Mount Kellett leads $73M equity infusion in Jain Irrigation
Jain Irrigation

Jain Irrigation Systems Ltd is raising $73 million (Rs 405 crore) through an issue of equity shares to Mount Kellett Capital Management and IFC. The biggest irrigation equipment maker in Asia, whose share price recently hit a three-year low, is also raising another $130 million (Rs 721 crore) through external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs).

The funds will be used to cut the high cost short-term loans of the company besides long-term loans due this fiscal. A part of it will be also invested in one of its subsidiaries – a new non-banking financial company, focused on agriculture and rural markets.

Mount Kellett Capital, a multi-strategy investment firm set up by former Goldman Sachs executives, is leading the equity round with a Rs 349 crore investment in the company. Jain Irrigation will issue a little over 43 million shares to Mount Kellett entities, who will together own 9.8 per cent stake.

IFC is also investing Rs 56 crore for 7 million shares or 1.6 per cent stake. As the World Bank arm already owns 1.71 per cent stake in Jain Irrigation, which also counts Singapore’s sovereign wealth fund Temasek among its investors, the fresh investment will increase its stake to 3.31 per cent.

The preferential issue is being made at Rs 80 per share, which is nearly 25 per cent premium to Jain Irrigation’s closing price of Rs 64.20 on Tuesday. The shares of the firm fell 5 per cent in the morning trade on Wednesday and were trading at Rs 62.6 a unit, down 2.49 per cent in afternoon trade on the BSE. Its 52-week low is at Rs 60 per share.

"We believe equity issuance is value accretive and shall help us to deleverage our balance sheets, convert short term liabilities into long term liabilities and also provide liquidity for operations while strengthening and re-rating our balance sheet," said Anil B Jain, managing director of Jain Irrigation. He added that the funds will help match its currency liabilities with its foreign currency earnings from exports as well as overseas subsidiaries thus nullifying any impact of rupee depreciation.

IFC ups exposure to Jain

IFC is also "contributing significantly" to the FCCB issue, through which Jain Irrigation is raising $55 million. It is also participating in the ECB issue, where the company is raising $75 million. ECB will have a tenor of 6-10 years and has also seen participation from Rabo Bank and European development finance institutions.

FCCBs will be convertible into equity shares at Rs 115 per unit anytime over the next five years. They will carry a coupon of 3 per cent (per annum) and yield to maturity of 6 per cent.

This round would significantly increase IFC's bet on Jain Irrigation, with which it is also partnering for the NBFC business. Jain Irrigation last year announced formation of Sustainable Agro-Commercial Finance Limited, NBFC which will provide loans to Indian small-scale farmers. IFC is a founding shareholder in this unit, which is expected to start operations from October.

Changing business model

Jain Irrigation makes drip and sprinkler irrigation systems, which the government subsidises to farmers. The company collects the subsidies from government, which take as much as 18 months leading to working capital issues and rising interest cost.

To deal with this, Jain Irrigation started a slowdown in its micro-irrigation services (MIS) business and focus on cash collection. The formation of an NBFC, Sustainable Agro-Commercial Finance, is also a part of this plan. The NBFC will help Jain Irrigation borrow at a lower cost and get paid upfront.

The current investment will help Jain Irrigation reduce its consolidated gross debt, which stood at Rs 3,900 crore as on June 2012. "We expect annualised savings on interest alone to be in range of Rs 80 to 100 crore resulting in better bottom line and expect to improve our gearing which shall further improve our credit rating in market," said Jain.

But the change in strategy has had an impact on Jain Irrigation's earnings. In Q1FY13 it reported a 9.1 per cent fall in net revenue to Rs 864.9 crore and reported its first loss of Rs 16.9 crore since 2004. In FY12 the company reported 18.7 per cent rise in net revenue to Rs 4,933 crore with adjusted profit after tax falling 20 per cent to Rs 223.5 crore.

"India is likely to have an opportunity of Rs 450 billion (Rs 45,000 crore) under micro irrigation over the next six to seven years. Jain Irrigation stands to gain the most, being the market leader in this space. Standalone sales of Jain Irrigation’s MIS segment have posted a CAGR of 56 per cent during 2005‐11. While Jain Irrigation is currently sacrificing some growth to rationalise their high receivables in MIS, we expect Jain Irrigation to get multiple re‐rating from the point when it shows improvement in working capital cycle by lowering the receivables and commencing the NBFC," said an Edelweiss Capital report on the firm.

(Edited by Sanghamitra Mandal)

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