Mahindra EPC Irrigation Ltd Management Discussions.

Company Profile

EPC Industri Limited became part of Mahindra Group of companies pursuant to Mahindra and Mahindra Limited (M&M) acquiring control and management stake in 2011. The Agriculture business vertical of M&M complements the Companys business and provides management bandwidth and competence in marketing and operations, thereby enhancing the scope for development of synergies to create value for the business.

EPC Industri Limited 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.

Overview

While water remains one of the most abundant resources on earth, less than 1 percent of the total supply is reliably available for human consumption. The per capita availability of water in India has significantly come down and is likely to come down further with the growing population and demand. As per the Ministry of Water Resources, per capita water availability in 2025 and 2050 is estimated to come down by almost 36 percent and 60 percent respectively from the 2001 levels. The demand for water in the country is projected to very soon overtake the availability of water. The rapid increase in population, urbanization and industrialization has led to a significant increase in water requirement. In the next decade, the demand in water is expected to grow by 20 percent. Water sector, hence, must adapt to changing climatic conditions by seeking alternative water resources and developing improved water management approaches that will reduce pressure on already stressed systems. Furthermore, there is a need to develop and implement technologies and policies that will reduce and mitigate fast depleting water resources. Competition among agriculture, industry and cities for limited water supplies is already constraining development efforts. As population expands and economies grow, the competition for limited supplies will intensify, resulting in a potential conflict among water users in the days to come. Producing more sustainably, with less use of water, is a challenge before the planners and policy makers which requires demand management mechanisms to reallocate existing supplies, encourage more efficient use and promote more water saving technologies.

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 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.

Micro Irrigation, an essential technological intervention for saving and conserving water, finds a special importance in Honble Prime Ministers flagship scheme "Pradhan Mantri Krishi Sinchai Yojana" which has been implemented with an aim to extend irrigation coverage – "Har Khet Ko Pani" and improving water use efficiency – "Per Drop More Crop" in a focused manner. The scheme focuses on providing end-to-end solution for the irrigation supply chain. One key differentiator for micro irrigation is that when compared to other components of this scheme which include creating infrastructure to bring water to farms and watershed development, micro irrigation presents a quick-win opportunity for all the stakeholders where the implementation can be seen on ground within months. With the need to increase productivity while saving water, micro irrigation will play a key role for the future of Indian agriculture.

Opportunities and Outlook

The Indian economy is well poised to grow in the coming years. The outlook for the manufacturing and service sector is positive, however, the third sector, agriculture continues to face significant challenges. Micro irrigation system can go a long way in addressing the challenges faced by agriculture sector. It is one of the most efficient solutions and a low hanging fruit for the government, industry and farmers.

Micro irrigation system market in India has been growing steadily and with the encouragement from the Government, it is expected to grow further in the years to come. Although, adoption of micro irrigation techniques by farmers is growing at a fast pace, the market penetration is still very low. Micro irrigation system sales in India are driven by strong demand in many States such as Gujarat, Rajasthan, Madhya Pradesh, Maharashtra, Karnataka, Andhra Pradesh, Tamil Nadu, and Chhattisgarh. Many States have undertaken mega projects for implementation of the Micro Irrigation Scheme.

The Indian micro irrigation market is majorly contributed by drip irrigation system in terms of revenue, as compared to sprinkler irrigation. The drip and sprinkler irrigation methods differ in terms of flow rate, pressure requirement, wetted area and mobility. However, both the irrigation methods have enormous potential for growth in India.

The micro irrigation market is highly competitive with the presence of large and small scale drip and sprinkler irrigation equipment manufacturers. Presently, there are nearly 200 micro irrigation companies in the country. Your Company is presently a major supplier of micro irrigation systems (MIS) in India. Our strong brand name, expertise in agronomy services, and widespread network has contributed to our growth.

Operations and Financial Performance

During the year 2017-18, your Company achieved Sales Turnover of Rs. 204.81 crores as compared to Rs. 201.46 crores in the preceding year. The major factors contributing to this performance were: Focus on project markets, deployment of cost control measures and effective working capital management.

These initiatives enabled your Company to achieve this performance despite some challenges owing to the delay in roll-out of pricing guidelines and its effect on issue of new work-orders by the concerned agencies and sluggishness in demand for some months, coupled with de-registration of the Company in the State of Maharashtra as MI supplier during the first 7 months of the year under review. Changes in applicable GST rates have also resulted in pushing the customers to wait and watch for purchase of new MI system. These factors have led to significant decline in Sales volume during the transition phase.

During the year under review, the Companys Vadodara plant became operational. This will majorly cater to customers demand in the nearby States, thereby improving market share and reducing delivery time. The Company will continue its policy to be in close proximity of customers in the years to come. In order to facilitate farmers in achieving "Farm Tech Prosperity", the Companys Agri Helpline continues to provide 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 open up more business opportunities and generate revenues in the years to come. The Companys initiatives towards various techniques such as 1S 2S, TMW, Total Productive Maintenance (TPM), Total Quality Management (TQM) Continuous Improvement Team (CIT), Mahindra Yellow Belt Programme, Kaizen, Parivartan, Quality Parameters on all machines etc. continued to receive paramount importance. These measures have resulted in improvement in production efficiencies and reduction in rejections.

Risks, Concerns and Threats

The major risks and threats to the Micro Irrigation industry are delay in the implementation of Mega Projects which may slowdown demand and the delay in release of subsidy by the government which affects the Companys working capital. In case of Mega Projects, the risk gets somewhat reduced due to commitments made by the State Governments to the farmers and the strong demands from farmer community ensure that the funds flow regularly. However, these delays require management of working capital cycles and need continuous infusion of funds into the business. Further, the major challenge is availability of raw material at right price and at right time. Further, the change in climatic conditions and seasonality in agriculture sector are adding ambiguity to the Micro Irrigation business.

Competition from unorganized sector is another major concern for the organized players in the industry. However, this will be reduced in the years to come due to implementation of new tax regime.

The demand for MI system in agriculture will amplify exponentially in view of the effective implementation of PMKSY Scheme. With the stable government at Centre, there is a healthy competition amongst different States for implementation of PMKSY scheme and bring more area under Irrigation.

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

During the year under review, Human Resources (HR) continued its transformation initiatives, in a volatile and uncertain business environment, to cater to the organizational requirements.

HR continued its catalyst role and enabled the process of change over to global tools to focus on personnel planning for mid and long term.

The Company continued its efforts to foster and drive younger generation towards future leadership. The Company also continues to attract and nurture fresh talent from leading agricultural colleges. The Company, through its Integrated Talent Management initiatives, continues to enable learning, networking and collaboration by emphasizing on cross entity movement between different Mahindra Group legal entities enabling holistic development and encouraging integration across different entities / locations.

The various human resource initiatives such as increasing productivity of sales force through building crop specific capability, mark to market studies for remuneration of employees, investment in assessing and identifying development areas for sales force, capability road map planning for employees, introduction of employee friendly policies are yielding better employee engagement score which is critical for business performance.

The safety, training, welfare and development of employees continues to receive the highest priority.

As on 31st March, 2018, the total number of employees in your Company was 359.

Industrial relations in both the Plants remained cordial during the year under review. Transitioning from ‘Industrial Relations to ‘Employee Relations, a more focused approach on increased Employee Engagement and increased collaboration between two plants and amongst all level of employees has been adopted.

The Company, during the year under review, successfully concluded the long-term wage settlement with the Workers union to take effect from 1st April, 2016 for a period of 4 years in an amicable and fair manner.

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.