2.1

0.8

1.3

Agriculture

Industry

Service

FY1947 FY1975 FY2003 FY20250

1,750

3,500

5,250

7,000

6008

3500

1250760

The agriculture’s demand forwater is increasing, while theshare allotted to it is bound to

fall

JUNE 2004 11

SSKI INDIA

This rapid growth in demand in the face of emerging supply constraints is likely tolead to a shortage of water for irrigation. State-wise data on potential for irrigation alsoindicates that the availability of water has been shrinking. Inappropriate policies thatinduce indiscriminate and wasteful use of water, lack of appropriate technologies, andinadequate institutional support systems have led to serious agro-ecological problemsin irrigated areas. The sustainability of Indian agriculture would be severely tested,unless the present practices of water usage and management are changed.

The International Water Management Institute forecasts that by 2025, 33% ofIndia's population will live under absolute water-scarcity condition. This underscoresthe urgent need for conservation of water and improvement in water use efficiency(WUE).

India’s agricultural WUE, at 35%, is one of the lowest in the world, compared withChina’s 55%. This demands radical changes in conservation and agriculture policies tohelp save water, fertilizer, and energy. MIS is the key means to achieve these objectives,and this has been amply demonstrated over the past 15 years. However, the adoptionof MIS has not been as fast as it might have been, on account of various isues detailedin the chart below.

Exhibit 10: Issues hampering the development of micro-irrigation

Source: SSKI Research

What has hampereddevelopment of MIS

Lack of credit Poor institutionalsupport mechanism

Lack of skilledhuman resources

Technophobia ofsome participants

High initial capex-deterrentfor poor farmers

Lack of informationon use of soil, water,

fertilizers

JUNE 2004 12

SSKI INDIA

WHAT HAS CHANGED: THE SECOND GREEN REVOLUTION

Some countries have already adopted micro-irrigation techniques to use their watermore efficiently, and to improve productivity. Micro-irrigation systems enable directand concentrated application of water to root zones of crops, through specially designedemitters, and piping networks.

At present, only 1.2mn hectares of farmland in India is covered under micro-irrigation,out of a potential 69mn hectares. The government of India, mindful of the need toimprove the efficiency of water management, constituted the non-partisan Task Forceon Micro-irrigation under Chandrababu Naidu (ex-CM of Andhra Pradesh). The TaskForce’s mandate was asked to suggest ways and means to enhance productivity, promotediversification, and drive sustainable growth in agriculture through the efficient use ofwater. The panel has recently submitted its findings and recommendations, the salientones being:

l Promote micro-irrigation as a total plant support system, from planting and post-harvest management to marketing. Take this up as a 'National Priority' project.

l Double production, mainly by enhancing yields and increasing cropping intensity.Water will be the most critical input to improve productivity.

l Micro-irrigation saves water, fertilizer, and power, and aids value-addition inagriculture.

l Micro-irrigation has vast potential—coverage can be increased from the current1.3mn hectares to 69mn hectares by 2030.

l Target 3mn hectares over the Tenth Plan period (2004-05 to 2006-7), and another14mn hectares over the Eleventh Plan period (2007-08 to 2011-12).

l Investment Rs105bn during the Tenth Plan, and another Rs510bn during theEleventh Plan.

l Funding for the project to be front-ended by availing the RIDF or similar funds ofNABARD, and share from state and central government. Effectively, no fiscal oroperational risks to the project.

The Task Force hasrecommended increasing the

area under micro-irrigationfrom the current 1.3mn

hectares to 69mn

JUNE 2004 13

SSKI INDIA

ADVANTAGES OF MODERN IRRIGATION TECHNOLOGIES

More Crop Per Drop: No Lift Without Drip

Micro-irrigation enables farmers to produce more crop with less water. The Task forcehas also argued for equating investments in irrigation projects to infrastructure support.It has recommended making micro-irrigation compulsory in the command areas ofnew irrigation projects, because drilling for water is most productive when micro-irrigation techniques are used. Projected investments during the Tenth Plan and theEleventh Plan stand at Rs615bn, to be shared by the GoI, state governments, andfarmers. The government's share of this requirement will be raised through Budgetprovisions, World Bank loans, import cess, and RIDF (under NABARD). The balance50% share is to be borne by the beneficiaries (farmers) for which they could seekinstitutional financing.

Exhibit 11: Indian farmer - the centre-point of development

Source: Task Force report, SSKI Research

In a related move, the GoI has proposed the creation of an Agri-Infrastructure andCredit Fund (AICF) of Rs500bn in the NABARD, in place of RIDF fund. This fundwill be used in the development of waste land, irrigation, storage of agro-products, coldchains, etc. The Task Force has recommended that micro-irrigation be given priorityconsideration while allocating funds out of the proposed AICF.

Drip irrigation: The 'root' solution

Drip irrigation involves high-frequency application of water in and around the rootzones of plants. The system consists of a network of pipes along with suitable emittingdevices. DIS is based on the fundamental concept of irrigating only the root zone of thecrop rather than the entire land surface as in surface-irrigation methods.

This would entail investmentsof Rs615bn over the Tenth

Plan and Eleventh Planperiods

JUNE 2004 14

SSKI INDIA

Exhibit 12:Conventional drip-irrigation system


Drip-irrigation systems (DIS) are known to be able to achieve high WUE, and alsoimproves crop yield. DIS allows frequent application of small quantities of water, whichultimately provides a nearly constant soil water condition in the major portion of theroot zone. As the chart below shows, direct application of water to the root zone incontrolled quantities results in uniform growth, higher crop yields, and improved qualityof produce—besides ensuring substantial savings in water required for irrigation. Indrip irrigation, the cyclical nature of the conventional irrigation methods can be avoidedand soil moisture levels can be maintained at optimum field capacity levels continuously,whereby the conditions for plant growth are ideal all along the duration of the crop.

