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Micro irrigation

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  • Micro Irrigation in India

    A Macro View

    EPC Industrie Rs 100 March 2014

    Stalwart Investment Advisors | www.stalwartvalue.com

  • WHATS INSIDE?

    A quick overview of Indian Agri and the

    challenges

    Micro Irrigation An introduction

    Micro Irrigation in India Opportunities &

    Challenges

    Is it ready for a take-off?

    Case Study Jain Irrigation The leader

    EPC Industrie

    What future holds the outlook

    2

  • Indian Agri

    Indias farm sector has a 14.1 per cent share of gross domestic product

    Around 140 million hectares of land is now under

    the cultivation

    Its largely rain-dependent with only 62 million

    hectares having irrigation coverage

    3

  • Ground water levels are going down fast

    About 65 per cent of water used for irrigation and

    85 per cent for drinking comes from groundwater

    sources in the country. It is, therefore, of concern

    that the majority of wells continue to register

    falls in water levels.

    If the per capita availability of water in a country

    is 1,700 cubic meters, then it is comfortably

    placed with regard to water resources

    India is a significantly water-stressed country,

    with per capita availability of the resource

    between 600 and 1,000 cubic meters 4

  • A growing population and the spread of

    conventional but highly wasteful flood method of

    irrigation has turned India into a water-deficit

    country

    The countrys challenge is to grow farm production at an annual rate of 4 per cent during

    the current 12th Plan against 3.6 per cent in the

    earlier Plan to arrest declining per capita

    availability of food grains

    5

  • Flood irrigation is a common mean of irrigation in India. However, such means of irrigation results in wastage of water in conveyance, distribution and evaporation.

    As a result, approximately 30 40% of applied water would be actually utilized by the crop and the remaining water is drained out or evaporated.

    6

  • The solution?

    Micro irrigation was introduced in India in 1986

    and is one of the most water and fertilizer efficient

    irrigation systems.

    7

  • What is Micro Irrigation?

    Micro irrigation is defined as the frequent

    application of small quantities of water directly

    above and below the soil surface; usually as

    discrete drops, continuous drops or tiny streams

    through emitters placed along a water delivery

    line.

    Micro Irrigation

    Drip Sprinkler 8

  • Drip Irrigation

    This irrigation system consists of a network of pipelines and valves. Those valves facilitate dripping water directly to the plant root zone.

    Unnecessary places in the cultivation are not wetted by this method, and ultimately it reduces the water loss by evaporation and leaking.

    The soluble fertilizer and chemicals (pesticides, cleaning agents) can be applied to the crop by dissolving in irrigated water.

    This method prevents the spreading of diseases that caused by contact of water.

    Generally used for row crops such as vegetables, flowers, fruits, plantation crops, etc. 9

  • 10

  • 11

  • Sprinkler Irrigation

    Sprinkler irrigation is similar to natural rainfall.

    It consists of pipelines, spray guns and spray

    nozzles. The gun will rotate as a circle by using

    the power of the spraying water.

    Although the water loss is very much less than

    surface irrigation, it is somewhat higher than

    drip irrigation. It is good for large plantings.

    Generally used for broadcast crops such as

    cereals, oilseeds, etc.

    12

  • 13

  • 14

  • System consists of:

    Pump

    Filters

    Fertigation equipments

    Fertilizer tank

    Throttle valve

    Main line PVC

    Sub-main lines LDPE

    Drippers/Sprinklers

    Emitting pipe

    Valves

    15

  • How much does it costs?

    It can cost anywhere from Rs 20,000 to Rs 45,000

    per acre to implement a micro-irrigation system,

    depending on the crop, level of automation and

    water source.

    Payback period is 2 - 3 crops

    16

  • Why ground water is extremely important?

    For the country as a whole about 56% of the irrigation is currently provided by underground water sources i.e. Dug, Tube and Bore wells.

    It is well established that grain productivity/yield with groundwater is 1.5 to 2.0 times more than the canal irrigated water sources.

    In quite a number of areas, the ground water levels are fast depleting because more water is pumped out than natural recharge.

    Groundwater in 877 blocks (17%) in the country is overexploited or nearly overexploited and new areas are being added to the list every year.

    17

  • This has not only reduced the irrigation potential but has

    caused drinking water scarcity, problem of water quality

    and land degradation. Punjab, Gujarat and Tamil Nadu are

    explicit examples.

