I had bought 500 shares of Jain Irrigation @ 106 around 1 year back. The stock was supposed to be a very attractive pick at that point of time, but it has only gone downhill. What is the prospect for this company?

Jain Irrigation is in the right industry but it has a lot of internal problems, with the biggest problem being of high debt levels. In fact, analysts and investors are worried that this debt could become unsustainable in the next one year. This is despite operating in an industry that shows a lot of promise considering the government thrust on the rural sector, drip irrigation, innovative water systems, etc. Why this is ironic is that today less than 15% of the land is covered by micro-irrigation facilities and Jain Irrigation has a 50% market share in this segment. In the last one year, Jain Irrigation has fallen nearly 75% and is quoting at just about Rs.25 per share. In fact, markets are also skeptical about whether the profits of the company are real. 

The main reason for this bad performance in the stock market is the rising debt of the company and that has raised questions about its debt servicing capacity. This has also led to rating downgrades by rating agencies. In fact, this problem of debt became more pronounced after companies like IL&FS, and Dewan Housing started defaulting. With that trend spreading across now to companies like Cox & Kings, the pressure on high debt companies is likely to stay. 

Let us look at debt numbers. In the last one year, debt has gone up from Rs.3900 crore to nearly Rs.5000 crore. In the light of what happened in the case of IL&FS, Dewan Housing, Cox & Kings and ADAG companies, markets are expecting that a default could happen soon. The company, on its part, has ruled out any crisis. According to the management of Jain Irrigation, the cash crunch is due to delay in disbursal of government subsidy for selling below their cost. 

In your case, you appear to have bought the stock close to its high price. Apart from debt, there are two other problems to worry about. Jain Irrigation has made some high-cost acquisitions in Belgium and the US at a fairly steep price and at the same time promoter pledge has also gone up from 17% to 48%. That is surely not a good feeling. As an investor, you are already sitting on big losses and you can just wait to see if the promoter pledge comes down and what happens to their proposed repayment of Rs.2000 crore loans. If you don’t see much traction, it is better to exit the stock.