Exhibit 13: Soil moisture content (%)

Source: Task Force, SSKI Research

7

14

21

28

0

0 5 10Days

15 20

Micro irrigation Food irrigation

JUNE 2004 15

SSKI INDIA

Exhibit 14: Conventional and modern irrigation methods

Performance indicator Conventional irrigation Modern irrigationWater consumption Wastes a lot of water. Losses Potential saving of 50% in water

occur due to percolation, run-off vis-a-vis conventional systems.

and evaporation Negligible losses due to run-off

and deep percolation.

Water use efficiency (WUE) Only 30-50%, because losses 80-95%

are very high.

Labour-intensity Fairly high Much lower than conventional

systems, as labour is required

only for operation and periodic

maintenance

Weed infestation Very high Almost nil

Water control Inadequate Very precise and easy

Efficiency of fertiliser use Very low, because of leaching Very high, because there's little

and run-off loss of nutrients due to leaching

and run-off

Soil erosion High Low

Crop yield Low Up to 40% higher than

conventional systems


Exhibit 15: Comparative irrigation efficiency (%)


Exhibit 16: Potential growth in horticulture crops

1991-92 1996-97 2000-01 2007-08P 2010-11P 2020-21P

Crop (mn tonnes) Prod Prod Prod Proj Dd Proj Dd Proj DdFruit 28.63 40.46 45.37 75 81 98

Vegetables 58.56 75.1 93.92 160 185 220

Spices 1.9 2.8 3.02 5 5.5 6.5

Coconut 6.93 8.98 8.67 18 20 24

Cashew 0.3 0.43 0.45 1.5 1.7 2

Others 0.24 0.3 1.07 6 7.1 9.5

TOTAL 96.56 128.0 152.5 265.5 300.3 360

Source: Ministry of Agriculture, SSKI Research

Conveyance Application Surface watermoisture evaporation

Overall efficiency0

25

50

75

100 Surface Sprinkler Drip

Modern irrigation techniquesare considerably more

efficient than conventionalones

JUNE 2004 16

SSKI INDIA

The horticulture sector is emerging as a promising area for diversification in agricultureon account of high-income generation per unit of area, water and other farm inputs. Atpresent, horticulture is contributing 29.6% to the Agricultural share to GDP from8.5% of land area. Given the increased need for nutritional balance for the growingpopulace, horticulture production is estimated to increase to 360mn tonnes from thepresent level of 152mn tonnes. Micro-irrigation-led agriculture will maximise thesynergistic interactions of improved seeds, water and fertilizer—the three key componentsof the Green Revolution.

Exhibit 17: Demand for horticulture crops (mn tonnes)

Source: Ministry of Agriculture, SSKI Research

FY92 FY97 FY01 FY08P FY11P FY21P0

100

200

300

400

97128

153

266

300

360

Key benefits ofMIS

Savings: 50% in waterand fertilizer, 25% in energy

consumption

Higher income generationfor farmers

Conversion of vastrain-fed areas into

irrigated lands

Easy irrigation ofdifficult terrain

Reduced labour cost,higher yields (>30%)

Horticulture-leddiversification of

agriculture

Improved quality(Uniform growth)

Exhibit 18: Key benefits of increasing usage of micro-irrigation


JUNE 2004 17

SSKI INDIA

While water saving is a necessary condition for the sustainable use of irrigation water, itmay not be a sufficient condition for sustainable agricultural development. There is aneed to increase the productivity of crops while saving water. DMI accomplishes preciselythis. WUE is significantly higher under DMI than under the flood method of irrigation(FMI), as shown in the table below.

Exhibit 19: Water consumption - much less under DMI than under FMI

Crop Water consumption Yield Water saving Yield increase

(mm/ha) (tonnes/ha) over FMI (%) over FMI (%)

FMI DMI FMI DMIVegetablesAsh gourd 840 740 10.8 12 12 11

Bottle gourd 840 740 38 55.8 12 47

Brinjal 900 420 28 32 53 14

Beetroot 857 177 4.5 4.9 79 9

Sweet potato 631 252 4.2 5.9 60 40

Potato 200 200 23.5 34.4 0 46

Lady’s finger 535 86 10 11.3 84 13

Onion 602 451 9.3 12.2 25 31

Radish 464 108 1 1.2 77 20

Tomato 498 107 6.1 8.9 79 46

Chillies 1097 417 4.2 6.1 62 45

Ridge Gourd 420 172 17.1 20 59 17

Cabbage 660 267 19.6 20 60 2

Cauliflower 389 255 8.3 11.6 34 40

Fruit cropsPapaya 2285 734 13 23 68 77

Banana 1760 970 57.5 87.5 45 52

Grapes 532 278 26.4 32.5 48 23

Lemon 42 8 1.9 2.5 81 32

Watermelon 800 800 29.5 88.2 0 199

Sweet lemon 1660 640 100 150 61 50

Pomegranate 1440 785 55 109 45 98

Other cropsSugarcane 2150 940 128 170 56 33

Cotton 856 302 2.6 3.2 65 23

Coconut 0 0 0 0 60 12

Groundnut 500 300 1.7 2.84 40 67


Exhibit 20: Investments needed to cover 17mn ha by end of Eleventh Plan

Particulars Rs bn US$ bnInvestments GoI share @ 40% as assistance 246 5.5

Corpus for Institutional support, data base, monitoring 6 0.1

State Govt. share @ 10% 61.5 1.4

Farmers contribution @ 50% as own contribution / bank credit 307.5 6.8

Loss due to abolishing Excise and Import Duty 51.24 1.2

Total Investments 672.24 14.9Benefits Value of 59 BCM water saved 450 10.0

Savings in electricity 38 0.8

Saving in fertilizer 180 4.0

Income due to increased production 638.83 14.2

Total benefit 1,306.83 29.0

Net benefit: RoI of 94% 634.59 14.1


JUNE 2004 18

SSKI INDIA

JISL- MANAGEMENT PROFILE

The Jain group is promoted by Bhavarlal Jain, a first-generation entrepreneur. Mr Jainstarted business in 1963, selling farm inputs like seeds and fertilizers, and equipmentlike tractors and irrigation plastic pipes. Today, the group has interests in a variety ofagri businesses, mainly micro-irrigation systems, food processing, and seeds. JISL is avertically-integrated agriculture company. It is the undisputed leader in drip-irrigationsystems, with an installed base of 500,000 hectares across the country, covering 40crops. JISL’s forte is its strong relationship with farmers. The company’s business prospectsare closely linked to the growth in agriculture. Consequently, JISL’s business performanceis subject to the agriculture sector’s seasonality, monsoons, and most important,government policies.