    Since subsidized power supply is one of the major reasons

    for such a situation, a solution could be giving preferential

    connections to owner who agrees to use micro irrigation

    and the banks should finance combined loan for pump and

    micro irrigation. Making micro irrigation compulsory in

    agriculture (at least for commercial crops) would release

    enough water for drinking and save public expenditure on

    distant supply of piped drinking water schemes. 18

  • PRIMARY REASONS FOR HIGHER YIELD

    WITH MI

    There are a lot of scientific reasons; however the

    primary reasons are following:

    Precision in supply of water if a plant needs 60

    drops every hour, it gets exactly 60 drops

    System purifies water before supplying

    System purifies fertilizer too

    Ground water is efficiently used ground water

    provides 50-100% higher yield

    19

  • Govt. woke up to this and

    The Task Force on micro irrigation was established

    under the Ministry of Agriculture, Department of

    Agriculture & Cooperation, Government of India in

    2003.

    In its report dated January 2004 (Report), inter

    alia, assessed the following projected benefits as a

    consequence of implementation of micro irrigation

    technology:

    20

  • Potential water savings through MI

    ~30%

    21

  • Over 45,000 Cr can be saved in infra costs by bringing

    only 17 mn ha under MI 22

  • In FY14 Govt. has budgeted Rs 66,000 Cr for fertilizer subsidy,

    a significant portion of which can be saved by adopting MI 23

  • Which finally led to the birth to NMMI

    National Mission on Micro Irrigation

    (NMMI) was implemented as a part of the

    XIth Plan from June 2010 which aimed to

    improve water use efficiency and efficient

    use of fertilizers on account of fertigation.

    The savings in water can be used to

    augment area under irrigation and

    thereby increase productivity.

    24

  • 40% of the cost of the Ml system will be borne by the

    Central Government, 10% by the State Government

    and the remaining amount will be borne by the

    beneficiary either through his / her own resources or

    loan from financial institutions.

    Additional assistance of 10% of the cost of the Ml

    system will be borne by the Central Government in

    respect of small and marginal farmers.

    The salient features of the NMMI Scheme

    include:

    25

  • All categories of farmers are eligible to avail

    assistance under this scheme.

    Assistance to farmers will be limited to a maximum

    area of five ha per beneficiary.

    75% of the cost of drip and sprinkler demonstration

    for a maximum area of 0.5 ha per demonstration

    will be borne by the Central Government.

    26

  • The potential?

    The size of the opportunity is ten times plus the replacement demand

    ~60% of the market potential is

    Sprinkler, rest is Drip

    27

  • The NMMI has been implemented with an outlay of Rs

    8,033 Cr of which Rs 3,409 Cr will be contributed by DAC

    as Central share comprising 40% subsidy for general

    farmers and 50% subsidy for small and marginal farmers.

    While the outlay for 2010- 11 was Rs 1,000 Cr, an amount

    of Rs 1,150 Cr was allocated as outlay for 2011-12.

    28

  • The Harvard study found MIS "up to 70 per cent more

    effective in water use efficiency", as it increased fertilizer

    use efficiency by 30 per cent.

    Some of the sectors whose performance can be immensely

    improved by the micro irrigation technologies or whose

    future can be impacted substantially are:

    1.Irrigation & Water Resource Sector

    2.Fertilizer Sector

    3.Power Sector

    4.Banking Sector

    5.Agriculture Sector

    6.Forest & Environment Sector

    7.Petroleum Sector and

    8.Petrochemicals Sector

    29

  • And its not just the Govt.; entire eco-

    system is enabling the change

    RBI has mandated 18% lending to agriculture

    sector

    Banks are lending preferably to farmers with

    micro irrigations systems installed as these lead

    to higher yield and hence higher income

    Banks are accepting their land holdings as

    collateral

    30

  • Understanding Indian MI Market

    Biz model has three channels:

    Projects Market (State Govt.)

