EPC industrie LTD - CMP 137
EPC industrie is a listed player in micro irrigation space which has been around since 1986 . EPC was acquired by Mahindra in 2011 and it is part of Mahindra’s agri business group .
EPC fails on most conventional valuation ratios and doesnât have a record worth speaking off . it had a troubled history - was in BIFR until 2009, was salvaged by PE infusion from Credit Renaissance Development Fund , they continued to hold around 50%+ in the company until recently .
Why to buy
1.Huge opportunity size :Though micro irrigation(MI) has been around for 30+ years in the country , it has extremely low penetration .MI is considered superior to traditional flood irrigation as it leads to substantial water savings (30% +) and increased crop yield (20%-90% increase depending on the crop) .in India out of 65000+ hectares , only 5-6 million hectare so far has been covered by MI . additionally , the MI systems needs to be replaced or upgraded every 4-5 years , so continued demand is virtually assured. Organized players have 85% share of the market , 15% is shared by various marginal regional players . Jain irrigation has major chunk of the market followed by netafim, finolex . EPC’s market share is less than 5% .The market is growing over 25% in past few years thanks mostly to the huge government (both state and central) subsidies to the farmers for installation of MI systems. subsidy can vary from 50% to 100% depending on the state.Budget outlays for this have been continuously increased realizing the benefits offered by micro irrigation when compared to the traditional flood irrigation which is prevalent in the country
2.Mahindra Muscle : Apart from infusing lot of cash via preferential allotment and subscribing substantially in the rights issue , Mahindra also has a formidable dealer/distribution network for its tractor and farm equipment business and enjoys lot of good will with the farmer community .Micro irrigation integrates very well with this business and this network is being leveraged already to market and distribute EPC’s products. Additionally , EPC has come up with its own retail format where MI products in addition to other agri inputs products from Mahindra are being sold . So far one outlet was opened in Maharashtra , not clear if this format has gained any traction or will be expanded nationwide .
From what i understand of MIS , there seems to be very little by way of differentiation in terms of products between the competing companies operating currently , Growth has been achieved by companies ability to reach out to farmers and their ability to sell the MI concept to them.Mahindra has a distinct advantage on this front . This has already started reflecting in the results of past few quarters post acquisition with company recording increased revenues.
For the full year of operation for FY12 under Mahindra , epc revenues were up 44% to 120.24 cr.profits were four fold to 6.66 cr
For FY 13 nine months , company has already notched up 123 crores in sales compared to 85 cr from last years , profits though are only marginally positive. still trying to understand reasons for flat bottom line growth in the period , there might be increased expenses related to branding and marketing and ramping up etc .Jain irrigation enjoys around 27%- 30% margins in its MI business at EBIDTA level ,though epc’s margins at 7-8% are extremely low compared to that.
3.Business model : EPC’s business model is two pronged :Open market Sales and project sales
Open market sales : Sales are made through various dealers and channel partners . Dealers/channel partners make majority of the payment to the company upfront . The dealers make the sale to the farmers and will take the burden of following up with government on subsidy payments. This is different from the business models which companies in this space used to follow traditionally , where in the subsidy was directly given to the company upon sale to the farmer . This used to expose companies to delays in payments by the government and is the cause for the trouble which jain irrigation finds itself in today . Jain has also started following this model in Maharashtra since last year with some degree of success though at the cost of reduced sales (around 20-25% YOY degrowth)
Project Sales: EPC also sells/installs the MI system as part of any project deal . Most of the project work is through the state government projects like Gujarat green revolution company. the company usually get a 15-20% advance payment and rest is paid by the government upon completion . the risk here is the company is exposed to any delays in release of payment by the government . the duration of payment varies from state to state . From efficient - 45 days (Gujarat) to not so efficient - up to 6 months (TN and AP).
The company has recently entered in to an arrangement with SBI to provide loans for farmers who want to install company’s MI system
Why not to buy
**Growth dependant on Government policies :**Most of the growth in the sector was kicked off by support from government subsidies . any reduction in government budgetary outlays for agriculture or irrigation could impact the sector as a whole . Though recently , MI has gained traction among the farmer community due to the proven benefits like Water savings and crop yield improvements when compared to traditional irrigation methods.
Delays in subsidy payments : any delay in release of government subsidies will have an adverse impact on the company . if you want to get a sense of how much this impacts look at jain irrigation (over 1500 crore receivable from various state government pending ). However the company seems to be keen on not making the same mistakes by following a relatively de-risked model since Mahindraâs takeover.
Competition : the market is dominated by jain irrigation followed by netafim . there are other players like finolex and recently godrej industries has made a foray in to the market .
At CMP of 138 , the stock trades at a PE of 55 ttm earnings . it looks like market is also quite bullish about what Mahindra can do with this business .
There is very little coverage from analyst community or brokerage houses .Even communications from company are limited . only coverage i have seen so far is from individual blogs like valuepicks etc . Though there is sizable stake by quite a few prominent institutions in the company. Hopefully this should improve going forward .
In conclusion , an investment in EPC at CMP is a bet on huge opportunity in micro irrigation sector and how far Mahindra can take their micro irrigation business
Looking forward to everyone’s comments.
Disc : have initiated a small position to track the company