EPC Industries Ltd (EPC), a Mahindra & Mahindra (M&M) subsidiary, is a micro-irrigation system (MIS) and component manufacturer based out of Nasik, Maharashtra. The Company was acquired by M&M in 2011 and has been well capitalized over the years. EPC commands a market share of ~5% out of the total industry size pegged at ~Rs.4000 crore as of FY17. The Company recently ventured into the greenhouse farming & agri-pumps segment with the aim of becoming a total agri-solutions player domestically. As of FY17, EPC is registered in 15 states under subsidy programme in India. The Company has more than 900 channel partners and 18 regional offices.
Micro irrigation system (MIS) is essentially an irrigation technique wherein regulated quantity of water is applied to the most critical part of the plant i.e. roots. It is implemented through the drip & sprinkler irrigation techniques. Drip is used for widely placed crops like sugarcane, watermelon, onion, cotton, banana, vegetables etc while sprinkler is used for closely placed crops like wheat, groundnut, maize, bajra, etc. The benefits of MIS vis-à-vis traditional method of irrigation are increase in crop yield (~20-30%), savings of labor (~30-50%), water (~30- 40%) & power (~20-40%) amongst others.
Given the savings arising out of using MIS, a wide array of incentives is being provided by the central & state governments towards its implementation. The central government has been promoting MIS through its flagship programme National Mission on Micro Irrigation (NMMI). It has been providing a subsidy of 35% (25% central government’s share + 10% state government’s share) of the cost of MIS to farmers (cap of 5 hectares/farmer). This, however, does not cap the share of the state governments, which are free to incentivize their local farmers. From April 1, 2014, NMMI has been subsumed under the National Mission on Sustainable Agriculture (NMSA) and is now being implemented as on farm water management (OFWM).
Currently, state governments are also giving a strong thrust to MIS with Maharashtra making it mandatory for all cane producers to switch to drip irrigation in the next two years post which their produce would not be procured for crushing if it is not produced using drip technique. The Tamil Nadu government also promotes MIS through 100% subsidy to farmers opting for it. The only dampener for the MIS Industry in India is the low farmer awareness and delay in subsidy release by the state governments. However, given the benefits arising out of usage of MIS and low penetration, the industry is poised for an exciting growth journey ahead.
The working capital cycle got stretched in FY17 with net working capital days coming in at 154 days due to muted demand environment and delay in disbursal of incentives by the government. However, given healthy farm income and rectification of subsidy disbursal mechanism by various state governments, we expect the working capital cycle to improve, going forward.
There is immense potential in the farm irrigation sector in India as methods used currently are still very primitive. Given the strong parentage of M&M additional funding/scaling up of operations is not a problem when the opportunity arises. Given the thrust on the agricultural sector by the government (focus on doubling farm income by 2022) MIS activity is expected to pick up over the next few years. I value the company at 25XFY19E EPS and recommend a BUY with a price target of Rs.204/share.
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The Tortoise Investment Strategy
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’