    Open Market Institutional (Big Sugar/tea farm owners)

    Open Market Retail (Farmers)

    Market Size

    Current INR 3,500 Cr Annually

    Organized players constitute 75%

    Rest served by 250 odd players (unorganized)

    31

  • Mkt. Share Mkt. Cap

    1. Jain Irrigation Systems Ltd. 50% 3,300

    2. Netafim Irrigation India Pvt. Ltd. 15%

    3. EPC Irrigation 5% 304

    4. Nagarjuna Palma 5%

    5. Texmo Pipes and Products Ltd. 16

    6. Tulsi Extrusion 13

    7. Sturdy Industries 11

    8. Rungta Irrigation 7

    9. Finolex Plasson Industries Ltd.

    10. Premier Irrigation

    11. Parixit Industries Ltd.

    The ones underlined are listed, Mkt Cap in Rs Cr. as on 11th April 2014

    Players in the organised market

    32

  • Understanding Indian MI Market Cntd.

    Seasonality:

    Currently Cotton is the key crop for which micro

    irrigation systems are widely used

    Cotton is planted in early summer i.e. March June

    Rabi is the main season i.e. February - May as dry

    land needs irrigation

    H2 makes up for 60% of the sales

    Q2 is weakest quarter

    33

  • Size of the opportunity in India

    Of the 69 million hectares under cultivation, only

    5 million hectares are under drip or sprinkler

    irrigation i.e. only ~7% of the potential

    In contrast, more than 50% of cultivated land in

    the US is under drip irrigation while the figure

    for Israel is over 95%

    34

  • The push is getting stronger

    Over and above the NMMI, recently Maharashtra

    government mandated sugarcane farms to install

    micro irrigation systems

    Total size of this opportunity is Rs 10,000 Cr. in MH

    alone, and is to be implemented over FY15-FY18

    This has thrown a huge opportunity to the MI

    industry and is expected to open doors for sugarcane

    in other key state of UP as well

    35

  • *Click on the news to read more

    36

  • Changing mindset

    Its true primary advantage of micro irrigation is

    water savings, however even those with access to

    sufficient water are adopting micro irrigations

    methods to:

    Increase crop yield

    Reduce labor costs

    Reduce electricity costs

    Reduce fertilizer costs

    37

  • The risks

    Like any other business in India, Micro Irrigation

    space has its own set of challenges and risks:

    Though there are issues like competitive bidding

    during project tenders, presence of foreign players

    as 100% FDI is allowed etc., the key challenge is

    managing the working capital in this business.

    A good proportion of business comes from states

    where payments sometimes take as long as 365

    days to get settled

    38

  • The risk mitigation

    The market leader Jain has realized this and is

    trying to bring its working capital down. In MH,

    Jain has completely moved to cash&carry model

    In the retail business, the purchase is either

    financed by the dealer or a bank who in turn wait

    for the subsidies to get released

    Other players like EPC are also focusing more on

    retail business and only some select states where

    receivables cycle is shorter

    39

  • 40

  • The background..

    Pioneered Micro Irrigation in India during late

    80s

    Had early mover advantage

    Introduced lot of innovative products

    41

  • 1991 - 2001

    Post liberalization, Jain Irrigation forayed into IT, merchant

    banking, advertising, telecom and even leased a granite

    quarry.

    To fund these ambitious projects, the company invested

    around Rs 400 Cr, taking on debt of Rs 250 Cr.

    As it turned out, none of these new forays took off and the

    company started to bleed after being financed by inter-

    corporate deposits borrowed at a usurious rate of 28%.

    With funds diverted from the core business, revenues

    whittled over 50% to Rs 135 Cr in 2000 and losses started to

    mount. The stock price which traded at Rs 90 in March 1996

    tanked to Rs 4 in March 2002.

    42

  • A new life line..

    A new lease of life came in 2001 in the form of Aqua

    International Partners, which offered to bail out the

    company. The only catch: it wanted management control.

    Founder Bhavarlal Jain decided to cede management

    control in the interest of the business. The fund invested Rs

    183 Cr for a 49% stake, while the promoter stake fell from

    73% to 37%.

    The company used the funds to rectify the financial mess,

    turned its focus back to the core business and exited all

    unrelated ventures.

    43

  • But history repeats itself..

    In 2005 company announced its plans to move away from

    state govts projects business due to delayed subsidy and instead focus on retail channel. However it did not walk the

    talk.

    Further it invested heavily in other businesses like Food

    processing, PE/PVC Pipes, Solar products both organically

    as well as inorganically, both domestically as well as

    abroad.

    The series of acquisitions also included some key names in

    global MI industry:

    Chapin Watermatic, US

    NaanDan, Israel

    44

  • The result?

