Jain Irrigation Systems Strategy Report (HBS Case Study)

JISL : THE WAY GOING FORWARD For requirements of the course Written Analysis and Communication – II (2012-13)

To Prof. Vijaya Sherry Chand Mr. Rahul Shukla By VINEET SINGH VIKRAMADITYA SHEKHAR Section E

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT LETTER OF TRANSMITTAL To: Dr. Jain Founder & Chairman, JISL Jalgaon India From: Vineet Singh & Vikramaditya Shekhar Executive Assistants, Chairman Office Date: 1st April 2012 Subject: Report on a financially viable strategy for future growth of JISL With reference to your request for a report making suggestions on the future strategy for JISL, we are attaching an analysis of the current situation which presents our analysis of current business situation, feasible business objectives, and an action plan to achieve the same. Yours sincerely, Vineet Singh & Vikramaditya Shekhar

JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT CONTENTS EXECUTIVE SUMMARY ___________________________________________________________1 ASPIRATIONS, VISIONS AND GOALS _______________________________________________2 OBJECTIVES _____________________________________________________________________5 ACTION PLAN ____________________________________________________________________9 EXHIBITS _______________________________________________________________________ 11

JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT EXECUTIVE SUMMARY The prime goal of Jain Irrigation Systems Limited (JISL) is to gain financial growth to become the world’s largest agricultural company while helping the small farmers achieve financial prosperity. JISL’s strengths lie in a sound business model that builds on farmers’ trust, continual cost improvement through innovation and an extensive network of dealers and associates advocating greater adoption. While heavy reliance on subsidy on MIS, high leverage due to extending credit to farmers, lack of a strong middle management and attraction of the best talent remain a concern, the growth opportunities for both MIS and food processing segment are quite lucrative. Withdrawal of subsidy by the government, competition in the international markets and potential backward integration by institutional clients are the major threats to be cognizant of. Thus, a strategy targeting sustainable growth in the MIS segment and an aggressive growth in the food processing segment is proposed. It is proposed that geographical expansion be first focused on India which offers vast potential and where JISL enjoys more competitiveness. The expansion strategy needs to be complemented with continual investment in research and development, capacity building and setting up processes that churn out competent middle level managers and associates on a regular basis. [Word Count: 202]

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT ASPIRATIONS, VISIONS AND GOALS JISL has grown from its humble founding in 1963 to the leading producer of agriculture inputs in India and the world. It has five major product lines: Micro Irrigation systems (MIS), piping products, agro processed products and other products like those for renewable energy. While JISL aspires to be the largest agricultural company in the world, its vision is to help the small farmers derive the maximum productivity from their land and hence, help them achieve financial prosperity. To determine the way forward for sustainable profits, an examination of the strengths and weaknesses of JISL, existing opportunities and threats of the business environment become pertinent

STRENGTHS JISL enjoys a strong brand and leadership position in its businesses in India, much of which can be attributed to its business model. Its model involves providing a complete solution for agriculture to the small farmers, including inputs, customized MIS systems, education on usage, help and advice with installation, and even helping finance the purchase by extending credit. This way, it has won the trust of the farmers, leading to greater adoption of its products. It also has a strong track record of dealing with the government and bringing positive policy changes related to growth of MIS market. Another factor playing a key role in JISL’s success is its continued emphasis on innovation and R&D. JISL houses the largest private sector team of agricultural engineers, technicians and scientists serving as a breeding ground for cost-effective and best practices in water management, irrigation systems, crop specific agriculture, and enhanced productivity. It has partnered with leading global academic and research institutes such as IRRI, CIMMYT, IRISAT and major agribusiness companies like Monsanto and Syngenta to explore

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT commercially viable agricultural solutions. It has been trying to develop alternate energy solutions to insure against the impending energy crisis. Its 3000 worldwide network of independent dealers (with 2100 in India), several model farmers and associates across the country give it an exclusive channel to push its products with extensive reach to rural markets. Since it deals with all the stages of value creation in the agricultural chain and has varied revenue streams, it is well shielded from economic shocks.

