IIM Project Report on Jain Irrigation Systems Strategy Report HBS Case Study
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Transcript of IIM Project Report on Jain Irrigation Systems Strategy Report HBS Case Study
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JISL : THE WAY GOING FORWARD
For requirements of the course
Written Analysis and Communication II (2012-13)
To
Prof. Vijaya Sherry Chand
Mr. Rahul Shukla
By
VINEET SINGH
VIKRAMADITYA SHEKHAR
Section E
INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD
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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT
LETTER OF TRANSMITTAL
To: Dr. Jain
Founder & Chairman, JISL
Jalgaon
India
From: Vineet Singh & Vikramaditya Shekhar
Executive Assistants, Chairman Office
Date: 1st April 2012
Subject: Report on a financially viable strategy for future growth of JISL
With reference to your request for a report making suggestions on the future strategy for JISL,
we are attaching an analysis of the current situation which presents our analysis of current
business situation, feasible business objectives, and an action plan to achieve the same.
Yours sincerely,
Vineet Singh & Vikramaditya Shekhar
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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT
CONTENTS
EXECUTIVE SUMMARY ___________________________________________________________ 1
ASPIRATIONS, VISIONS AND GOALS _______________________________________________ 2
OBJECTIVES _____________________________________________________________________ 5
ACTION PLAN ____________________________________________________________________ 9
EXHIBITS _______________________________________________________________________ 11
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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT
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EXECUTIVE SUMMARY
The prime goal of Jain Irrigation Systems Limited (JISL) is to gain financial growth to become
the worlds largest agricultural company while helping the small farmers achieve financial
prosperity. JISLs strengths lie in a sound business model that builds on farmers trust, continual
cost improvement through innovation and an extensive network of dealers and associates
advocating greater adoption. While heavy reliance on subsidy on MIS, high leverage due to
extending credit to farmers, lack of a strong middle management and attraction of the best
talent remain a concern, the growth opportunities for both MIS and food processing segment
are quite lucrative. Withdrawal of subsidy by the government, competition in the international
markets and potential backward integration by institutional clients are the major threats to be
cognizant of. Thus, a strategy targeting sustainable growth in the MIS segment and an
aggressive growth in the food processing segment is proposed. It is proposed that geographical
expansion be first focused on India which offers vast potential and where JISL enjoys more
competitiveness. The expansion strategy needs to be complemented with continual investment
in research and development, capacity building and setting up processes that churn out
competent middle level managers and associates on a regular basis.
[Word Count: 202]
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ASPIRATIONS, VISIONS AND GOALS
JISL has grown from its humble founding in 1963 to the leading producer of agriculture inputs
in India and the world. It has five major product lines: Micro Irrigation systems (MIS), piping
products, agro processed products and other products like those for renewable energy. While
JISL aspires to be the largest agricultural company in the world, its vision is to help the small
farmers derive the maximum productivity from their land and hence, help them achieve
financial prosperity.
To determine the way forward for sustainable profits, an examination of the strengths and
weaknesses of JISL, existing opportunities and threats of the business environment become
pertinent
STRENGTHS
JISL enjoys a strong brand and leadership position in its businesses in India, much of which can
be attributed to its business model. Its model involves providing a complete solution for
agriculture to the small farmers, including inputs, customized MIS systems, education on
usage, help and advice with installation, and even helping finance the purchase by extending
credit. This way, it has won the trust of the farmers, leading to greater adoption of its products.
It also has a strong track record of dealing with the government and bringing positive policy
changes related to growth of MIS market.
Another factor playing a key role in JISLs success is its continued emphasis on innovation and
R&D. JISL houses the largest private sector team of agricultural engineers, technicians and
scientists serving as a breeding ground for cost-effective and best practices in water
management, irrigation systems, crop specific agriculture, and enhanced productivity. It has
partnered with leading global academic and research institutes such as IRRI, CIMMYT,
IRISAT and major agribusiness companies like Monsanto and Syngenta to explore
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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT
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commercially viable agricultural solutions. It has been trying to develop alternate energy
solutions to insure against the impending energy crisis.