    A bloated working capital with a staggering receivables

    days of 200

    Debtors include over 1,200 Cr due from various state

    governments

    Debt of 4,000 Cr against a net worth of 2,150 Cr implying a

    debt-equity of over 1.8 times

    A significant debt is denominated in foreign currency

    where rupee depreciation is hurting further

    45

  • The present Avatar

    Jain Irrigation is today a Rs 5,600 Cr company with

    operations in over 100 countries

    Micro Irrigation contributed only 40% to its FY13 revenues

    And the company now derives over 40% of its consolidated

    revenues from overseas businesses

    It commands a whooping 50% market share in the

    organized segment of domestic MI business

    46

  • In H1FY14

    Drip Irrigation formed over 86% of its topline whereas

    Sprinkler contributed only 14%

    Projects business contributed a mere 10%, whereas rest of

    the 500 Cr domestic MI turnover came through retail &

    institutional channels

    Margins continue to be over 22% in MI business

    NBFC, floated few months ago to finance MI, has now a

    loan book of 45 Cr and expected to cross 100 Cr by year end

    47

  • The current strategy of the leader:

    To bring traction in retail business by expanding reach i.e.

    adding more dealers

    Reduce exposure to projects business in states with delayed

    release of subsidy like AP & TN

    Focus on states like Gujarat, Maharashtra and Karnatka

    owing to both size of the opportunity as well as shorter

    working capital cycle

    Divest stake in non-core business of food processing

    Bring down debt to sustainable levels of debt-equity of one

    48

  • 49

  • The background..

    EPC Industrie Ltd. was established in 1981

    Founded by Mr. K. Khanna, a technocrat who is

    an alumnus of IIT, Mumbai

    EPC stands for Exomet Plastics and Chemicals and is based out of Nashik, Maharashtra

    50

  • Because of working capital crunch, EPC was filed

    to BIFR in 2007 and then in the same year the

    company received a total investment of Rs.40 Cr

    from New York-based PE player Credit

    Renaissance Partners LLC

    Though technologically advanced and a pioneer

    in the space, it remained a small player

    throughout and closed FY11 with a meager

    turnover of 86 Cr with operating margins in

    single digit and a net profit of just 1.4 Cr

    51

  • Enter phase 2.0

    Mahindra acquires EPC and makes its foray into

    Micro Irrigation in Feb 2011

    Through a Rights Issue it increased its stake

    further from 38.1% to 54.8%

    52

  • Some Data points on EPC

    The capacity of the plant is 16,728 MT/year

    Following an asset light model by outsourcing incremental

    capacity requirements (Job work)

    Open market operations through 47 channel partners in 17

    states and a network of ~600 dealers

    30-40% business comes from state projects business

    53% from drip and rest from sprinkler systems

    53

  • Understanding the Projects Business

    54

  • Project Model

    Work Orders are issued to the Company by the nodal

    agencies after the loan tie ups and subsidy eligibility is

    approved by the nodal agency in these states.

    MIS is installed only after receipt of the work order from

    the nodal agencies which enables co. to secure release of

    payments under the project markets.

    Under the recently launched Pundit Deendayal Kisan

    Bagawan Samridhhi Yojna (Part II), 2010 2011 scheme, companies enter into an agreement with the farmers.

    Subsequently, 20% of the cost of the MIS can be obtained

    by co. as advance from the farmer and the balance amount

    would be released to through the farmer upon successful

    installation of the MIS to the satisfaction of the farmer and

    the project implementing agency. 55

  • EPCs agreement with Andhra Pradesh

    Agreement with Andhra Pradesh Micro Irrigation Project

    (APMIP)

    Provides a subsidy of 90% of the cost of installation of the

    MIS.

    Entitled to obtain the first installment of 10% of the costs

    upon submission of the benchmark survey report.

    The second installment of 85 % is paid within 15 days after

    installation and production of competition certificate from

    the project director.

    Receive the balance amount of 5% on a quarterly basis over

    a period of time against submission of bank guarantee for a

    period of 5 years from the year of installation.

    Further, EPC also receives compensation at mutually

    agreed rates for agronomical services.

    Source: Rights Issue Document, 2012

    56

  • EPCs agreement with Tamil Nadu Agreement with Tamil Nadu Horticulture Development

    Agency (TANHODA)

    The Tamil Nadu State Government provides a subsidy of

    100% (of which 50% is contributed by Central Government

    and 50% by Tamil Nadu state Government) of the cost of

    MIS to small and marginal farmers.