Exhibit 21: JISL- a timeline

Year Key event1978 Formation of Jain Plastics via acquisition of a papain processing unit

1980 Sets up a unit to manufacture PVC pipes for irrigation

1985 Starts making drip-irrigation systems, floats Jain Irrigation Systems Ltd (JISL)

1989-90: First maiden public offer, raises equity of Rs30mn

1991 Sets up an EoU - diversifies into plastics sheets

1992 ● Floats a Rs540mn public issue of partly-convertible debentures, at a premium of

Rs30/share

1994 ● Launches an EDR issue of US$30mn, with depository receipts priced at Rs350 apiece

● Diversifies into food-processing, granites and financial services

1995 Floats a public issue of Rs220mn for shares at a premium of Rs85 (JPCL)

1996 ● Cost overruns lead to losses in JPCL’s food-processing business

● JISL makes losses for the first time in its history

● Borrowings at an average rate of 25%

● Defaults to institutional and retail lenders

1998 JISL asks lenders to restructure loans; KPMG does viability study

2001 ● Restructuring complete. Lenders agree to postpone payments and cut rates. Debt

restructuring involves an amount of Rs4.89bn.

● Closure of all non-core businesses

2001 US-based Aqua International* commences due diligence

2002 ● Aqua invests US$38mn (Rs1.83bn) into JISL

● JISL partly repays debt amounting to Rs2.5bn

● JISL sells Polycarbonate Sheet business to GE Plastic and raised Rs. 190mn

2003 ● Micro Irrigation becomes National Priority

● Government appoints Task Force for Micro-Irrigation

2004 ● Actual implementation of MI projects in states such as Andhra Pradesh

● EoI from Maharashtra

Source: Company, SSKI Research* JISL made a preferential allotment of shares to Aqua International Partners at a price of Rs77/share, for a 49.4% stake forRs1.83bn. Aqua is a US$350mn fund established with the support of US Overseas Private Investment Corporation, anindependent federal agency that mobilizes private capital for investments. Aqua was founded by William Reilly, former Headof the US Environmental Protection Agency. As its name suggests, Aqua invests in water-related businesses, such asbottled water, purification, and pumps. Aqua has so far invested in eight companies all over the world, and the one in JISLis one of its biggest.

JUNE 2004 19

SSKI INDIA

Exhibit 22: JISL’s business interests


Jain Irrigation Systems Ltd.(JISL)

IrrigationSystems

Agro Processed Products

PlasticPiping

PlasticSheet

Drip IrrigationSprinkler Irrigation

Dehydrated OnionsFruit Puree

PVC PipesPE Pipes

PVC SheetsPC Sheets

Exhibit 23: Product applications and market presence

Product Use and application Brand Market share

Drip irrigation systems (DIS) Farm irrigation and landscaping Jain Drip About 45% in domestic market

Sprinkler irrigation systems (SIS) Farm irrigation and landscaping Jain Sprinkler About 35% in domestic market

PVC pipes Water supply, farm irrigation, plumbing Jain Pipe About 20% in domestic market

High-density polyethylene Water, sewerage, effluents, cable ducting, Jain Pipe About 20% in domestic market

(HDPE) pipes gas distribution

PVC sheets Excel 50% in domestic market, and

- Free foam Display boards, building and construction about 10% overseas

- Integral foam Advertising, signboards, interior designs

Poly-carbonate (PC) sheets Excel 80% in domestic market, 3%

- PC compact Building, construction, transport, advertising overseas

- PC Corrugated Greenhouses, stadium and industrial roofing

Dehydrated onion Fast-food, soups, salads Farm Fresh Largest manufacturer-exporterin India

Fruit puree and concentrate Baby foods, juices Farm Fresh One of the first 3 manufacturers


JUNE 2004 20

SSKI INDIA

BUSINESS OUTLOOK

JISL is the undisputed leader in micro-irrigation, with an integrated manufacturingcapacity and an unmatched distribution network. Its 40-year experience in supplyinga range of farming equipment has given it a strong franchise among farmers. Its otherbusinesses, mainly plastic pipes & sheets and food-processing, are also set for rapidgrowth over the next three years.

MICRO-IRRIGATION SYSTEMS (MIS): MORE CROP PER DROP

FY2005E: 31% of revenues, 41% of EBITDA

Why micro-irrigation?

MI is an advanced method of irrigation that involves focussed, efficient application offinely calibrated amounts of water to crops. This enables savings of water and power,and improves productivity. Installation of MIS requires high initial investments. Assuch, it is essential to subsidise these systems if farmers are to be persuaded to adoptthese systems. The government has decided to provide a 50% subsidy for MIS, with aceiling of Rs50,000 to Rs100,000 per farmer, depending on the crop.

The potential

Only about 1.2mn of India’s farmland is covered under MIS. There is huge scope toincrease this coverage, as it would save water and at the same time improve productivityand quality of produce. The government is likely to set up a target of covering 17mnhectares over the Tenth and Eleventh Plan periods. This would entail an investment ofRs615bn (US$13.6bn). The Task Force on Micro Irrigation has recommended covering69mn hectares under MIP (27mn hectares under drip irrigation, and 42mn hectaresunder sprinkler irrigation) in phases. Even assuming a robust growth of 25% a year,saturation in the business is at least 20 years away.

