Mahindra EPC Irrigation Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS

Company Profile

Mahindra EPC Irrigation Limited, one of the pioneers of Micro Irrigation in India (Since 1986), enables farmers to Rise through Sustainable Precision Farming Solutions in the space of Micro Irrigation, Water Management, Automation, Community Irrigation and Protected Cultivation.

Mahindra EPC Irrigation Limited (Mahindra EPC), formerly known as EPC Industrie Limited is a part of Mahindra Agriculture Business. In order to have better synergies, the Mahindra Agriculture business and thus Mahindra EPC has moved under Mahindra and Mahindra Limiteds Farm Equipment Sector.

Mahindra EPC responsibly carries the legacy of over 75-Year-old Diverse Mahindra Group. We work for ‘Driving Positive Change in the lives of our community and believe in ‘Only when we enable others to Rise will we Rise #TogetherWeRise.

Mahindra EPC is known for its quality and its ability to provide customized end to end Irrigation and Water Management solutions to individual farmers as well as communities. This is made possible through the Companys Pan India presence, Synergies with Mahindra Group, Technical Expertise, Superior Manufacturing Facilities, Wide range of Quality Products as well as Highly Qualified and Capable team. To be closer to our customers, we have set up multi-locational manufacturing facilities in India. Further the Company is also known for its Quality Services in the space of Planning, Design, Installation, Agronomy, After sales Services - In person as well as through Digital delivery. Working over the last few years, we have successfully proved application of Drip Technology on even Non-Traditional Crops such as Paddy. It is our constant endeavour to innovate our products, services as well as solution delivery approach.

Mahindra EPC is registered in all major states of India under the Per Drop More Crop scheme (PDMC) of the Government of India (GoI) for subsidy program, which is ably supported by respective State Governments. To deliver on various solutions under this program, Mahindra EPC has a strong network of over 1000 channel partners which is supported by its branch offices across India.

In recent years Mahindra EPC has moved beyond India to the African Continent through its channel partners and have executed a few irrigation projects.

In our Protected Cultivation Solutions business, we have conceptualised, designed, and delivered, innovative and profitable solutions to hundreds of small and marginal farmers in addition to our core competency of High-end Technology Solutions.

As a responsible corporate, we are aligned to Sustainability Commitments, have signed up for Science Based Targets and are committed to a Carbon Neutrality road map.

Overview:

Agriculture continues to be a significant contributor to Indian Economy. Though for the year 2023-24, the Ministry of Statistics & Programme Implementation has projected a 1.8% growth for Agriculture Sector which is lower compared to previous years (F21 - F23) range bound growth of about 4%. According to the estimates, released by the Ministry of Statistics & Programme Implementation (MoSPI), the GVA of agriculture and allied sectors was 20.1 % in 202021, 19% in 2021-22, 18.3% in 2022-23 and it has further come down to 17.8% LE 2023-24. This to some extent is on account of improvements in other sectors. However, Agriculture continues to be a major sector for Indias growth and sustenance.

As we know the most critical resource for agriculture is water. The agriculture sector accounts for 70% of freshwater withdrawals as per World Resources Institute (WRI) whereas as per Central Water Commission, in India, the figure is a whopping 80% for the agriculture sector with just 7% for industries and power generation, 6% for domestic use and 7% for other use. Further, the water requirement by 2050 is expected to be 1,180 billion cubic meters (BCM), while the total availability of water in the country from all available sources is going to be lower than this projected demand, at around 1,123 BCM, thus we are staring at a shortage of approx. 57 BCM in 2050. To survive, feed the increasing population and ensure the success of growth-contributing programs such as ‘Make in India, the only solution is to improve the water use efficiency and the major contribution must come from the Agriculture sector.

Thus, the growth story of Indian economy in general and Agriculture in particular will remain a challenge without Micro Irrigation. Micro Irrigation addresses issues such as Water use efficiency, Productivity and Farmer income improvement, which aligns with Hon. Prime Ministers vision of doubling farmer income. Various studies have proved that Micro irrigation benefits the farmer by saving cost such as Fertiliser, Labour and Electricity in the range of 20-30% while improving the productivity by 30-40%. Over the last few decades, continued irrigation through traditional practices has begun to show its ill effects on groundwater quality and availability, soil health, crop productivity and cost economics of farming practices. This calls for Surface water use efficiency improvement too, which is incomplete without ‘on farm water management, making Micro Irrigation critical which currently has only about 15% penetration out of a 70 billion Hectare potential.