Its 3000 worldwide network of independent dealers (with 2100 in India), several model farmers
and associates across the country give it an exclusive channel to push its products with
extensive reach to rural markets. Since it deals with all the stages of value creation in the
agricultural chain and has varied revenue streams, it is well shielded from economic shocks.
WEAKNESSES
Growth of the MIS segment is heavily reliant on government subsidies, which are credited only
180 to 365 days after approval. This has led to a highly leveraged business model (the
debt/equity ratio for a 5 year period since 2008 has been 2.0 on an average) with constantly
increasing cost of maintaining a cash to cash cycle of 150 to 170 days. This has restricted
JISL's ability to raise additional funds for capacity building and expansion in other segments
like food processing.
JISL has a strong top management but has failed to create a pool of middle level managers who
can work independently being committed to the ideals of the company. Its HR and recruitment
processes also dont do enough to continually produce competent middle level managers and
attract the best talent.
OPPORTUNITY
The Indian market for MIS alone has a potential of around 1278 billion (EXHIBIT A: INDIA
MARKET FOR MIS), of which JISL has been able to achieve sales of only around 27 billion.
Even if only the area under irrigation is considered, the market for MIS has a potential of
around 566 billion. Clubbing it with the market for ancillary services and agricultural input,
and considering the scope for expansion in other regions of India and abroad makes the upside
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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT
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quite huge. Thus, purely from an economic perspective, the MIS segment in particular remains
prone to expansion.
With growing needs for food to feed a population exceeding 1000 million, land and water are
going to only become scarcer. MIS offers an efficient water usage system and enhanced
productivity, which can ease these pressures. Thus, the solution being offered by JISL is bound
to gain greater adoption as time progresses. Overcoming scarcity of energy, aggravated by
India's significant power deficit in rural areas offers an opportunity to build and sell
commercially viable renewable energy applications which can be integrated with MIS.
The food processing industry is estimated to grow at a pace of 20% -30% in India. JISL has less
than 0.4% market share and is well positioned to expand exponentially if it can leverage well
its access to farmers for sourcing an increasing number of food varieties and tie up with more
institutional clients like Coca-Cola.
THREATS
While none of the domestic companies are big enough to challenge the business, pursuit of
quick profit strategy and sale of inferior MIS by smaller competitors can negatively impact the
perception of MIS's utility as a booster of farm productivity and income among farmers.
Competition in international markets can be intense due to Netafim pursuing an aggressive
growth strategy with support from its private equity parent firm.
Withdrawal of government subsidy limiting the average farmers ability to invest in MIS, poses
a threat to JISLs growth. Backward integration by JISL's current multinational customers such
as Coca-Cola, Nestle, and Unilever which have significant financial resources, could also lead
to loss of opportunities in the highly profitable food processing business.
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OBJECTIVES
Across its different business lines, growth in MIS segment is the most vital as it bootstraps
growth in other segments. The implementation of MIS requires piping and other products
leading to business for these units. MIS leads to an increase in the quality and quantity of the
crop, which allows the product to be processed and sold to customers like Coca Cola, for a
premium, benefiting the food processing business.
However, growth in the MIS segment must be controlled so that it remains sustainable. Growth
of MIS segment in any new territory requires building up an entire ecosystem comprising of
model farmers and dealers who push for adoption and then continual service by the associates
who aid as advisory throughout the process of farming. This process is often time consuming
and requires much effort and attention to detail.
Food processing opportunities have been largely untapped and entail the highest operating
margins. The business can only get more profitable as economies of scale come into play and
more institutional clients are acquired.
Expansion in any segment would require financing. At the moment, JISL extends credit to the
farmers on the subsidy from government which is a huge strain on the borrowing and financing
capability of the firm. NBFC offers a potential solution for the problem as it would move this
credit off the books of JISL and free the otherwise pledged accounts receivables for getting
credit for expansion. Since the marginal benefit to the farmer would remain a lot higher than
the marginal cost, the NBFC solution should gain acceptance by the farmers (EXHIBIT B).
Geographical expansion: focus on domestic or international markets is another decision point.