AP government kickstarts MIP

The government of Andhra Pradesh has launched its Water Stress-ManagementProgramme, estimated to cost Rs12bn over the next two years. Fifty percent of this willbe funded by the Rural Infrastructure Development Fund (RIDF) of NABARD. Thebalance 50% will come from bank loans to farmers. JISL has bagged bags nearly a thirdof the overall orders, reflecting its dominant market position. Other states have alsoexpressed their keenness on implementing MIS in their water-stress areas. If that happens,it would catapult JISL to a much higher growth trajectory.

Positioning of JISL

JISL is India's leading manufacturer of micro-irrigation systems, with a market share of45%. The company's micro-irrigation systems include irrigation through strip tubing,emitters, jets and mini-sprinklers. There need be no fear of competition, as the globaldrip-irrigation industry is currently worth just US$2bn a year-and the potential inIndia alone is estimated at US$13.6bn over the next eight years. Global leaders Netafimand Plastro have only a marginal presence in India. Given the huge size of the opportunityand JISL’s strong ground presence, we do not foresee any significant competitive pressuresfor the company.

The government has decidedto provide 50% subsidy for

MIS to promote investments

The Andhra Pradeshgovernment has already

launched a Rs12bn irrigationprogramme

JUNE 2004 21

SSKI INDIA

Exhibit 24: MIS cost structure*

Source: Company, SSKI Research; Average cost structure, based on different crops and spacing

Exhibit 25: Key financials - MIS & SIS projects

MIS / SIS (Rs mn) 2002 2003 2004 2005P 2006P 2007P 2008PRevenues 825 496 911 2140 3349 3885 4,520

% change yoy -14 -40 84 135 56 16 16

EBITDA 256 118 247 555 932 1085 1270

EBITDA growth (%) -22 -54 109 125 68 16 17

EBITDA (%) 31 24 27 26 28 28 28

Share of sales (%) 26 16 21 31 38 38 39

Share of EBITDA (%) 46 22 31 40 49 49 49


Exhibit 26: Assumptions: MIS/SIS

Business Growth 2004 2005 2006 2007 2008 2009Total 1,446 2,007 3,213 3,743 4,373 5,123

Base 5 683 717 753 791 830 872

Project 20 763 1,290 2,460 2,952 3,542 4,251

Price/Hectare 29,242 30,000 30,000 30,000 30,000 30,000

Hectare 26,082 43,000 82,000 98,400 118,080 141,700

% change yoy 38.8 60.1 16.5 16.8 17.2

Note: Annual project growth of 20% from the year 2007 onwards (including replacement market); Project growth during theyear 2004 and 2005 based on contracts in hand, and deals in negotiations.

Tubings, HE pipes,drippers, accessories,

and fittings(72.0%)

PVC pipes(13.0%)

Filter & fertiliser tank(10.0%)

Bought-outcomponents

(5.0%)

JUNE 2004 22

SSKI INDIA

POLYVINYL CHLORIDE (PVC) SHEETS: EXPLOSIVE GROWTH

22% of revenues, 30% of EBITDA (FY2005E)

Riding the export wave

JISL exports almost all of its PVC-sheet production to the US and Europe. In the US,foam sheets are fast replacing lumber, because of environmental and cost issues. JISLhas seen a sharp rise of late in exports of its premium product, higher-thickness free-foam sheets. We expect revenues from this segment to increase by 150% to Rs1.6bn inFY2005. Higher-thickness PVC sheets have found multiple applications. They arecurrently competing with natural wood, and this, we believe, would trigger sustainedgrowth over the next few years, with exports forming the biggest chunk of the segment.

Expansion to fuel growth

With increased growth potential, JISL has enhanced its capacities for PVC Sheets. Weexpect JISL to sell around 17000tonnes in the current fiscal with EBITDA contributionat a strong 25%. We understand that JISL has a 7% share of the world market for PVCsheets, which we expect to scale to levels of around 20% over the next 3 years.

Expect revenue CAGR of 40% over FY2004-FY2008

JISL’s revenues from PVC sheets have increased at an annualized 35% over the pastthree years. We expect growth to accelerate to 40% over the next four years. Our marginforecasts are conservative, and we believe they have an upside.

Exhibit 27: PVC sheets - financial projections

(Rs mn) 2002 2003 2004 2005P 2006P 2007P 2008PTurnover 367 484 661 1621 1865 2144 2466

Growth (%) 37 32 37 145 15 15 15

EBITDA 78 121 160 413 474 546 627

EBITDA Growth (%) 111 55 32 158 15 15 15

EBITDA (%) 21 25 24 25 25 25 25

Share of Sales (%) 12 15 16 23 21 21 21

Share of EBITDA (%) 15 23 20 30 25 25 24


JISL’s PVC-sheet businesswill be driven by exports,

mainly to the US

Expect revenue CAGR of 40%over FY2004-FY2008

JUNE 2004 23

SSKI INDIA

PVC & PE PIPES: LOW MARGINS, BUT STRONG CASH FLOWS


Low margins, robust cash flows

Pipes (both PVC and PE) yield good cash flows, although margins are low. Pipes currentlyaccount for 35% of JISL’s revenues and 16% of its EBITDA. Operating margins are inhigh single digits, and growth is estimated at 20% for FY2005. This business currentlyaccounts for about 25% of JISL’s turnover, but just 11% of its profit. We expect steadycash flows from this business, with stable input prices leading to a rise in margins. Thissegment's growth will be linked to that of micro-irrigation systems.

Mature markets; growth through new pursuits

PE pipes are used in telecommunications, sprinkler irrigation systems, gas distribution,and water conveyance. It's a small segment, but we expect rapid growth on the back ofhuge gas-pipeline projects as well as telecommunications. However, this business arefairly mature, with their margins unlikely to reflect any material gains. Development ofnew application for Ducting, Gas Distribution, Drainage & Sewerage etc. will boostdemand. But a bigger driver would be an increasing customer preference for productsfrom the organized sector, with increased institutional sales. Currently, the industryprocesses nearly 0.35mn tpa of PVC and PE pipes, with regional, unorganized playersaccounting for a large chunk of it. The big three in the sector are Supreme Industries,Finolex and JISL. JISL is also focussing on niche overseas markets for speciality pipingproducts with high margins.

