Fitch Affirms Jain Irrigation at 'B+'; Outlook Positive

Jain Irrigation Systems

11/01/2019 07:14

(The following statement was released by the rating agency)


Fitch Ratings-Singapore/Mumbai-January 11: Fitch Ratings has affirmed 
India-based micro-irrigation company Jain Irrigation Systems Limited's (JISL) 
Long-Term Issuer Default Rating (IDR) at 'B+'. The Outlook remains Positive. The 
agency has also affirmed JISL's USD200 million 7.125% senior unsecured notes due 
in 2022 at 'B+' with Recovery Rating of 'RR4'. The notes are issued by JISL's 
wholly owned subsidiary Jain International Trading B.V. and guaranteed by JISL.

The affirmation with Positive Outlook reflects Fitch's expectation of further 
improvement in JISL's leverage following a healthy operating performance over 
the last 12 months and satisfactory deleveraging in line with our expectations. 
We expect JISL's leverage (defined as lease adjusted debt net of cash adjusted 
for seasonality/EBITDAR) to reduce below 3.5x by the financial year ending 31 
March 2020 (FY20) from 4.4x at FYE18 and 4.9x at FYE17, supported by continued 
growth in EBITDA and a prudent approach to growth investments. However, the bulk 
of the company's micro-irrigation business, which accounts for around 60% of its 
EBIT, is susceptible to unpredictable weather patterns and India's vulnerable 
agricultural sector, which poses risks to the company's deleveraging.

JISL's ratings incorporate its high, albeit improving leverage, and its strong 
business risk profile as a globally diversified producer of micro-irrigation 
systems (MIS), a leading manufacturer and distributor of polyvinyl chloride and 
polyethylene pipes in India for industrial and residential uses, as well its 
leading position in supplying processed fruits and vegetables to leading 
multinational fast-moving consumer goods companies across several geographies.

KEY RATING DRIVERS

Favourable Growth Prospects: JISL's MIS business in India is poised for 
sustained growth over the next several years as India continues to take steps to 
reduce the agriculture sector's dependence on erratic rainfall by promoting the 
use of more efficient micro-irrigation systems. Similarly, JISL's pipes business 
stands to benefit from the government's focus on developing urban 
infrastructure, such as roads, water supply and sewage services, solid waste 
management and storm water drains, over the medium to long term. Recent 
investments into orange and spice processing facilities will support growth in 
JISL's food processing business.

Progress under government programmes, such as Pradhan Mantri Krishi Sinchai 
Yojana (PMKSY, planned outlay of INR500 billion over FY16-FY20), Smart Cities 
Mission (INR2 trillion) and Atal Mission for Rejuvenation and Urban 
Transformation (AMRUT, INR500 billion), have led to a robust increase in JISL's 
order book for these segments to more than INR37 billion as of September 2018 
from INR27 billion a year ago. We expect JISL's order book to expand further as 
its leading position and track record in providing end-to-end solutions in large 
projects supports its competitive positioning.     

Improving FCF to Aid Deleveraging: JISL's deleveraging during FY18 remained 
broadly in line with Fitch's expectations as lower working capital investments 
boosted operating cash flows and supported a higher-than-expected level of 
capex. JISL's free cash flow (FCF) will remain positive from FY20 with improving 
EBITDA and a moderate level of growth capex. 

Fitch expects JISL management to take a measured approach to growth and use free 
cash to repay debt, in line with its publicly articulated strategy. In 
particular, the acquisitions in FY18 have improved JISL's access to overseas 
markets and capacity utilisation will remain comfortable over the medium term, 
which will limit need for any significant investments. However, any significant 
acquisitions or high level of growth capex would impact the pace of deleveraging 
and may prompt a revision in the Outlook to Stable.              

Cash-Flow Seasonality: JISL's sales are slower during the first half of the 
fiscal year than the second half, which results in a higher cash balance at the 
fiscal year-end compared with other quarters. This is primarily because sales of 
MIS in India depend on the performance of the monsoon rains, which usually occur 
between June and September. Fitch therefore deducts INR1 billion from JISL's 
year-end cash balance when calculating the year-end leverage ratio to account 
for this seasonal variance. 

Leading Market Position; Diversification: JISL's leading market position 
underpins its competitive strength in its key products. JISL is the largest 
manufacturer of MIS in India by sales and number two in the world. It is also 
the world's largest mango processing company, and second-largest producer of 
dehydrated onions. The company is also one of the largest manufacturers in India 
of plastic pipes. JISL's diversification across products and geographies helps 
to reduce its exposure to volatility in individual end-markets. Overseas markets 
accounted for 47% of revenue in FY18, while plastic pipes and food processing 
accounted for 20% and 12% of operating profits, respectively, which helps to 
reduce dependence on the MIS business. 

DERIVATION SUMMARY

Fitch does not rate any of JISL's direct competitors. However JISL may be 
compared with companies in the diversified manufacturing segment, such as JSC 
HMS Group (HMS, B+/Stable), Hilong Holding Limited (Hilong, B+/

Stable) and Borets International Limited (Borets, BB-/Stable).

HMS is a major pump, compressor and equipment manufacturer for the oil and gas 
industry in Russia and the Commonwealth of Independent States. Its rating 
factors in the group's leading market position and stable demand from the oil 
industry, but also the lack of diversification by customer and geography and a 
low share of after-market services. JISL has a stronger business risk profile 
than HMS due to its larger operating scale and more diversified cash flows 
across geographies and end-markets. These help to counterbalance JISL's higher 
leverage and support its rating at the same level as HMS.