Recognizing the importance of Micro Irrigation and its ability to improve productivity, the Government of India (Gol) identifies Micro Irrigation as one of the key tools to double farmer Income. Though this is very encouraging, the funding from State Governments is equally important. As major part of the subsidy is controlled by state, various critical aspects of the scheme such as pricing decision, are taken by state Governments whereas, GoI issues guidelines and defines boundary conditions such as the Unit cost norms.

Industry Structure and Developments

The Micro Irrigation System (MIS) Industry in India has been broadly segmented based on types of micro irrigation systems (drip and sprinkler irrigation systems), applications of micro irrigation systems and with or without subsidy assistance. The subsidy business has been further segmented basis the approach of solution delivery and subsidy disbursement into the project market and open market. Project markets being the ones where the Company directly supplies and installs the solution at Farmers field against the work orders received from the State Nodal Agency, whereas open markets are the states in which the Companys solutions reach to farmers through its dealers and farmer claims the subsidy directly.

In the recent past the Industry has been subdued with a steep drop in F21 v/s F20 and then a slow revival in F22 and F23, still with a negative CAGR for F20 to F23. From F23 H2 onwards, as few major states revived and the price increase was operationalised, the Industry started showing better growth rate. The growth trend continued in F24 and the Industry is likely to grow by 7-9% and may resume its F20 levels (All growth number are based on Industry Coverage data in Hectares published on official portal). This is on account of major markets such as AP, Karnataka, TN and Gujarat being active for a substantial part of the year. While few major states contributed positively, Maharashtra demand was constrained on account of skewed rainfall as well as delayed fund disbursements compared to F23.

For a significant part of the year F24 the raw material prices were stable and softer compared to the previous financial year. Riding on this the industry witnessed a better year and to note, the coverage of Micro Irrigation in F24 is likely to be around 11.8 Lakhs Hectares, v/s 11 Lakh hectares of F22. The industry is estimated to have done better in H1 of F24 on the top line. A major state like AP got activated early in Q1 F24 and had a positive impact on the industry numbers. Early this year Micro Irrigation project ‘Per Drop More Crop (PDMC) got shifted from ‘Pradhan Mantri Krishi Sinchayi Yojna (PMKSY) to ‘Rashtriya Krishi Vikas Yojana (RKVY). Though difficult to predict, in the long run this may prove to be beneficial, but in the current context the industry faces certain procedural challenges. In F24, the industry also faced challenges of delayed collection from certain major contributing states, making it a play of individual Companys risk appetite. This has led to increased receivable days for many players.

The profitability of the Industry is primarily driven by the Prices from State Governments and the Raw Material Prices which is the largest contributor to input costs. As mentioned earlier the raw material prices softened and the price increase effect that flowed in from H2 F23 from states other than Karnataka, which too made Price increase operationalised in F24. To note, the price increase so far made effective for every state has still not covered the increased input costs in entirety.

Based on the coverage in Hectares published by the GoI, a new trend is emerging in last couple of years showing, higher rate of industry growth in Northern and Eastern states compared to traditional states in Central and South India.

Further, as we look at the various key states, the stable policy states like Maharashtra, Gujarat, and Tamil Nadu are likely to continue their contribution in F25, in addition to this States like AP, and Telangana show a promise, though in their limited capacities. It is also expected to get a positive push from states in the North viz. Rajasthan and Uttar Pradesh.

The Government of India (GoI) strongly believes in Micro Irrigation as one of the key tools to save water as well as double farmer Income and thus Hon Prime Minister has been pushing for 20 Lakh Ha a year target for Micro Irrigation.

Though this is very encouraging, the buy-in, funding and priorities of State Governments is equally important. States play a vital role in controlling Funds, Pricing as well as administrative aspects. Also, for Micro Irrigation industry the raw material prices play a critical role, presently though the prices of polymers look stable, the changes in the Geopolitical conditions could impact this key cost.

With prices improved, RM Stabilised, Dormant states getting active and new states emerging, various Industry players expect a reasonable growth in the coming years.