Exhibit 28: Key financials - PVC pipes


Growth (%) 13 -12 29 23 12 12 12

EBITDA 61 48 96 119 137 158 181

EBITDA Growth (%) -33 -21 100 24 15 15 15

EBITDA (%) 5 5 8 8 8 8 8

Share of Sales (%) 35 31 30 22 20 19 19

Share of EBITDA (%) 10 9 12 9 7 7 7


Exhibit 29: Key financials - PE pipes


Growth (%) 3 89 -25 14 8 8 8

EBITDA -6 37 23 28 31 35 38

EBITDA Growth (%) -123 -38 22 11 13 9

EBITDA (%) -4 13 10 11 11 12 12

Share of Sales (%) 5 9 5 4 3 3 3

Share of EBITDA (%) -1 7 3 2 2 2 1


The pipes business promisesrobust cash flows, albeit on

modest margins

JUNE 2004 24

SSKI INDIA

POLYCARBONATE (PC) SHEETS: CONVERSION MARGINS


Divested to GE

JISL sold this business to GE Plastics in FY2003, but retained the right to use theassets on lease, to manufacture and supply to GE on a contract basis. JISL also retainedthe marketing rights in certain export markets such as US and Europe (markets otherthan Asia Pacific). In this business, JISL acts as a contract manufacturer for GE Plastics.As such, its business prospects hinge on GE's plans for growth. PC sheets are usedmainly by the building industry (roofing and interiors). We expect this business torecord a revenue CAGR of 14% over the next four years.

Steady conversion margins

Margins in this business are about 18-20%, and are likely to remain at these levels.The business is characterized by a huge dependence on basic raw material, i.e., mainresins. There are just three companies in the world in this business, and we see merit inJISL aligning itself with a global player in the segment to achieve consistent growthand profitability.

Little relevance to JISL’s overall business

Over the next few years, we expect the significance of this division to be lower than inthe past. From 11% of revenues coming from PC Sheets and a profitability of 10% inFY03, we expect a sharp scale down (despite growth), in turnover and profitability toaround 4% by FY2008.

Exhibit 30: PC Sheet


Growth (%) 23 51 -14 20 12 12 12

EBITDA 25 55 58 79 90 102 115

EBITDA Growth (%) 67 120 5 36 14 13 13

EBITDA (%) 11 16 20 22 23 23 23

Share of Sales (%) 7 11 7 5 5 4 4

Share of EBITDA (%) 4 10 7 6 5 5 4


In the polycarbonate sheetbusiness, expect a revenueCAGR of 14% over the next

four years

JUNE 2004 25

SSKI INDIA

ONION DEHYDRATION & FRUIT PROCESSING: POTENTIAL VALUE CREATION

13% of revenues, 11% of EBITDA

Onion-dehydration: Huge opportunity

The market for dehydrated vegetables is estimated at 900,000 tonnes. Onions andgarlic account for the biggest portion of this demand, 27% and 13%, respectively. Theglobal market for dehydrated onions is expected to grow at a compounded annual rateof 5% for the next four years. The major markets for dehydrated onions are in the USA,Europe and Japan. Dehydrated onions are widely used by manufacturers of soups,sauces, pizzas, ketchups, and fast-foods.

JISL has established itself as a high-quality player in the industry, supplying to leadingglobal brands, among them, Nestle, Schumacher, and Culinar. The key in this businesslies in existing global relationships and local procurement abilities—and JISL is strongin both aspects.

JISL is expanding capacity to tap growing demand

We expect significant improvement in the performance of JISL’s onion dehydrationplant. The company’s own plant is a 100% export-oriented unit (EOU), and it alsoproduces from two plants taken on lease. In order to achieve self-sufficiency in thisbusiness, the company plans to triple its production capacity within three years. Besides,it plans to diversify into dehydrated garlic. Both dehydrated onions and garlic have along shelf-life (about a year), are easy to handle, and can be transported over longdistances economically. Going forward, the plant would also produce other dehydratedvegetables.

CAGR: 31%

We expect capacity expansion to drive a CAGR of 21% in revenues and 31% in EBITDAin JISL’s vegetable-dehydration business over the next four years. An increase in yieldswould expand margins.

Exhibit 31: Onion dehydration

(Rs mn) 2002 2003 2004 2005P 2006P 2007P 2008PRevenues 200 260 364 457 549 658 790

Growth (%) 45 30 40 26 20 20 20

EBITDA 59 42 54 81 103 130 162

EBITDA growth (%) -838 -29 29 50 27 26 25

EBITDA (%) 30 16 15 18 19 20 21

Share of sales (%) 6 8 9 7 6 7 7

Share of EBITDA (%) 9 8 7 6 5 6 6


Onion dehydration: Globaldemand is expected to growat a compounded rate of 5%

over the next four years

JISL is expanding capacity totap growing demand

JUNE 2004 26

SSKI INDIA

Fruit processing: Increasing product bandwidth

Fruit-processing is another key business. JISL currently processes mango, banana andguava, and sells its products to Coca Cola and Nestle, among others. We understandthat Coca Cola has expressed an interest in a strategic relationship with JISL to fuelgrowth in this business. This being a seasonal business, it is imperative for JISL toexpand its product portfolio across more types of fruit.

Industry coming of age

The Indian fruit-processing industry is coming of age, becoming relevant even in thedomestic food segment. One sign of the industry’s growing stature is the Andhra Pradeshgovernment’s invitation to JISL to set up a ‘Food Park’ in the state.

The growth in the domestic market for fruit puree and concentrates is driven by aggressivemarketing of fruit juices and nectars by such majors as Coca Cola, Parle, Godrej, andDabur. The domestic market for fruit purees and concentrates is estimated at around60,000tpa.

JISL has set up a large fruit-processing unit in Jalgaon, which is one of Asia’s biggestsources of bananas. The company also has captive platations of bananas and mangoes,covering 480 acres. We expect this business of JISL to register a CAGR of 18% inrevenues and 24% in EBITDA over the next four years.

