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Mahindra EPC Industries

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

2 Likes

HI Shadab,

The company has declared good results for June '13. Are you still tracking it ?

BR,

Shankar.

hi shankar

yes i do . the PAT numbers look good but sales are up only 10% YOY. given that every agri related company has done exceedingly well this quarter its somewhat disappointing .Even jain who had revamped thier business model and intentionally gone slow on growth to reduce subsidy burden in last few years in micro irrigation business have grown 21% this quarter.

i was expecting a more aggressive ramp up in revenues as they were starting off with such a low base ,i guess markets were also expecting this but this has not come about in last few quarters hence stock has been crumbling slowly on a daily basis .

Have shared a presentation on Micro Irrigation and Two prominent companies - Jain Irrigation and EPC Industrie

3 Likes

Superb Presentation Jatin. Kudos…Totally floored by it.

Looks interesting both the companies. Have initiated starter position. Lemme read some more over the long weekend.

Yes the presentation was a good one Jatin.

I won’t be surprised to see Mahindra’s doing a Mahindra CIE to EPC Irrigation sometime in future. Would need to keep a keen eye on Mahindra’s plan for EPC. They have big plans coming up in the agri sector. EPC may well be their platform for the same (after EPC’s takeover,Mahindra made changes to the memorandum of EPC to include other agri businesses).

Cheers!!!

believed in mis, but had to come out of jain at a loss :frowning: … convinced to park the remaining in epc ! m&m is a long race horse… lets see what they gonna do with epc … 5 years down the line.

Anyone tracking the company now ? Any views on it ?

FY18 Q2 Results: http://www.bseindia.com/xml-data/corpfiling/AttachLive/044A69CC_4B8D_459C_BE52_3E99014438EE_171301.pdf

Surprising to see negative numbers…

Mahindra group firm EPC Industrie Ltd today said it has formed a joint venture with Israeli greenhouse company, Top Greenhouses Ltd, to work in protected cultivation industry and provide specialised and relevant technologies to Indian market.

EPC will hold 60 per cent stake in the JV with the rest 40 per cent by Top Greenhouses, Mahindra & Mahindra said in a BSE filing.

“It is an opportunity for EPC and Top wherein both the partners can draw on the strengths of each other and grow protected cultivation business by providing access of hi-tech and relevant solutions to country at large,” EPC Industrie Managing Director Ashok Sharma said.

EPC Industrie expands into the nascent, high-potential protected cultivation industry.

Having huge plans with 218 Mahindra Agri Villages coming-up pan India, Mahindras will be dominant players across the entire agri value chain & EPC clearly has a very important role to play.

A bet on surging industry prospects & Mahindras as great wealth creators

Mahindra epc (as it is now named) seems to be on a strong growth path. Both q4 fy 20 and FY 20 full year results have been good.

fy 18 sales 205 cores, Op profit 12 crores net profit 5 cr
FY 19 sales 260 crores Op profit 20 crores net profit 11 cr
FY 20 sales 284 crores Op profit 23 crores, net profit 23 crores.

FY 20 eps is at 8.39 per share.

Seems company has delivered 3 years of consistent growth in both sales and profits with expanding margins.

With competition in tatters (jain irrigation is in trouble), if company can play its cards right, it has a long run way for growth due to allocation in PMKSY scheme.

Technically, stock has broken out of a cup and handle pattern.

disc: took a starter position to track the story.

12 Likes

Hitesh bhai any thoughts on the business not generating enough cash flows?
23 Crs PAT vs 9 Crs CFO in FY20

@barathmukhi

Company works in a sector which enjoys govt subsidies. The payment of these will not follow a regular pattern and will often be lumpy.

So receivables will always be high. Key monitorable remains working capital and balance sheet strength.

There is talk of DBT in this sector and if that comes through, receivables will be less of an issue.

4 Likes

sir how does DBT work?

Mahindra EPC Irrigation Ltd - Audited Financial Results For The Quarter And Year Ended March 2020

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Outsourcing is making biz more asset light. Fixed asset turnover has improved from 5.5x to 11x. DPO increased from 75 days to 160 days over last 5 years. However, DSO has deteriorated.

Non-project business has very high estimated loss rates for receivables and seems to have been wound down - receivables declined to 12 cr in FY19 v 28 cr in FY18

Given the historical issues of players with receivables in this business, I would look at receivables management as the most important capability for management. In that respect, EPC is yet to prove itself

2 Likes

Few Notes from Annual Report

  • Company’s MD - Mr Ashok Sharma’s salary is Rs 24 lacs per annum only.

  • Pradhan Mantri Krishi Sinchai Yojana (“PMKSY”) was launced in 2015 for a period of 5 years. [PM More Crop per Drop plan 2020 Scheme will be implemented under PM Krishi Sinchayee Yojana . Through this, the cultivated areas of the country will be expanded in 5 years.]

  • Tamil Nadu, Andhra Pradesh, Gujarat, Maharashtra and Karnataka contribute to over 70% of Micro Irrigation coverage in India. With highest state allocation for MIS, Gujarat, Maharashtra, Karnataka and Tamil Nadu represent the hotspots for MIS in India

-During the year under review, the Company has focused on improving penetration of affordable automation products for Micro Irrigation under the brand “Smartflo”. Further, the company has introduced Drip tape, an innovative product, which provides effective and desired wetting pattern for the crop resulting into improvement of yield.

-In line with the policy of going near to customer, the Company has successfully implemented the strategy of having a plant in Tamil Nadu on contract manufacturing model. This proximity to customer has benefited the Company delivering the solutions in time and realizing considerable savings in freight costs.

-The major risks and threats to the Micro Irrigation industry are uneven distribution of rainfall, competition from unorganized sector, Government policies, constant fluctuation in polymer prices and drought like situation for consecutive years. [Re: polymer pricing - Materials cost was 53% of the Company’s Sales for FY 20. Low crude prices bodes well for RM cost reduction in current times.]

  • Long lead time in release of State subsidies requires more working capital for MI Industry. However, with the implementation of PMKSY Scheme by the Central Government, the overall subsidy release has shown some signs of improvement.

-Competition from unorganized sector, a major concern for the organized players in the industry has started declining due to implementation of new tax regime.

  • On Covid: Agriculture falls in the essential activity category and so the micro irrigation industry by virtue of its support to agriculture may see a somewhat reduced impact. In addition, the industry by its nature is concentrated in rural areas where risk of COVID spread is lower than in urban areas. Also, the Company as a part of its strategy has implemented strong geographical diversification with presence across several States and hence due to this, the COVID risk gets further reduced.

  • Cash flow from operations continues to be low in FY 20 also with Debtors at around 180+ Days outstanding.

  • Roughly 1/4th of receivables are classified as Non-Current (Expected to be received in more than 1 year). Doubtful receivables fully provided have increased from 12 Cr in FY 19 to 17 Cr in FY 20.

  • Roughly 3/4th of Receivables are ‘Project’ and balance are Non Project.

  • Short term borrowings have gone up from 3 Cr to 13 Cr. Interest rate is 7.5%.

  • Commission paid on sales is very high at 11% of Sales (FY 19 also 11% of Sales)

Disc - Invested with a small % of total Portfolio.

Mr. Sanjeev Mohoni is the CEO. His compensation is ~ 1.5 cr.

So, management is fairly well paid.

He was the CEO till 31st March 2020.
Mr. Abhijit Page – CEO ( From April 2nd 2020)
https://www.linkedin.com/in/abhijit-page-14699118/?originalSubdomain=in