Mahindra EPC Irrigation Ltd Management Discussions.

Company Profile

Mahindra EPC Irrigation Limited became part of Mahindra Group of companies pursuant to Mahindra and Mahindra Limited ("M&M") acquiring control and management stake in 2011. M&Ms Agri business vertical supplements the Companys business and provides management bandwidth and competence in marketing and operations, which enhances the scope for development of synergies to create value for the business.

The Company is engaged in the business of manufacturing Irrigation systems. The Companys products are popular amongst farmer community for their superior quality. The Companys product portfolio includes mainly Drip Irrigation Systems and Sprinkler Irrigation Systems, consisting of online drippers, inline drip lateral, plain laterals, drip fittings, filters, fertigation equipment, pipe fittings, sprinkler nozzles etc. The Company also manufactures specialised pipes for water and gas distribution, besides pipes required for industrial and agricultural use.

Besides Micro Irrigation Systems, the Company also undertakes activities in the following:

Automation products

Range of Pumps required for agriculture and domestic use

Landscape products

Overview

Indias population stands at 1.3 bn and is estimated to rise at a steady pace to reach 1.7 bn by the year 2050. (According to the World Bank estimates). According to UNFAO report, Indias water resources, particularly in the context of agriculture, are facing extreme stress. Amongst all the economic sectors, agriculture is the one where water scarcity has greatest relevance. Agriculture accounts for approximately 70 percent of the global freshwater withdrawals and approximately 90 percent of its consumptive use.

The country sustains 16 percent of the worlds human population and 20 percent livestock population with just 3 percent of the worlds water. According to UNFAO report, Indias water resources, particularly in the context of agriculture, are facing extreme stress. The country sustains 16 percent of the worlds human population and 20 percent livestock population with just 3 percent of the worlds water. With changing lifestyles and rising water consumption in urban areas, water for agriculture is under threat from other users. Conflicts over access and control of water sources are becoming common, not only among people, but also among states within the country.

Even though food grain production has increased significantly over the years, there is a need for the production to double further in order to meet the ever growing demand created with this population increase. Given the fact that land and water are limited resources, this would require an improvement in the productivity of crops. Further, conservation of water sources and judicious use of water will be key to sustaining agricultural production in the coming years.

The Government has focussed on water related technologies and groundwater management as well as – increasingly – efficient irrigation management. With the need to increase productivity while saving water, micro irrigation will play a key role for the future of Indian agriculture.

Micro Irrigation Systems is one of the most effective water saving technologies being used for optimum usage of water and increasing efficiency of agriculture. Over a period, micro irrigation has proved to deliver many other economic and social benefits to the community. It reduces soil erosion, weed problems, cost of cultivation, labour, energy use and wastage of fertilisers/ nutrient loss, besides increasing productivity of crops.

Industry Structure and Developments

The micro irrigation system market is one of the fastest growing segments of the agricultural industry. This growth is complemented by Governments encouragement for adoption of micro irrigation system for various crops in order to conserve natural water resources. The industry though fragmented into organised and unorganised, is in a position to aid Government programmes like Pradhan Mantri Krishi Sinchai Yojana ("PMKSY") launched in 2015 for a period of five years with an outlay of Rs. 50,000 crores. The major objective of PMKSY is to achieve convergence of investments in irrigation at the field level, expand cultivable land under assured irrigation (Har Khet_ko Pani), improve on farm water use efficiency to reduce wastage of water, enhance the adoption of precision irrigation and other water saving technologies (more crop per drop) with sustainable water conservation practices.

The market size of the Micro Irrigation System Industry in India has been broadly segmented on the basis of types of micro irrigation system (drip and sprinkler irrigation system), by States, by crop types, by type of drip and sprinkler equipments, by applications of micro irrigation system and by organizational structure of the industry. It has been further segmented into project market and open market.

The adoption of micro irrigation technology in our country has helped in achieving higher cropping and irrigation intensity and higher farm productivity in recent years.

Opportunities and Outlook

Micro irrigation technology is rapidly expanding all over the world, especially in the water scarce areas of developed countries. It is very popular in the United States, Israel and some parts of Europe, while in Asia it is still in the development stage. This technology has also established a stronghold in the Asian regions, where it is best utilized in India and China but still there is ample market potential with a continuously rising population. Micro irrigation is becoming the most needed technology. Water scarcity is the most important driving factor of the Micro_ Irrigation Industry. The area available for crop cultivation, growing population in the country and GDP in the agriculture sector contributes to the growing demand for MIS. The other major contributor to this market is growing pollution levels due to which the water level has declined and in the near future this trend is expected to continue.