In domestic markets, the expansion rates would be much higher due to the advantage of a well-
defined business model and extensive network of dealers. International expansion would
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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT
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require partnering with more subsidiaries or undertaking acquisitions requiring substantial
management bandwidth and capital infusion. This makes domestic expansion more lucrative.
To remain competitive and achieve price differentiation through lowered cost, enhanced
product portfolio and more efficient manufacturing processes, continued investment in R&D
will remain a pre-requisite. Similarly, evolving a process to attract middle level managers
should be another priority.
Any strategic plan charting the future of JISL thus, has to strive to achieve the following goals:
i) Financial goals: Ensuring financial growth and sustainability commensurate with
the objective of becoming the largest agricultural firm in the world. It would entail
a) Reaching revenues of around 10 billion USD in 10 years
b) This would also require reorganizing its current capital structure which is highly
leveraged, with establishment of NBFC a probable solution
ii) MIS expansion: Reaching out to as many farmers as possible with MIS products and
helping them reach economic prosperity, increased productivity and better yields
iii) Geographical expansion: Expanding to other parts of India as well as international
expansion, with focus on domestic expansion
iv) Continued Investment in R&D: Continuing to engage in R&D processes with the
motive of creating various innovative and commercially viable product offerings
v) Aggressive Expansion of Food Processing: Investing in this business to obtain
revenues in excess of 1 billion USD
vi) Human Capital Management: Processes should be created that attract the best talent
and middle level managers should be formally groomed
PRIORTIZATION OF OBJECTIVES
Taking into account the above analysis and JISLs aspirations, these objectives can be
prioritized based on a) feasibility b) instrumentality in achieving core objective of growth along
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with serving the farmers c) trade-offs required. With due focus, all of these objectives seem
feasible. However, most of them will require a trade-off.
The prioritization of these objectives is discussed as follows:
a) Financial goals:
Instrumentality in achieving core objective: Aligned with the core objective
Trade-off involved: Achievement of this objective paves the way for achieving other
capital intensive objectives
b) MIS expansion:
Instrumentality in achieving core objective: Aligned with the core objective
Trade-off involved: Required capital infusion will have to contend with growth across
other segments like food processing
c) Geographical Expansion:
Instrumentality in achieving core objective: Required for sustainable growth but several
other methods of expansion are also possible like increasing the penetration in areas
currently under MIS
Trade-off involved: Achievement of this objective requires huge capital investments and
efforts. International expansion will constrain efforts on R&D and exploitation of
opportunities in food processing
d) Continued Investment in R&D
Instrumentality in achieving core objective: Source of our competitive advantage and
central to our core objective
Trade-off involved: Requires capital infusion over time which will sacrifice growth in
other business segments of JISL
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e) Aggressive expansion of food processing:
Instrumentality in achieving core objective: The increased revenue streams from this
high profit segment can help achieve capital expenditure for other expansionary
objectives
Trade-off involved: Achievement of this objective requires huge capital investments.
While this may constraint growth in some areas in the immediate run, sustained cash
flows over the long term will aid in their achievement
f) Human Capital management:
Instrumentality in achieving core objective: It is necessary for sustainable growth
Trade-off involved: This would require some amount of management bandwidth and
capital infusion, but wouldnt restrict the ability to invest for other objectives
Thus, each of the objectives is closely tied with other objectives and not necessarily
independent. Thus, while achieving financial goals would assume top priority due to its
centrality, vehicles for it would be sustainable MIS growth and aggressive growth in food
processing. Competitiveness of this expansion would rely on continual investment in R&D and
human capital management. This expansion will be initially focused on domestic markets.
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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT
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ACTION PLAN
1. JISL must target reaching 14 million farmers in India by 2022 primarily through
expansion in northern states with poor existing irrigation infrastructure. JISL would
need to recruit associates in the villages that it targets for sale of MIS systems. JISL
would also need to create a network of model farmers that can demonstrate
productivity and income gains possible from a shift to MIS from traditional irrigation
forms.
