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.

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13

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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

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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.

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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.

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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

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