The long term outlook of Micro Irrigation Industry is robust. The real boost to the business is likely to come from the micro irrigation projects launched by various State Governments under the PMKSY Scheme aiming to increase coverage of micro irrigation activities under major government programmes.

With the strong brand image of Mahindra, the Company is looking forward to consolidate its position in the market by strengthening after sales services and agronomy support, enhancing product portfolio, intensifying its efforts to increase dealer /distributor network besides exploring opportunities in overseas markets.

Operations and Financial Performance

During the year 2018-19, your Company achieved Sales Turnover of Rs. 260.11 Crores as compared to Rs. 204.81 Crores in the preceding year reflecting an impressive growth 27%. The Profit after Tax was at Rs. 11.44 Crores as compared to Rs. 4.94 Crores reflecting 132% growth over the previous year. The major growth drivers are – penetration in new markets, focus on various project markets, proximity to customers, effective working capital management and deployment of cost control measures and effective working capital management.

During the year under review, the Company has introduced new series affordable automation products under the brand "Smartflo" sensing temperature, humidity, soil moisture and rain detection. The innovative product namely Drip tape which provides effective and desired wetting pattern to the crop resulting into improvement of yield.

In line with the policy of going near to customer, the Company has further initiated setting up of a plant in Tamilnadu on contract manufacturing model. This imminence to customer would immensely benefit the Company delivering MI in time and considerable savings in freight costs.

The Company continues to provide support to farmers by way of Agri Helpline for online support besides undertaking initiatives such as Demo Plots, farmer meetings, success stories, Agri Village and agronomical services for farmers to improve farm productivity. These value added services will certainly help enhancement in number of farmers to achieve Farm Tech Prosperity. During the year under review, the Company has achieved ‘the Mahindra way (TMW) which indicates business excellence in various business processes. The Company continues to focus Total Productive Maintenance (TPM), Total Quality Management (TQM) Continuous Improvement Team (CIT), Mahindra Yellow Belt Programme, Kaizen, Quality Parameters on all machines, Design, Service and Installation Quality Index etc. continued to receive paramount importance. These measures have resulted in improvement in production efficiencies, reduction in rejections and improvement in customer satisfaction levels.

Risks, Concerns and Threats

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. Seasonality is also another major concern for all irrigation companies as the major business originates from non-monsoon months. However, this concern gets addressed with the well spread operations in different States, where monsoon months vary, the Companys operations are balanced to certain extent. 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 been accelerated by various State Governments and many States implemented releasing subsidies online. In order to increase affordability of MI systems, many MI manufacturers have been selling Thin Wall drip systems for farmers holding small land. Lately, this is becoming popular amongst small farmers.

The demand of MI systems in agriculture will not diminish, it will indeed increase exponentially. Even though surface irrigation will still dominate as the primary irrigation method with the current trends, the area under micro-irrigation will continue to expand.

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

Internal Control Systems

The Company has an effective and reliable internal financial control system commensurate with the nature of its business, size and 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, adhere to statutory requirements for 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. This also identifies opportunities for improvement and ensures that good practices are imbibed in the processes that develop and strengthen the internal financial control systems and enhance the reliability of Companys financial statements. The internal control framework comprises of elements like entry level controls, Risk Control Matrix, management testing programs and a strong emphasis on integrity and ethics as a part of work culture.

Internal audits are conducted periodically, covering major areas of business and the Company continuously upgrades systems in line with the best accounting practices. The reports of Internal Auditors are reviewed by the Audit Committee of the Board. The Audit Committee discusses significant findings,recommendations of internal and external auditors with reference to significant risk areas and adequacy of internal controls and based on that, corrective measures are initiated. 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

The Company takes great pride in the commitment, competence and dynamism shown by its employees in all spheres of business. The Company continues to take initiatives to align its policies with the holding Company and to meet the growing needs of the business. The Company also continues to attract and nurture fresh talent from leading agricultural colleges. The Company has adopted the Balance Scorecard for performance evaluation and strategy deployment. All four aspects of the scorecard – financial perspective, customer perspective, internal business process and innovation and learning - have been implemented across all employees till officer level. This has ensured maintaining balance across multiple dimensions of performance of employees. Human resources initiatives such as skill level upgradation, various training programme, increasing productivity of sales force through building crop specific capability, appropriate reward and recognition systems and productivity improvement are the key focus areas for development of the employees of the Company. The Company continues to maintain its unique track record of industrial harmony. As we look ahead we are confident that our strong, positive people philosophy and practices will make us a preferred destination for talent. The safety, training, welfare and development of employees continues to receive the highest priority.

As on 31^st March, 2019, the total number of employees in your Company was 353.

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, on the basis of any subsequent developments, information or events.