2. JISL must set up an NBFC in order to reduce the receivables amount on JISLs balance
sheet and shift the cost of financing the subsidy through a short term loan on to the
farmers. Under the NBFC model, the farmer would have to take a loan equivalent to the
amount of subsidies from the NBFC. This loan amount would be paid to JISL in lieu of
the subsidy receivables. After receiving the subsidy amount from government, the
farmer would close the loan and pay the interest amount to the NBFC. Our estimate is
that the NBFC would reduce cumulative working capital investment by 75 billion over
a 10 year period [EXHIBIT C, F]. This would reduce JISLs financial leverage and
increase its capacity to substitute short term loans with lower cost long term loans in
order to fund its investments in R&D and manufacturing capacity.
3. In order to achieve 53.5 billion (US$ 1.2 billion) sales from agro processed foods
segment by 2017, JISL would have to invest in order to expand its food processing
capacity, increase product portfolio, build linkages with the global food supply chain
through acquisitions, and acquire more institutional clients. An increased capacity must
allow JISL to process almost double the number of varieties of food and vegetables that
it procures from farmers in current scenario. We expect that agro processed foods will
contribute to almost 45% of JISLs total revenues by 2022 as compared to 17% in 2012.
The shift in revenue mix to a more profitable business would boost PBIDTA margin to
26% by 2022, up from 20% in 2012. [EXHIBIT C, E]
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4. We estimate that JISLs workforce would expand to more than 20,000 by 2017 and
more than 40,000 by 2022 thereby requiring significant investment in recruitment and
training activities to manage the business growth. JISL should establish partnership with
universities offering courses in agriculture in order to satisfy its huge intake
requirements of young professionals each year. Internship programs would provide JISL
opportunities to identify candidates with a strong aptitude and willingness to work with
farmers in the tough rural environment. Robust training and incentive based
compensation systems would allow the firm to identify top performing candidates best
suited for management roles. Thus a focus on recruiting motivated individuals at the
beginning and developing leaders within the firm would promote a culture of
meritocracy and allow the most deserving candidates to take up more responsibilities
for managing JISKs rapid growth.
5. We anticipate JISL would have to invest 61.9 billion by 2017 [EXHIBIT G] in order to
build capacity and R&D expenses for sustaining rapid growth across all its business
segments. This investment would have to be mobilized through external sources of
financing. We project that the total debt would increase to 80 billion by 2017 from 38
billion in 2012. The firm would also have to issue additional equity shares to raise
equity financing till 2017. However, positive cash flows that would result from higher
profitability and lower investment requirements in successive years would allow JISL to
completely pay-off its debt by 2022. Based on our financial model [EXHIBIT C to H]
we estimate a 20% IRR for the JISLs business based on our 10 year projections. Thus,
we expect our strategy to yield positive returns with lower business risk.
[Word Count: 2396]
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EXHIBITS
EXHIBIT A: INDIA MARKET FOR MIS
Supply of agricultural land in India 140 million ha
Supply of Irrigated land 62 million ha
Based on total agricultural land 1,278 billion
Based on irrigated land 566 billion
Assuming 45,650 as cost of installation of an MIS system per ha of land with an average lifecycle of 5 years we estimate the annual sales
EXHIBIT B: INDIA MARKET FOR MIS
Additional Interest Burden On Farmers Due to NBFC 2000 (assuming 12% p.a. interest for 9 months)
Minimum Assured Increase In Farm Income 22,285 per ha
