Brokerage house Motilal Oswal is bullish on Jain Irrigation Systems and has recommended buy rating on the stock with a target price of Rs 140, in its research report dated May 19, 2014.
With a focus on progressive states and switch to a NBFC-based model, we expect Jain Irrigation's (JI) working capital concerns to be allayed over FY14-16. Hence, we expect strong free cash generation which should aid in reducing debt equity from 1.6x in FY14 to 1.0x in FY16E. Policy impetus from the new government in the form of direct credit of subsidy or a reduced working capital model on the lines of GGRC can be potential game changer events. We value JI at 14x FY16E EPS of INR10.
JI's management has moved away from doing business in TN, Karnataka and AP due to substantial delays in payments. As a result, revenue contribution from these states has declined from 21% in FY12 to 8% in FY14 and is further slated to decline to 3% of total MIS revenue in FY16E. Growth over FY14-16E will be driven by higher contribution from progressive states like Maharashtra and Gujarat whose revenue contribution is expected to increase from 47% in FY14E to 53% in FY16E.
With a focus on progressive states and switch to NBFC-based model, we expect JI's working capital concerns to be allayed over FY14-16. Hence, we expect strong free cash generation which should help in reducing debt equity from 1.6x in FY14 to 1x in FY16E. Policy impetus from the new government in the form of direct credit of subsidy or a reduced working capital model on the lines of GGRC can be potential game changer events. We value JI at 14x FY16E EPS of INR10 and arrive at a target price of INR140, implying 40% upside. We initiate coverage with a Buy rating", says Motilal Oswal research report.
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