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CLSA - Buy Jain Irrigation
Tuesday, June 5, 2007
CLSA is bullish on Jain Irrigation and has recommended a buy rating on the stock.
Jain Irrigation recently concluded a USD 21.5 million acquisition of a controlling 50% stake in Israel based Na’anDan giving it access to enhanced scale, technology as well as new markets. At a reasonable 4x 2007 EV/ebitda, the acquisition will be 3-4% cash EPS accretive immediately with further scope for revenue and cost synergies. Prudent inorganic growth cements Jain's strong earnings outlook but the Indian micro-irrigation market remains the focal point for stock performance. The 3-5 year growth outlook on this remains extremely strong. Reiterate BUY.
Jain acquires a controlling stake in Na’an Dan:
Following on its micro-irrigation acquisitions in the US, Jain Irrigation has acquired a 50.001% stake in Israel based Na’an Dan. Na’an Dan is the world’s fifth largest micro-irrigation company (USD 75 million revenues) and will consolidate Jain’s position as the second largest player in the space with over USD 200 million of group revenues. Apart from scale, Na’an Dan will allow Jain access to (a) 50 countries which Na’an Dan supplies to (especially the key markets of Europe, Australia, US, Lat-Am, Israel) from its seven manufacturing units across the globe and (b) technology in micro-sprinklers, climate control and expertise in turn-key projects.
Reasonable deal multiples:
Jain will pay USD 21.5 million of which USD 11 million will be paid to existing shareholders and USD 10.5 million will be infused into the company. This pegs Na’anDan’s EV at USD 35.6 million (considering only long term debt) valuing it at a reasonable 5.7x2006 EV/ebitda. With Na’an Dan starting 2007 on a strong note (1Q profits have risen6x) and scope of revenue synergies (from cross-selling) and cost rationalizations (Jaincan supply bought-outs which form 30% of Na’an Dan’s input cost), profitability is expected to rise rapidly making forward multiples more attractive (4x 2007 EV/ebitda).
Balance sheet is not stretched:
Jain will acquire the stake via an SPV which will be capitalised with USD 15 million of non-recourse debt at Libor + 250 bps and USD 6.5 million of equity. Jain has also committed to bringing in USD 7.5 million of additional capital (at commercial terms, likely debt) to fund future growth in Na’an Dan (existing shareholders have a commitment of USD 2.5 million). We also understand that after two years Jain has a call-option to buy out additional stakes (at higher than current transaction EV) while existing shareholders have a put-option at lower value. At a net D/E of 1x (ex of USD 60 million FCCBs), Jain’s balance sheet is not stretched and will improve further in the next 2 years.
Upgrading estimates and target price:
Management has aggressive business plans for Na’an Dan but even on more moderate assumptions, the acquisition will be 2% EPS accretive and 3-4% cash EPS accretive immediately. We are upgrading estimates by 2-3% and also upping our target price by Rs 25 per share to reflect our fair value for estimate of Na’an Dan (USD 125 million EV). Prudent inorganic growth cements Jain's strong earnings outlook but the Indian micro-irrigation market remains the focal point for stock performance. The 3-5 year outlook on this remains extremely strong. BUY.
Jain Irrigation recently concluded a USD 21.5 million acquisition of a controlling 50% stake in Israel based Na’anDan giving it access to enhanced scale, technology as well as new markets. At a reasonable 4x 2007 EV/ebitda, the acquisition will be 3-4% cash EPS accretive immediately with further scope for revenue and cost synergies. Prudent inorganic growth cements Jain's strong earnings outlook but the Indian micro-irrigation market remains the focal point for stock performance. The 3-5 year growth outlook on this remains extremely strong. Reiterate BUY.
Jain acquires a controlling stake in Na’an Dan:
Following on its micro-irrigation acquisitions in the US, Jain Irrigation has acquired a 50.001% stake in Israel based Na’an Dan. Na’an Dan is the world’s fifth largest micro-irrigation company (USD 75 million revenues) and will consolidate Jain’s position as the second largest player in the space with over USD 200 million of group revenues. Apart from scale, Na’an Dan will allow Jain access to (a) 50 countries which Na’an Dan supplies to (especially the key markets of Europe, Australia, US, Lat-Am, Israel) from its seven manufacturing units across the globe and (b) technology in micro-sprinklers, climate control and expertise in turn-key projects.
Reasonable deal multiples:
Jain will pay USD 21.5 million of which USD 11 million will be paid to existing shareholders and USD 10.5 million will be infused into the company. This pegs Na’anDan’s EV at USD 35.6 million (considering only long term debt) valuing it at a reasonable 5.7x2006 EV/ebitda. With Na’an Dan starting 2007 on a strong note (1Q profits have risen6x) and scope of revenue synergies (from cross-selling) and cost rationalizations (Jaincan supply bought-outs which form 30% of Na’an Dan’s input cost), profitability is expected to rise rapidly making forward multiples more attractive (4x 2007 EV/ebitda).
Balance sheet is not stretched:
Jain will acquire the stake via an SPV which will be capitalised with USD 15 million of non-recourse debt at Libor + 250 bps and USD 6.5 million of equity. Jain has also committed to bringing in USD 7.5 million of additional capital (at commercial terms, likely debt) to fund future growth in Na’an Dan (existing shareholders have a commitment of USD 2.5 million). We also understand that after two years Jain has a call-option to buy out additional stakes (at higher than current transaction EV) while existing shareholders have a put-option at lower value. At a net D/E of 1x (ex of USD 60 million FCCBs), Jain’s balance sheet is not stretched and will improve further in the next 2 years.
Upgrading estimates and target price:
Management has aggressive business plans for Na’an Dan but even on more moderate assumptions, the acquisition will be 2% EPS accretive and 3-4% cash EPS accretive immediately. We are upgrading estimates by 2-3% and also upping our target price by Rs 25 per share to reflect our fair value for estimate of Na’an Dan (USD 125 million EV). Prudent inorganic growth cements Jain's strong earnings outlook but the Indian micro-irrigation market remains the focal point for stock performance. The 3-5 year outlook on this remains extremely strong. BUY.
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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.