Assuming cost of MIS as 45,650 with 50% subsidy. The increase in farm income outweighs the additional interest cost
EXHIBIT C: GROWTH ASSUMPTIONS
5 year CAGR in Revenues 2013 - 2017 2018 - 2022
Micro Irrigation 30% 15%
Piping Products 15% 10%
Agro Processed Products 45% 31%
Plastic Sheets 5% 5%
Other Products 30% 15%
Operating Assumptions* End of 2017 End of 2022
Cash to Cash Cycle (days) 160 100
Net Fixed Assets (% of revenues) 55% 53%
Depreciation (% of Net Fixed Assets) 6% 6%
PBDIT Margin 23% 26% * For the years in between 2012-2017 and 2017-2022 we assume a linear interpolation of the above values
Other Assumptions
Marginal Tax Rate 34%
Terminal Growth Rate 3%
Cost of Capital 15%
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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT
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EXHIBIT D: REVENUE SCHEDULE
All figures in
millions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Micro
Irrigation 26,798 34,837 45,289 58,875 76,538 99,499 114,424 131,588 151,326 174,025 200,128
Piping
Products 9,855 11,333 13,033 14,988 17,236 19,822 21,804 23,985 26,383 29,021 31,923
Agro
Processed
Products
8,352 12,110 17,560 25,462 36,920 53,534 70,130 91,870 120,350 157,658 206,532
Plastic Sheets 1,995 2,095 2,199 2,309 2,425 2,546 2,673 2,807 2,948 3,095 3,250
Other
Products 2,400 3,120 4,056 5,273 6,855 8,911 10,248 11,785 13,553 15,585 17,923
Eliminations -194
Total Revenue 49,206 63,496 82,137 106,908 139,974 184,312 219,279 262,034 314,558 379,384 459,756
Revenue
Growth 18% 29% 29% 30% 31% 32% 19% 19% 20% 21% 21%
EXHIBIT E: PROFIT AND LOSS SCHEDULE (PARTIAL)
All figures in
millions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Total Revenue 49,206 63,496 82,137 106,908 139,974 184,312 219,279 262,034 314,558 379,384 459,756
Revenue
Growth 18% 29% 29% 30% 31% 32% 19% 19% 20% 21% 21%
PBDIT 9,706 12,928 17,245 23,125 31,167 42,210 51,480 63,025 77,468 95,616 118,518
PBDIT
Margin 20% 20% 21% 22% 22% 23% 23% 24% 25% 25% 26%
Depreciation 1,599 2,070 2,687 3,508 4,606 6,082 7,184 8,521 10,154 12,155 14,620
Depreciation
(% of Net
Fixed Assets)
6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%
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EXHIBIT F: WORKING CAPITAL AND NET FIXED ASSETS SCHEDULE All figures
in millions except %
and days
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Working
Capital 23,457 29,782 37,896 48,504 62,432 80,794 88,913 97,635 106,864 116,414 125,961
Cash to
Cash Cycle
(days)
174 171 168 166 163 160 148 136 124 112 100
Net Fixed
Assets 25,715 33,531 43,825 57,628 76,219 101,372 119,726 142,022 169,232 202,591 243,671
Net Fixed
Assets
(% of
revenues)
52% 53% 53% 54% 54% 55% 55% 54% 54% 53% 53%
EXHIBIT G: FREE CASH FLOW AND TERMINAL VALUE
All figures in millions 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
After tax PBIT 7,166 9,609 12,947 17,530 23,844 29,235 35,972 44,427 55,084 68,572
Depreciation 2,070 2,687 3,508 4,606 6,082 7,184 8,521 10,154 12,155 14,620
Working Capital
Investment 6,325 8,114 10,608 13,928 18,362 8,119 8,721 9,229 9,550 9,547
Capital Expenditure 9,886 12,981 17,310 23,197 31,236 25,538 30,817 37,364 45,514 55,700
Free Cash Flow to Firm (FCFF)
-6,975 -8,799 -11,463 -14,989 -19,671 2,762 4,955 7,988 12,175 17,946
Terminal Value in 2022 154,032
Total Cash Flow to Firm -6,975 -8,799 -11,463 -14,989 -19,671 2,762 4,955 7,988 12,175 171,978
Cumulative financing of 61.9 billion required till 2017 as cash
flows are negative
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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT
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EXHIBIT H: FINANCIAL RATIOS All figures in millions except %
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Reinvestment Rate 226% 220% 216% 212% 208% 115% 110% 105% 100% 95%
Debt/Equity 2.2 2.1 1.5 1.1 0.9 0.8 0.6 0.4 0.3 0.2 0.1
Sales/Capital Ratio 1.0 1.00 1.01 1.01 1.01 1.01 1.05 1.09 1.14 1.19 1.24
Return on Assets 5% 7% 8% 9% 10% 10% 12% 13% 15% 16% 18%
Return on Equity 13% 22% 20% 19% 18% 18% 19% 19% 19% 19% 20%