TEXT-Fitch cuts Jain Irrigation to 'Fitch BBB(ind)'

(The following statement was released by the rating agency)

June 19 - Fitch Ratings has downgraded India-based Jain Irrigation Systems Ltd's (JISL) National Long-Term rating to 'Fitch BBB(ind)' from 'Fitch A(ind)'. The Outlook is Negative. A list of additional rating actions is provided at the end of this commentary.

The downgrade reflects JISL's stretched liquidity position as illustrated by the almost full utilisation (100%) of its fund-based limits in FY12 (end-March 2012). This is on account of continued high standalone receivable days due to the delayed receipt of subsidy in JISL's micro-irrigation segment (around 50% of revenue) largely from the government of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu (around 80% of the segment revenue).

Fitch notes that JISL could not securitise its micro-irrigation segment receivables as the segment is classified as non-priority banking according to the Reserve Bank of India's guidelines issued in August 2011. In addition, debt-funded capex and revaluation of foreign currency loans (around 31% of total debt as on end-March 2011) resulted in standalone debt levels increasing to INR28.3bn in FY12 from INR22.1bn in FY11. Consequently, interest coverage ratio (EBITDA/interest) declined to 2.3x in FY12 (FY11: 3.1x), while adjusted net leverage remaining high at 3.6x (FY11: 3.8x). Fitch notes that JISL funded its incremental working capital requirements through short-term/ working capital loans.

The Negative Outlook reflects potential refinancing risk, stemming from JISL's huge repayments lined up in FY13 (INR4.6bn) and FY14 (INR3.7bn) on a consolidated basis. Additionally, in the event delays in the disbursement of subsidy continue, JISL may have to repay additional liabilities arising from discounted receivables. The company expects to timely service its interest and principal commitments primarily through internal accruals, founders' equity infusion and refinancing of a portion of its debt. In case of delays in such inflows, the company would have to raise debt from other sources to service its obligations.

The ratings, however, derive support from JISL's dominant position in micro-irrigation systems, strong brand image, well-diversified product portfolio, and its wide distribution network. The ratings also reflect the company's strong relationships with farmers, fast accrual of benefits through flexible and scalable production facilities, and break-even in most of its overseas subsidiaries (around 24.4% of FY12 revenue).

The company plans to change its business model to more of a cash-based purchase to shield itself from receivables risk and improve its working capital cycle and thereby cash flow position. The Outlook may be revised to Stable if JISL efficiently manages its overall receivable days and undertake conservative capex plans to improve its internal accruals and position to service its debt obligations. Negative rating action may result if consolidated net adjusted leverage (adjusted net debt/EBITDA) exceeds 6.0x on a sustained basis.

JISL has a diversified revenue profile, with a presence in the micro-irrigation systems, poly-vinyl chloride (PVC) and polyethylene pipes, PVC and polycarbonate sheets, and agro-processing segments. The company has customers in 107 countries and has subsidiaries in Israel, USA and Europe. For FY12, on a standalone basis, company reported revenue of INR37.8bn (FY11: INR33.3bn) with EBITDA margins of 22.2% (22.0%). While FY12 consolidated financial numbers are not available, Fitch expects JISL's foreign subsidiaries to have remained profitable.

Rating actions on JISL's instruments:

- INR12.4bn term loans (increased from INR10.7bn): downgraded to National Long-Term 'Fitch BBB(ind)' from 'Fitch A(ind)'

- INR9.2bn fund-based limits (reduced from INR11.3bn): downgraded to National Long-Term 'Fitch BBB(ind)' from 'Fitch A(ind) and assigned National Short-Term 'Fitch A3+(ind)'

- INR7.4bn non-fund-based limit: downgraded to National Short-Term 'Fitch A3+(ind)' from 'Fitch A1(ind)'

- INR6.4bn short-term debt: assigned National Short-Term 'Fitch A3+(ind)'

- INR3bn commercial paper programme (carved out of the fund-based limits): downgraded to National Short-Term 'Fitch A3+(ind)' from 'Fitch A1(ind)'