Opportunities and Outlook

Micro-irrigation being a proven solution to improve water use efficiency, productivity improvement and improving farmer income, stands as a compulsive tool to ‘Double Farmer Income, ‘Water conservation and support the ‘Growth of Sectors other than Agriculture. With this background and various initiatives taken by Central and State Governments, Micro Irrigation industry is likely to see good growth possibilities in the near future.

Though F25 is a year of General Elections as well as State elections in few industry critical states, it would be a year of Opportunity led reasonable growth. As per the Indian Meteorological Department and various Private players, India is likely to receive above average Monsoon in 2024. This brings in a likelihood of good ground water availability especially in the second half of F25, which is critical for Micro Irrigation.

In F25 several current active states are expected to remain active giving a positive push to the industry, though there will be an impact on regular operations during the election period. As mentioned earlier, few states in the north are showing growth for last couple of years e.g., Uttar Pradesh; with processes becoming more and more transparent these states are likely to contribute to the overall Industry.

Further, the Central and State Governments are focussing on Water conservation and use efficiency improvement. In F23 Government introduced ‘Atal Bhujal Yojana, with the objective to improve the management of groundwater resources in select water-stressed areas. In F24 the Industry witnessed a positive push on account of this, especially in the State of Gujarat, which is likely to continue in F25.

Further the GoI is also actively looking at developing clusters for linkage of Major Irrigation projects to Micro Irrigation along with ‘Pressurised Piping Systems. These actions may open up opportunities for Irrigation Projects.

The Company will focus on small, faster cycle projects for which some early success is seen.

Though the RM prices are expected to be range bound at current levels, on account of ongoing Geopolitical matters it is difficult to predict the same. This highlights the continued efforts to safeguard and improve margins with a focus on Cost-saving measures and balancing the revenue portfolio through optimizing State, Product and Segment mix.

There are opportunities identified for future in the space of water use efficiency in ‘Water Guzzling Crops such as paddy. Taking F23 initiatives further the Company developed success stories for ‘Drip in Paddy, and this has benefitted the farmers by improvement in productivity. These efforts will continue in F25 too, though the real commercial benefit will take some more time as the farmers adopt these technologies on a large scale.

As mentioned in the investor communication, within the Mahindra Group, the Company is now a part of Mahindra Farm Equipment Sector (FES). This will throw good opportunities of Synergy with the sector businesses.

The overall Agriculture Space is experiencing a lot of technological interventions in precision agriculture, leaving possible opportunities for adoption, convergence, and collaboration.

Operations and Financial Performance

F24 began with state of AP getting active, Gujarat showing a spurt in demand and Maharashtra being active. This led to a growth of 51% in H1 F24. Subsequently in Q3 F24 the growth was constrained on account of lower demand from Maharashtra and a slowed down operation in AP. In Maharashtra the channel cash flow was impacted on account of delayed subsidy disbursements to farmers as well as a lower demand on account of skewed rainfall. Whereas in AP the fund disbursement was delayed and the situation remained till end of F24. On the other hand, the Companys revenue was supported by operational Karnataka and the non PDMC revenue.

Overall during the year, the RM prices remained range bound.

During the year 2023-24, the Company achieved a Sales Turnover of Rs. 262.50 crores as compared to Rs. 210.40 crores in the preceding year, a growth of 25%.

The Company continued its focus on debtor management and processes.

The Company consciously controlled the operations in certain states of strength to strengthen processes including Revenue Recognition, Debtor reduction etc.

While doing so the Company worked on improving the product mix, state mix and segment mix. During this period Company achieved its highest ever Exports Revenue as well as Non PDMC Revenue. With continued efforts, the Company has developed a strong work order pipeline for irrigation projects. As a result, in F24, the Company has registered 27% of its revenue from non PDMC segments, a stride towards reducing dependence on subsidy.

The strategic actions taken in the previous years gave the Company a much-awaited push in select markets as well as the non-subsidy segment. This included actions on geographies, channel, people, and processes.

The Company continued its focus on serving the Customers needs resulting in lower Customer complaints, Lower rejections across all production locations.

The Company further continued efforts on asset efficiency improvement through TQM practices and frugal engineering as well as the reduction in working capital to reduce the impact on the bottom line. The Companys commitment to sustainability (SBTi), social responsibility and delivering quality services to the farming community will strengthen further in times to come, as an acknowledgement of this Mahindra EPC, retained its grading to ‘Stage 5 in ‘The Mahindra Way (TMW) assessments.