    Further, the subsidy is 75 % (of which 50% is contributed

    by Central Government, 25% by Tamil Nadu State

    Government and balance 25% is contributed by the farmer)

    of cost of MIS to other farmers in the state.

    In order to avail the subsidy benefits a tripartite agreement

    is entered into by EPC with the farmer and the district

    level agency. A claim for 90 % of the subsidy amount shall

    be submitted upon successful installation of the equipment

    and submission of requisite documents to the government.

    The balance 10% subsidy amount will be paid after a period

    of one year from installation subject to satisfactory

    performance of the equipment.

    57

  • EPCs agreement with Gujarat

    Agreement with Gujarat Green Revolution Company Limited

    (GGRCL)

    The state government of Gujarat provides a subsidy of 50 % of the

    cost of the equipment with a ceiling of Rs 60,000 per hectare,

    whichever is lower.

    In order to avail of the subsidy benefits, EPC enters into a

    tripartite agreement with GGRCL, the farmer and bank (in case

    bank finance is availed by the farmer) for supply of MIS.

    Subsequently, a claim for 25 % of the cost of the equipment shall be

    submitted as advance to GGRCL upon receipt of such a tripartite

    agreement and of the balance amount 20% is paid by GGRC and

    50% is paid by the farmer through GGRC upon successful

    installation of the equipment.

    EPC receives the balance amount of 5% (Retention money against

    the performance guarantee) on a quarterly basis over a period of

    time against submission of bank guarantee. Further, EPC also

    receives compensation at mutually agreed rates for agronomical

    services.

    58

  • EPCs agreement with Himachal Pradesh

    Subsidy scheme under the Pundit Deendayal Kisan Bagawan

    Samridhhi Yojna (Part II), 2010 2011 in Himachal Pradesh

    The empanelled companies shall enter an agreement with

    the farmers. The company will not charge more than 20%

    of the total project cost as an advance.

    The company will take advance at the time of dumping of

    material at the site as per agreement. The project

    assistance shall be released to the companies through

    farmer after testing of MI system installed to the entire

    satisfaction of the farmer and PIA.

    In case farmer had availed bank loan then the assistance

    will be released to those beneficiaries through bank.

    59

  • Things changing for the better

    The following positive changes are happening in

    the Projects Model:

    Karnatka Government spends 10,000 Cr on

    Irrigation projects every year which its planning to

    merge with Micro Irrigation schemes.

    The administration process was a major bottleneck in

    clearing subsidies. The same has been moved online

    now. With computerized processing and direct bank

    transfers the efficiency is expected to improve multi-

    fold.

    Policy environment is getting better and Industry

    Leader is expecting a shorter receivables cycle in the

    state

    The state has immense potential for MI

    60

  • Gujarat, on the other hand, is already one the

    best states to operate under projects model;

    subsidy takes less than 120 days to get disbursed

    The states that continue to delay subsidy

    payments and are worrisome for industry mainly

    include Andhra Pradesh and Tamil Nadu

    61

  • The current Avatar

    Mahindra has been able to double sales to 165 Cr

    in two years, albeit on a low base

    EPC now commands a 5% market share

    Rights issue proceeds have been utilized in

    increasing capacity and meeting working capital

    needs

    Product portfolio has been increased to include

    pumps ranging from 0.5HP to 25HP both

    submersible as well as surface pumps

    New variants are being launched in MI systems

    as well

    62

  • Whats new?

    Mahindra has recently launched the concept of Agri Dealerships, wherein they intend to market the agri input products of Mahindra Group along with EPCs micro irrigation systems and pumps.

    This will help provide one stop solution for major agri

    inputs to their customers.

    They have established the first Agri Dealership at

    Buldhana, Maharashtra.

    63

  • 64

  • CONCLUSION Its basically a bet on the:

    Size of the market opportunity; current

    penetration level is only 7%. The market is

    growing at 25% per annum and might see a

    vertical take-off as order flow starts from the

    sugar-cane industry

    Mahindras vision regarding their agri-related businesses, be it Shubhlabh or Samridhi

    Execution capabilities of the group and likely

    synergies with other rural/agri focussed

    businesses like Tractors and M&M Finance, and

    A neat corporate governance and minority

    shareholder friendly practices

    Goes without saying that its a fairly long-term

    story

    65

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    66

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