Report - for Monday 17th

Jain Irrigation - Buy
Price - Rs616
Target Price - Rs811

‘Arable play’
Jain Irrigation (JISL) has grown its Earnings at a CAGR of 62% over the last three years on the back of strong growth being clocked by its Micro Irrigation, PVC Piping and Food Processing businesses. We believe JISL will maintain this momentum going ahead as well given the government's thrust on Irrigation and Infrastructure Development. We expect JISL's Consolidated Revenues to grow at a healthy CAGR of 43.7% over FY2007-10E, while expansion in OPMs is expected to aid Consolidated PAT to clock CAGR growth of 58.2% over FY2007-10E. We estimate Consolidated OPMs to expand by over 310bp to 17.6% in FY2010E from 14.5% in FY2007.

Company Background
Jain Irrigation Systems Limited is one of the leading Agri-business companies in India, with a wide presence in Water Irrigation, Piping Systems, Plastic Sheets and Food Processing. JISL has been one of the key beneficiaries of the government's thrust on boosting agricultural output and productivity in the country. The government has earmarked a substantial sum of Rs2,10,000cr for Irrigation in the Eleventh Plan FY2007-12.
From traditional water transportation and industrial use, PVC and PE pipes have found various new applications like in the city gas distribution networks, sewage and waste disposal systems, telecom cables, etc. This provides visibility for JISL's Piping Segment. JISL's Food Processing Segment primarily caters to the overseas market. In the domestic market too, the Segment is expected to gain momentum on the back of rising disposable income levels, dual income families and organised Retail.

Micro Irrigation - Primary focus area:
We expect JISL's Micro Irrigation (MI) Segment to clock 45-50% CAGR growth over the next 2-4 years. In the domestic markets, the Segment fetches the highest Operating Margins of over 25-30%, which we believe will be sustainable going ahead as well. Healthy Exports as well as the recent acquisitions have given JISL a global footprint, which it proposes to expand further with higher growth rates of over 35-40% during the next 2-3 years.

Water Projects - Unfolding opportunity:
Healthy GDP growth and the ongoing infrastructure boom in the country have fueled growth of JISL's Piping Segment. We expect the Segment to clock 30-35% CAGR growth over the next 2-3 years. To achieve such growth, JISL has signed large continuous contracts with some MNCs revenue from which is expected to flow FY2009 onwards.

Food Processing - A Budding Segment:
JISL's Food Processing Segment has been focusing on Exports. The Segment derives over 75% of its Sales from Exports. Going ahead, over the next 2-3 years, we expect the Segment to clock Sales CAGR growth of over 25-30%. Margins are also expected to be healthy at 16-17% going ahead.

Outlook and Valuation
We expect JISL to register strong growth over the next 3-4 years on the back of favourable government policies for irrigation, infrastructure development, etc. To cater to the incremental demand, the company in the past couple of years has invested heavily in augmenting its plant capacities. We expect the trend to continue going ahead also, with an average capex of over Rs160-180cr over the next 2-3 years. JISL is expected to report Rs40.6 fully diluted EPS during FY2010E. At Rs616, the stock is available at 15.2x FY2010E Earnings. We Initiate Coverage on the stock, with a Buy recommendation and Target Price of Rs811.

JSW Steel - Buy
Price - Rs935
Target Price - Rs1,170

'Capacity’ to ride
We believe that significant capacity expansions, enriched product mix ( through US acquisitions and SISCOL merger) and backward integration initiatives into key inputs like coking coal and iron ore are the key positives that would drive JSW Steel's growth going ahead. We expect the company to record a CAGR growth of 28.9% in consolidated Bottom-line over FY2007-10E.

Company Background
JSW Steel is one of the largest steel producers in India with the current crude steel capacity of 3.8mtpa. JSW Steel has presence in all forms of flat products and is also one of the largest exporters of galvanised products from India, with a presence in over 50 countries around the world. The company is straddled across the value chain right from Mining, Power, Pellets and value-added steel products. JSW's upstream facility of 5mtpa of pellets and 3.8mtpa of flat steel is located in the iron-ore rich belt of Bellary District in Karnataka. JSW also has 0.28mtpa of HR plate, 1mtpa of CR coils/sheets, 0.9mtpa of GP/GC and 0.1mtpa of colour coating lines at Vasind and Tarapur in Maharashtra.

Capacity Expansions to fuel growth:
JSW is expanding its slab capacity from 3.8mtpa in FY2007 to 6.8mtpa by FY2009 and 10mtpa by FY2011. With the slab capacity, HR Coil capacity will also increase to 5.2mtpa in FY2009 from 2.5mtpa in FY2007 and to 8.2mtpa in FY2011. On the back of capacity expansions, we expect JSW Steel to post a CAGR growth of 28.8% in volumes over FY2007-10E, which will result in consolidated Revenue and Bottom-line clocking a CAGR growth of 39.2% and 28.9% respectively, in the mentioned period.

Backward Integration initiatives to improve Margins:
JSW has 30% captive iron ore while it sources 100% of its requirements of coking coal from outside. The company has been awarded iron ore and coal mines in India and abroad. We believe that these mines will be operational over the next 2-3 years post which the company will register substantial cost savings and improve margins. Further, the company is setting up a 10mtpa beneficiation plant to be completed by FY2008, which will result in cost saving of 30% to the market price of iron ore.

Product Mix to improve:
Acquisitions of US Plate & Pipe mills with a capacity of 1.2mtpa and 0.55mtpa respectively, merger with SISCOL (1mtpa long products), introduction of 1.5mtpa capacity of long products by FY2009 and CR mill of 1mtpa (already set up in September 2007) is expected to improve JSW's consolidated product mix going forward. We expect the consolidated share of value-added products (sales tonnage) to improve to 58% in FY2009 and 59% in FY2010 from 29% in FY2007.

Robust Industry Outlook:
We expect the steel prices to remain firm in the short to medium term period due to strong demand from Emerging countries like India and China. Also, the recent spike in the raw material prices is expected to support prices going ahead. The Chinese initiatives to curb exports and shutting in-efficient mills are also expected to aid a favourable demand/supply balance in the global steel market apart from providing a cushion to the steel prices.

Outlook and Valuation
At Rs935, on consolidated basis, JSW Steel is trading at an EV/EBIDTA of 4.7x on FY2010E EBIDTA and P/E of 6.8x FY2010E consolidated fully diluted EPS. The company is quoting at a 20-30% discount to its domestic and international peers. We believe that JSW does not warrant quoting at such a discount in view of its robust earnings outlook, strong volume growth, stable steel prices, moving towards raw materials self sufficiency and an improved product mix. We Initiate Coverage on the stock, with a Buy recommendation and Target Price of Rs1,170, translating into an upside of 25%.

----- With due apologies and full credits to Angel Broking