Key Financial Ratios

The Key Financial Ratios of the Company are given below:

				Standalone
Ratio	Numerator	Denominator	FY 2024	FY 2023	% Change
Debtors Turnover (Days)	Average Debtors	Net Sales	239	305	-21.63%
Inventory Turnover (Times)	COGS	Average Inventory	3.29	3.32	-0.75%
Debt Service Coverage Ratio	Earnings available for debt service	Debt Service	7.53	0.81	832.84%
Current Ratio (Times)	Total Current Assets	Total Current Liabilities	2.35	2.20	6.77%
Debt Equity Ratio (Times)	Debt	Shareholders Equity	0.09	0.09	0.0%
Net Profit Margin (%)	PAT	Net Sales	0.64%	-5.82%	-110.94%
Return on Equity (%)	PAT	Net Worth	1.02%	-7.23%	-114.06%
Trade Payable Turnover (Days)	Average Trade Payables	Net Purchases	152	166	-8.82%
Return on Capital employed	EBIT	Capital Employed	3.11%	-7.58%	-141.01%
Working Capital Turnover Ratio	Net Sales	Average Working Capital	2.14	1.96	8.83%
Return on Investments	Income generated from invested fund	Average invested funds in treasury investment	7.42%	2.84%	161.76%

During this year, the Company initiated its operations in the State of West Bengal keeping in view the industry growth in eastern markets.

In F24, the Company completed the impairment of its stake in JV and going forward will explore the ‘Protected Cultivation segment on its own.

With focused efforts on receivable optimization, the company has successfully for the second consecutive year managed the business with lower debtor days, from 269 days in F22 to, 195 Days in F23 and 172 Days in F24. Although, the delays in collection from certain project markets has impacted the cash flow. With continued efforts, improvement in the collection process as well as expected normalcy at the nodal agencies, we expect an improved performance in F25.

The Company has done a detailed review of old receivables and taken actions to recover the same. Further, as a measure of abundant caution have provided sufficiently for receivables that have been due for a longer period.

The Company continues to provide support to farmers by way of the Agri Helpline for online support besides undertaking initiatives such as showcasing Demo Plots, organizing farmer meetings, creating success stories and agronomy services for farmers to improve farm productivity. These value-added services certainly help enhance the number of farmers achieving Farm Tech Prosperity.

During the year under review, the Company continued to achieve a high rating in ‘The Mahindra Way (TMW) assessment, which measures business excellence across business processes. The Company continued its focus on Total Productive Maintenance (TPM), Total Quality Management (TQM) Continuous Improvement Team (CIT), Mahindra Yellow Belt Programme, Kaizen, Quality Parameters on all machines and Service Quality Index. These measures have resulted in improvements in production efficiencies, reduction in rejections and improvement in customer satisfaction levels.

Risks, Concerns and Threats

The major concerns faced by the industry are, absence of all year round working of the scheme, delayed Opening of the scheme, lack of implementation of dynamic price revision and delayed funds release by certain State Governments. Though the intent of the GoI as well as State Governments is to increase the speed of MI coverage, these concerns presently remain. There are many deliberations and representations taking place through the competent Industry bodies and the importance of

the same has been conveyed to the relevant authorities. In the future, consistent and cohesive Central and State policies will bring in effective solutions on the same. Till then tighter internal controls have been exercised for debtor monitoring along with rigorous cost controls.

The Company has identified certain markets and is focusing on developing these for year-round business opportunities. Further, the Company has undertaken initiatives to reduce dependence on subsidy markets, this has and will lead to maintain business activity levels as well as improve on working capital. Also, the Company riding on Synergy possibilities across Farm Equipment Sector, will cover the risk to topline and bottomline to some extent.

Further, uneven distribution of rainfall, unorganized sector and dependence on polymer prices are a few more risks. The risks due to seasonality and distribution of monsoon get addressed with Mahindra EPCs well-spread operations in different States, where despite different monsoon months, the Companys operations are balanced to a certain extent.

In the recent past, an increasing preference for low-cost - medium-life non-subsidy products are observed. The Company has its readiness to address these requirements.