Exhibit 32: Fruit processing - financial projections


Growth (%) 35 64 36 12 20 20 20

EBITDA 34 31 57 66 84 106 132

EBITDA Growth (%) -9 84 16 27 26 25

EBITDA (%) 20 11 15 16 17 18 18

Share of Sales (%) 5 9 9 6 6 6 6

Share of EBITDA (%) 5 6 7 5 4 5 5


JUNE 2004 27

SSKI INDIA

FINANCIALS, VALUATION AND RECOMMENDATION

JISL recorded revenues of US$100mn in FY2004, and its target market is potentiallyworth an estimated US$13bn. We expect the company’s revenues to grow by 62% inFY2005, and subsequently post a CAGR of 30% over four years. EBITDA would rise84% in FY2005, and margins would expand by 350bps over the next three years. Thiswould drive a CAGR of 104% in the company’s net profit over FY2005-FY2008. Thecompany’s gearing curently stands at 1.55x, and we expect it to drop to zero in threeyears. The stock is trading at a PER of 4.7 and EV/EBITDA of 2.7 on FY2006E—cheap fora company delivering an RoCE of 27%. We are initiating coverage on JISL with anOutperformer rating—buy with an 18-month price target of Rs150.

Exhibit 33: Financial projections

Rs mn 2002 2003 2004 2005P 2006P 2007P 2008PRevenue 3,154 3,209 4,249 6,903 8,793 10,110 11,646

Growth 11% 2% 32% 62% 27% 15% 15%

Exports 942 1,157 1,404 2,669 3,083 3,565 4,125

EBIDTA 538 532 747 1,372 1,886 2,199 2,570

EBITDA (%) 17.1% 16.6% 17.6% 19.9% 21.4% 21.8% 22.1%

Interest 490 457 477 367 350 296 219

Depreciation 216 212 214 228 247 260 275

Ordinary Income (Net) 83 227 -28 0 0 0 0

PBT -85 90 28 777 1,289 1,644 2,076

Current taxation 0 0 0 61 101 484 774

Deferred taxation -64 -333 -47 237 377 131 0

PAT -22 423 75 479 810 1,028 1,302

Cash earnings 47 75 270 943 1,434 1,419 1,578


Key features

q Revenue CAGR over 4 years: 29%

q EBITDA CAGR over 4 years: 36%

q Net profit CAGR over 4 years: 104%

q Interest costs may fall further, following a sharp decline in interest rates

We expect JISL to record aCAGR of 29% in revenues and

36% in EBITDA over the nextfour years

JUNE 2004 28

SSKI INDIA

Exhibit 34: Revenue distribution

Division (Rs mn) 2002 2003 2004 2005P 2006P 2007P 2008PMIS/SIS (Base) 825 496 683 854 897 942 989

MIS/SIS (Project) 0 0 229 1,286 2,452 2,943 3,531

PVC pipes 1,116 983 1,265 1,552 1,739 1,947 2,181

PE pipes 156 295 222 252 273 294 318

PVC sheets 367 484 661 1,621 1,865 2,144 2,466

PC sheets 228 345 295 355 398 446 499

Onion dehydration 200 260 364 457 549 658 790

Fruit processing 166 273 372 416 499 598 718

Banana tissue culture 22 36 46 46 53 61 70

Solar water-heaters 34 32 50 63 69 76 83

Others 41 5 69 0 0 0 0

Total 3,154 3,209 4,257 6,903 8,793 10,110 11,646

Growth (%) 10.9 1.7 32.7 62.1 27.4 15.0 15.2


Key Issues

q 29% CAGR in revenues aided by a 50% CAGR in revenues from irrigation

q PVC-sheet business likely to register a revenue CAGR of 40% over 4 years

q All businesses set for double-digit growth rates

q Upsides possible in micro-irrigation project business, depending on how quicklythe government implements projects

Exhibit 35: Operating profit (EBITDA) - Gains in all segments

Division (Rs mn) 2002 2003 2004 2005E 2006P 2007P 2008P 4-year

CAGR (%)MIS/SIS 246 118 247 555 932 1,085 1,270 51

PVC Pipe 56 48 96 119 137 158 181 17

PE Pipes -7 37 23 28 31 35 38 14

PVC Sheet 78 121 160 413 474 546 627 41

PC Sheet 20 55 58 79 90 102 115 19

Onion Dehydration 51 42 54 81 103 130 162 32

Fruit Processing 28 32 57 66 84 106 132 24

Banana Tissue Culture 6 16 19 17 20 24 28 11

Solar Water Heater 5 6 8 12 13 15 16 21

Others 55 58 69 0 0 0 0

Total EBITDA 538 532 790 1,372 1,886 2,199 2,570 34

EBITDA (%) 17.1 16.6 18.6 19.9 21.4 21.8 22.1 Up 350bps


Key Issues

q The most-profitable businesses are also the fastest-growing

q 4-year EBITDA CAGR: 51% in MIS, 41% in PVC sheets

q Consistent growth in the agri-processing portfolio (onion dehydration and fruitprocessing).

