Jain Irrigation Systems Ltd has been grappling with high finance costs for some time now, with interest expenses eating up a significant portion of its operating profit. For the three months and six months ended September, the interest cost as a percentage of operating profit was a staggering 72% and 62%, respectively. This is a cause for concern as it indicates that a large chunk of the company’s earnings is being used to service debt.
To address this issue, Jain Irrigation recently announced plans to raise ₹792 crore through equity issuance. The funds raised will be used to reduce the company’s debt burden and finance growth in its food processing business. The ultimate goal is to bring down the net debt-to-equity ratio to 1:1. Currently, the company’s net debt stands at ₹4,268 crore, while its net worth is ₹2,120 crore, resulting in a net debt-to-equity ratio of 2:1.
Analysts at Edelweiss Securities Ltd have projected that Jain Irrigation aims to reduce its debt by ₹600-700 crore in the coming quarters, which could lead to an interest saving of ₹100 crore in fiscal year 2017. This reduction in interest costs, coupled with a modest growth in operating income, is expected to drive a significant increase in net profit. IIFL Institutional Equities has also expressed optimism about the company’s prospects, stating that interest costs are projected to start declining from FY16 onwards.
Despite these positive developments, Jain Irrigation’s shares have fallen by 2% since the equity infusion announcement on 6 November. Investors are likely waiting to see tangible results before fully embracing the company’s turnaround efforts. The company’s September quarter results, which showed a modest increase in operating revenues and operating profit, did little to inspire confidence among investors. The micro-irrigation systems business saw a decline, while the food processing, pipes, and other businesses recorded growth.
However, it is important to note that the September quarter is typically slow for Jain Irrigation, and investors seem to have taken the results in their stride, as evidenced by the flat share price since the financial results were announced. Moving forward, the company’s ability to execute its debt reduction plans and drive growth in its core businesses will be crucial in restoring investor confidence and driving shareholder value.