Considering the impact and ever staring water crisis Micro Irrigation creates a strong case to address the key challenges surrounding the agriculture sector which include, innovation in technology and mechanisation with increased penetration. The Company is working on technology solutions for the farmers through its collaborations and tie-ups with various partners in this space.

With only 15% penetration of Micro Irrigation, Surface irrigation will still dominate as the primary irrigation method for some years, the efforts of the Government agencies to create policies that include connection of surface water to on-farm water management will further improve the scope for Micro Irrigation, and the area under micro-irrigation will continue to expand.

Internal Control Systems

The Company has an effective and reliable internal financial control system commensurate with the nature of its business, the size, and the complexity of its operations. The internal financial control system provides for well-documented policies and procedures, that are aligned with Mahindra Groups standards, processes, and policies; and enable the Company to adhere to statutory requirements for the orderly and efficient conduct of business, safeguarding of assets, detection and prevention of frauds and errors, adequacy and completeness of accounting records and timely preparation of reliable financial information.

The Company uses an ERP System as a business enabler and to maintain its books of accounts. The transactional controls built in the ERP System provide segregation of duties and appropriate levels of approval mechanism and maintenance of audit trail. The System and the Standard Operating Procedures are reviewed by the management and strengthened wherever required. These systems and controls are audited by the Internal Auditors and their findings and recommendations are reviewed by the Audit Committee. The Action Plan is prepared by the management for all the Audit findings and recommendations and is continuously monitored on monthly basis, while the action taken report is reviewed by the Audit Committee every quarter. The Company continuously makes efforts to automate its processes to enhance the controls.

The internal control framework covers all major business processes and the risks therein, bringing control and integrity. These are tested by the management based on the Risk Control Matrix.

Based on managements assessment and testing of controls, it is concluded that the Company has proper internal financial controls which are considered adequate and are operating effectively.

Human Resources and Industrial Relations

In line with its commitment to deliver superior performance through its dedicated, capable, and agile workforce in all spheres of business, the company has focused on Collaboration at work, capability enhancement systems, new ways of Learning & Development and Work-Life Balance to ensure higher productivity.

With the core purpose of Together We Rise philosophy, the introduction of Refresh Rise has shown the new path towards "Rise for a More equal world", "Rise to be Future-Ready", and "Rise to create Value" in the life of our communities.

Given the challenging environment the Company has made changes to its performance management system and has brought in weightages to Collaborative, Agile and Bold Behaviours, the employees would be assessed twice a year during the performance appraisal period. This process covers all four aspects - financial perspective, customer perspective, and Internal business process along with innovation and learning for performance evaluation and strategy deployment. This practice ensures balance across multiple dimensions of the performance of employees.

Human resources initiatives such as skill level upgradation, online training courses, re-deployment of manpower for better utilization, productivity improvement of sales force through building crop-specific capability, appropriate reward and recognition systems and productivity improvement are the key focus areas for the development of the employees of the Company. In the past two years, there have been number of instances wherein the senior positions have been filled through internal talent, which is in line with our strong succession planning policy. As we look ahead, we are confident that our strong, positive people philosophy and practices will make us a preferred organization for talent.

Inline with Mahindra culture of promoting ‘Speak up and ‘Zero Tolerance on Ethics and Governance, the Company has a ‘Ethics help line which is promoted through all communications by senior management. The events reported are addressed by the Ethics Committee through a laid down process.

The organisation has established a proactive Grievance handling mechanism and addressed issues at the very initial stage, to ensure industrial peace and higher productivity. In line with the wage settlement in force, the organisation has ensured to comply with each clause in the Long Term Settlement to ensure harmony at the workplace. The organisation engages with the union and opinion makers to ensure better engagement of the workforce leading to better productivity.

The Companys employees proactively participate in ‘Employee Social Options and the Company is experiencing an overwhelming response by the employees to selflessly participate in ‘Mahindra Volunteers Day, which coincides with ‘World Volunteer Day.

The Company is also sensitizing its people to maintain allaround wellness to ensure the safety of themselves, their families and society at large. To note the Company has over 1500 days of ‘Zero Accident Days.

As of 31^st March 2024, the total number of permanent employees in our Company was 333.

Cautionary Note

This report contains forward-looking statements based on certain assumptions and expectations of future events. Actual performance, results or achievements and risks and opportunities may differ from those expressed or implied in any such forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements, based on any subsequent developments, information, or events.