Expect all-round growth inJISL’s business

JUNE 2004 29

SSKI INDIA

Exhibit 36: EBITDA margins (%)

Division 2002 2003 2004 2005P 2006P 2007P 2008P Swing (bps)MIS/SIS 29.9 23.8 27.0 25.9 27.8 27.9 28.1 +110bps

PVC pipes 5.0 4.8 7.6 7.7 7.9 8.1 8.3 +70bps

PE pipes -4.5 12.6 10.3 11.3 11.5 11.8 12.1 +180bps

PVC sheets 21.3 25.1 24.2 25.4 25.4 25.4 25.4 +120bps

PC sheets 8.7 16.1 19.7 22.3 22.6 22.8 23.0 +330bps

Onion dehydration 25.4 16.0 14.9 17.8 18.8 19.7 20.5 +560bps

Fruit processing 16.9 11.6 15.2 16.0 16.9 17.7 18.4 +320bps

Total 17.1 16.6 18.6 19.9 21.4 21.8 22.1 +350bps


Key Issues

q We believe our margin assumptions are conservative, and have possible upsides

q Expect no major change in margins of key businesses (overall EBITDA margins toincrease by 350bps over the next four years)

q Historical volatility in margins will decline sharply as scale benefits kick in

Exhibit 37: Contribution to overall revenues (%)

Division 2002 2003 2004 2005P 2006P 2007P 2008PMIS/SIS (Irrigation) 26 15 21 31 38 38 38

PVC / PE pipes 40 40 35 26 23 22 22

PVC / PC sheets 19 26 23 28 26 25 25

Agri processing (Onion/Fruit) 12 17 17 13 12 12 13

Others 3 2 4 2 2 2 2

Total 100 100 100 100 100 100 100


Exhibit 38: Contribution to EBITDA (%)

Division 2002 2003 2004 2005P 2006P 2007P 2008PMIS/SIS (Irrigation) 46 22 31 40 49 49 49

PVC / PE pipes 9 16 15 11 9 9 8

PVC / PC sheets 19 33 27 36 30 30 28

Agri processing (Onion/Fruit) 14 14 14 11 9 11 11

Others 12 15 12 2 2 2 2

Total 100 100 100 100 100 100 100


Key Issues

q Irrigation systems and PVC sheets will be the biggest drivers of revenue growthand margin expansion

q EBITDA contribution of low-profitability segments (such as pipes) will declinesharply, from 40% to less than 22%. Their net-profit contribution would declinefrom 16% to 8%.

Our calculations indicate astrong growth in margins over

the years ahead

JUNE 2004 30

SSKI INDIA

Exhibit 39: Financial Ratios: Zero-debt by FY2008

2002 2003 2004 2005P 2006P 2007P 2008PDebt-equity ratio (x) 6.4 2.1 1.5 0.9 0.6 0.4 0.3

Interest cover (x) 1.1 1.2 1.6 3.7 5.4 7.4 11.8

Interest to net sales (%) 15.6 14.2 11.2 5.3 4.0 2.9 1.9

Fixed-asset turnover (x) 1.0 1.1 1.3 2.2 2.8 3.1 3.6

Current ratio (x) 1.2 0.9 1.1 1.4 1.6 1.8 2.0

ROCE (%) 5.9 9.7 13.2 21.2 27.1 24.0 22.5

EPS (Rs) -7.4 -2.8 1.4 8.8 14.9 18.9 24.0

Cash EPS (Rs) 2.1 1.6 5.0 17.4 26.4 26.1 29.0

Book value (Rs/share) -16.6 29.1 21.4 40.7 61.9 82.5 105.9


Key Issues

q With cash generation surging, gearing would decline from 6.4x to less than 0.3xby end-FY2008

q JISL will cut long-term debt to zero within three years

q RoCE set to expand from 13% to 22%; incremental capex limited to 5% of revenues

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SSKI INDIA

Exhibit 40: Income statement

Year to 31 March (Rs mn) 2004 2005E 2006E 2007E 2008ERevenues 4,248 6,903 8,793 10,110 11,646

yoy growth (%) 29 62 27 15 15

Domestic 2,775 4,235 5,709 6,545 7,521

Export 1,404 2,669 3,083 3,565 4,125

Variable expenses 3,141 5,061 6,396 7,357 8,474

Raw material 2,408 3,758 4,804 5,526 6,366

yoy growth (%) 56 28 15 15

Bought-out components 0.0 209 228 249 272

Packing material 0 132 156 182 213

Stores & Spares 115 134 176 204 237

Power & Fuel 181 271 320 369 426

General Manufacturing 98 106 129 149 172

Freight & Handling Charges 204 323 421 491 573

Commission on sale 5.9 9.7 10.9 12.3 13.9

Sales-tax 11.4 11.2 12.1 13.2 14.4

Excise duty 56.1 39.2 43.7 48.7 54.4

Selling 61.5 66.6 97.2 112.9 131.4

Contribution margin (%) 1,108 1,843 2,396 2,753 3,172

% to revenue 26.1 26.7 27.3 27.2 27.2

Fixed expenses 361 449 482 518 558

Salary 233 295 316 340 365

Manufacturing 122 131 141 152 164

Marketing 45 87 92 98 104

Administration 66 77 83 90 98

Other expenses 128 154 166 179 193

EBIDTA 747 1,372 1,886 2,199 2,570

% to Revenue 17.6 19.9 21.4 21.8 22.1

Interest 477 368 350 296 219

Depreciation 214 228 247 260 275

PBT 28 777 1,289 1,644 2,076

Current taxation 0 61 102 484 774

Deferred taxation (47) 237 377 131 0

Profit after tax 75 479 810 1,028 1,303

Preference dividend 37 37 36 36 35

Retained cash earnings 233 906 1,398 1,384 1,543


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SSKI INDIA

Exhibit 41: Balance sheet

As on 31 March (Rs mn) 2004 2005E 2006E 2007E 2008EEquity share capital 543.5 543.5 543.5 543.5 543.5