Hilong is a leading provider of drill pipe manufacturing and oil country tubular 
good (OCTG) coating services in China, where it enjoys about 45%-50% market 
share. Hilong's rating reflects its growing international presence but also 
small operating scale, dependence on the oil and gas industry and low earnings 
visibility. JISL has a broadly similar business and financial risk profile, 
supporting its rating at the same level as Hilong.

Borets is a leading manufacturer of electrical submersible pump (ESP) systems 
globally with a market share of about 28%. Borets benefits from a solid share of 
after-market revenue and higher profitability than peers. However, its rating is 
constrained by its relatively small scale and limited business diversification 
with the oil and gas industry as its primary end-market. JISL's large size and 
more diversified business profile help to counterbalance its exposure to 
relatively more volatile end markets than Borets's. JISL is rated one notch 
lower than Borets, which has lower leverage as well as sustainable free cash 
generation. 

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Revenue growth of 16% in FY19 and around 9% a year thereafter, supported by 
robust demand in the mirco irrigation and  plastics segments and recent 
investments in the food processing business 

- EBITDA margin of 13% to 14% in the next two to three years

- Annual capex to average INR3.8 billion over FY19 to FY21

- Dividend payout to remain below 20% of net income 

Recovery Rating Assumptions 

- The recovery analysis assumes that JISL would be considered a going-concern in 
bankruptcy and that the company would be reorganised rather than liquidated. We 
have assumed a 10% administrative claim.

- We have assumed that JISL's going-concern EBITDA is equal to JISL's EBITDA in 
FY18 with no further discount applied. This remains conservative because it does 
not factor in EBITDA growth we expect JISL to post over the medium term. It 
reflects Fitch's view of a sustainable, post-reorganisation EBITDA level, upon 
which we based the valuation of the company.

- An enterprise value (EV) / EBITDA multiple of 6x is used to calculate the 
post-reorganisation valuation and we believe this is closer to a distressed 
multiple, considering that as of 31 March 2018, JISL was trading at a EV/EBITDA 
multiple of around 9x.

- We used secured and unsecured debt as of 31 March 2018. The compulsory 
convertible debentures, USD200 million bonds issued by Jain International 
Trading B.V., vendor financing in trade-payables reclassified as debt, and the 
foreign currency convertible bonds are treated as unsecured debt.

- We have assumed that JISL's sanctioned but undrawn lines of INR13.8 billion 
will be fully drawn at the point of distress, and that these lenders would have 
a prior ranking claim on JISL's assets ahead of bond investors.

- The recovery waterfall results in a 71%-90% recovery estimate corresponding to 
a 'RR2' Recovery Rating for the USD200 million unsecured notes. Nevertheless, 
Fitch has rated the senior notes at 'B+' with a Recovery Rating of 'RR4' because 
under Fitch's Country-Specific Treatment of Recovery Ratings criteria, India 
falls into 'Group D' of creditor friendliness. Instrument ratings of issuers 
with assets in this group are subject to a soft cap at the issuer's IDR.

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action

- Lease adjusted debt net of cash adjusted for seasonality /operating EBITDAR 
sustained below 3.5x

- Ability to generate sustained neutral free cash flow

Developments That May, Individually or Collectively, Lead to Negative Rating 
Action

- Not meeting the positive rating sensitivities for an extended period will 
result in the Outlook being revised to Stable

LIQUIDITY

Comfortable Liquidity: At FYE18, JISL had readily available cash (net of cash 
adjustment for seasonal variations) of INR3.0 billion and approved but undrawn 
credit facilities of INR13.8 billion which will sufficiently cover INR1.9 
billion of vendor financing and INR3.1 billion of long-term debt maturing in 
FY19 and INR0.7 billion of negative free cash flow. The group had a further 
INR15.0 billion of short-term working capital debt, which we expect lenders to 
roll over during the normal course of business, given the group's satisfactory 
credit profile. Debt maturities in FY20 and FY21 are manageable at below INR5 
billion. Fitch believes JISL's improving free cash generation and leverage will 
support its refinancing ability in FY22 when debt maturities will exceed INR15 
billion.

Contact: 

Primary Analyst

Hasira De Silva, CFA

Director

+65 6796 7240

Fitch Ratings Singapore Pte Ltd

One Raffles Quay

South Tower #22-11

Singapore 048583

Secondary Analyst

Snehdeep Bohra

Associate Director

+91 22 4000 1732

Committee Chairperson

Kalai Pillay

Managing Director

+65 6796 7221

Summary of Financial Statement Adjustments 

- Added back a net INR0.3 billion to JISL's FY18 EBITDA in order to exclude 
certain non-cash / non-operating items, including provisions for doubtful 
advances, bad debts and irrecoverable claims and fair value changes. 

- The full value of JISL's compulsory convertible debentures is treated as debt

- JISL extends a corporate guarantee of up to INR1 billion on the debt of its 
associate Sustainable Agro-Commercial Finance Limited (SAFL), which we include 
as off-balance-sheet debt, when computing leverage.

- JISL includes vendor financing as part of its trade payables. However we have 
removed this from payables and treated it as debt as it extends JISL's normal 
working capital cycle significantly. Vendor financing amounted to INR2.4 billion 
and INR1.9 billion, respectively, for FY17 and FY18. 

- We have excluded INR1 billion from JISL's reported year-end cash in order to 
account for a typically lower cash balance during other fiscal quarters.

Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: 
bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: 
leslie.tan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Hybrids Treatment and Notching Criteria (pub. 09 Nov 2018)

https://www.fitchratings.com/site/re/10051058

Corporate Rating Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023785

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Country-Specific Treatment of Recovery Ratings Criteria (pub. 16 Apr 2018)

https://www.fitchratings.com/site/re/10026835

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10059066

Solicitation Status 

https://www.fitchratings.com/site/pr/10059066#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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