Preference share capital 935.3 935.3 910.3 885.3 885.3

Reserves & Surplus 1,365 2,177 2,950 3,943 5,211

Shareholders’ net worth: 2,844 3,656 4,404 5,372 6,639

Secured loans - Long-term 1,325 1,190 1,002 609 181

Unsecured loans - Long-term 331 183 26 16 15

Unsecured loans - Short-term 93 93 93 93 93

Secirity deposits from dealers 52 52 52 52 52

Working-capital loan 1,465 1,465 1,465 1,465 1,465

Loan funds: 3,266 2,984 2,639 2,236 1,807

Total capital & liabilities 6,110 6,639 7,043 7,608 8,446

Gross fixed assets 4,771 5,043 5,421 5,685 5,992

Depreciation -1,681 -1,909 -2,156 -2,415 -2,691

Net fixed assets: 3,090 3,135 3,266 3,269 3,301

Group companies 140 140 140 140 140

Others 10.4 10.4 10.4 10.4 10.4

Investment 150 150 150 150 150

Group companies 184 184 184 184 184

Other advances 117 117 117 117 117

Loans & advances 301 301 301 301 301

Inventory 1,007 963 1,080 1,173 1,278

Receivables 1,477 1,983 2,393 2,688 3,031

Cash & bank balance 203 199 481 858 1,385

Other current assets 453 538 648 750 794

Creditors for purchases -1,178 -998 -1,268 -1,445 -1,658

Accounts payable -1,073 -915 -1,165 -1,328 -1,526

Accounts payable -105 -83 -103 -116 -132

Other current liabilities -175 -175 -174 -173 -173

Net current assets 1,788 2,509 3,159 3,851 4,658

Other current assets 36 36 36 36 36

Deferred tax assets 745 508 131 0 0

Total assets 6,110 6,639 7,043 7,608 8,446


VALUATION AND RECOMMENDATION

Buy with a price target of Rs150

JISL recorded revenues of US$100mn in FY2004, and its target market is potentiallyworth an estimated US$13bn. We expect the company’s revenues to grow by 62% inFY2005, and subsequently post a CAGR of 30% over four years. EBITDA wouldrise 84% in FY2005, and margins would expand by 350bps over the next threeyears. This would drive a CAGR of 104% in the company’s net profit over FY2005-FY2008. The company’s gearing curently stands at 1.55x, and we expect it to dropto zero in three years. The stock is trading at a PER of 4.7 and EV/EBITDA of 2.7on FY2006E—cheap for a company delivering an RoCE of 27%. We are initiatingcoverage on JISL with an Outperformer rating—buy with an 18-month price targetof Rs150.

JISL is trading at a veryattractive valuation—buy with

a price target of Rs150

JUNE 2004 33

SSKI INDIA

This document has been prepared by S.S. Kantilal Ishwarlal Securities Pvt. Ltd. (SSKI) and is meant for use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It shouldnot be considered to be taken as an offer to sell, or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied uponas such. We may from time to time have positions in, or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentionedin this document.

SSKI INDIA

Income statement

Year to 31 March (Rs mn) 2002 2003 2004 2005E 2006E 2007E 2008ENet Sales 3 ,154 3,209 4,248 6,903 8,792 10,110 11,646

% yoy Growth 1.7% 32.4% 62.5% 27.4% 15.0% 15.2%Total cost 2,616 2,677 3,501 5,531 6,906 7,910 9,076EBITDA 538 532 747 1,371 1,885 2,199 2,570Depreciation 215 211 214 227 246 259 275Interest 490 456 476 367 350 295 218PBT (85) 90 28 776 1,288 1,643 2,076Tax(including deferred tax) (63) (332) (47) 298 478 615 773

Net profit -21.6 423.1 75 478 810 1028 1302

Balance sheet

As on 31 March (Rs mn) 2002 2003 2004 2005E 2006E 2007E 2008EShare capital 543 543 543 543 543 543 543Shareholders funds 250 1,102 1,554 2,603 3,729 4,828 6,095Total debt 5,058 3,437 3,214 2,931 2,586 2,183 1,754Total liabilities 5 ,852 5,083 5,312 6,078 6,859 7,555 8,393Net fixed assets 3,277 3,116 3,079 3,124 3,255 3,258 3,290Investments 140 151 150 150 150 150 150Gross current assets 3,434 3,054 3,435 3,977 4,896 5,765 6,783Current liabilities 999 1,238 1,352 1,173 1,442 1,618 1,831Net current assets 2,434 1,815 2,082 2,804 3,453 4,147 4,952

Total assets 5 ,851 5,082 5,311 6,078 6,858 7,555 8,392

Cash flow statement

Year to 31 March (Rs mn) 2002 2003 2004 2005E 2006E 2007E 2008EProfit before tax (85) 90 28 776 1,288 1,643 2,076Depreciation 215 211 214 227 246 259 275Tax paid - - - 61 101 484 773Cash from operation 130 302 242 943 1,434 1,419 1,577Increase/(Decrease) in WC (650) 102 725 367 316 278Cashflow from operations (348) 140 217 1,066 1,103 1,299Capital Expenditure 88 (189) (272) (377) (263) (307)Investments (11) 1 - - - -Dividends (37) (37) (36) (35) (35)Cashflow from investing (225) (309) (414) (299) (342)Increase in borrowings (1,621) (223) (283) (345) (403) (429)Cashflow from financing (1,621) (223) (283) (345) (403) (429)

Increase/(Decrease) in cash (1,969) (308) (374) 307 401 527

Key ratios

Year to 31 March (Rs mn) 2002 2003 2004 2005E 2006E 2007E 2008EEBITDA Margin (%) 17.1 16.6 17.6 19.9 21.4 21.8 22.1PAT margin(%) -0.7 13.2 1.8 6.9 9.2 10.2 11.2ROCE (%) 5.9 9.7 13.2 21.2 27.1 24.0 22.5Total Debt/ Equity(x) 6.4 2.1 1.5 0.9 0.6 0.4 0.3

Sales/ GFA(x) 0.68 0.70 0.89 1.37 1.62 1.78 1.94

Valuations

Year to 31 Dec 2002 2003 2004 2005E 2006E 2007E 2008EEPS (Rs) -0.4 7.8 1.4 8.8 14.9 18.9 24.0PER (x) -188.6 9.6 54.1 8.5 5.0 4.0 3.1EV/ EBITDA (x) 12.9 13.0 9.3 4.9 2.8 2.0 1.2EV/ sales(x) 2.2 2.2 1.6 1.0 0.6 0.4 0.3

Price/ BV(x) -4.5 2.6 3.5 1.8 1.2 0.9 0.7

Jain Irrigation Rs68 Systems Ltd. (JISL) OUTPERFORMERfalling from a peak of 6.4x to the current...

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