WEAKNESSES Growth of the MIS segment is heavily reliant on government subsidies, which are credited only 180 to 365 days after approval. This has led to a highly leveraged business model (the debt/equity ratio for a 5 year period since 2008 has been 2.0 on an average) with constantly increasing cost of maintaining a cash to cash cycle of 150 to 170 days. This has restricted JISL's ability to raise additional funds for capacity building and expansion in other segments like food processing. JISL has a strong top management but has failed to create a pool of middle level managers who can work independently being committed to the ideals of the company. Its HR and recruitment processes also don’t do enough to continually produce competent middle level managers and attract the best talent.

OPPORTUNITY The Indian market for MIS alone has a potential of around ₹1278 billion (EXHIBIT A: INDIA MARKET FOR MIS), of which JISL has been able to achieve sales of only around ₹27 billion. Even if only the area under irrigation is considered, the market for MIS has a potential of around ₹566 billion. Clubbing it with the market for ancillary services and agricultural input, and considering the scope for expansion in other regions of India and abroad makes the upside

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT quite huge. Thus, purely from an economic perspective, the MIS segment in particular remains prone to expansion. With growing needs for food to feed a population exceeding 1000 million, land and water are going to only become scarcer. MIS offers an efficient water usage system and enhanced productivity, which can ease these pressures. Thus, the solution being offered by JISL is bound to gain greater adoption as time progresses. Overcoming scarcity of energy, aggravated by India's significant power deficit in rural areas offers an opportunity to build and sell commercially viable renewable energy applications which can be integrated with MIS. The food processing industry is estimated to grow at a pace of 20% -30% in India. JISL has less than 0.4% market share and is well positioned to expand exponentially if it can leverage well its access to farmers for sourcing an increasing number of food varieties and tie up with more institutional clients like Coca-Cola.

THREATS While none of the domestic companies are big enough to challenge the business, pursuit of quick profit strategy and sale of inferior MIS by smaller competitors can negatively impact the perception of MIS's utility as a booster of farm productivity and income among farmers. Competition in international markets can be intense due to Netafim pursuing an aggressive growth strategy with support from its private equity parent firm. Withdrawal of government subsidy limiting the average farmer’s ability to invest in MIS, poses a threat to JISL’s growth. Backward integration by JISL's current multinational customers such as Coca-Cola, Nestle, and Unilever which have significant financial resources, could also lead to loss of opportunities in the highly profitable food processing business.

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT OBJECTIVES Across its different business lines, growth in MIS segment is the most vital as it bootstraps growth in other segments. The implementation of MIS requires piping and other products leading to business for these units. MIS leads to an increase in the quality and quantity of the crop, which allows the product to be processed and sold to customers like Coca Cola, for a premium, benefiting the food processing business. However, growth in the MIS segment must be controlled so that it remains sustainable. Growth of MIS segment in any new territory requires building up an entire ecosystem comprising of model farmers and dealers who push for adoption and then continual service by the associates who aid as advisory throughout the process of farming. This process is often time consuming and requires much effort and attention to detail. Food processing opportunities have been largely untapped and entail the highest operating margins. The business can only get more profitable as economies of scale come into play and more institutional clients are acquired. Expansion in any segment would require financing. At the moment, JISL extends credit to the farmers on the subsidy from government which is a huge strain on the borrowing and financing capability of the firm. NBFC offers a potential solution for the problem as it would move this credit off the books of JISL and free the otherwise pledged accounts receivables for getting credit for expansion. Since the marginal benefit to the farmer would remain a lot higher than the marginal cost, the NBFC solution should gain acceptance by the farmers (EXHIBIT B). Geographical expansion: focus on domestic or international markets is another decision point. In domestic markets, the expansion rates would be much higher due to the advantage of a welldefined business model and extensive network of dealers. International expansion would

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT require partnering with more subsidiaries or undertaking acquisitions requiring substantial management bandwidth and capital infusion. This makes domestic expansion more lucrative. To remain competitive and achieve price differentiation through lowered cost, enhanced product portfolio and more efficient manufacturing processes, continued investment in R&D will remain a pre-requisite. Similarly, evolving a process to attract middle level managers should be another priority. Any strategic plan charting the future of JISL thus, has to strive to achieve the following goals: i)

Financial goals: Ensuring financial growth and sustainability commensurate with the objective of becoming the largest agricultural firm in the world. It would entail a) Reaching revenues of around 10 billion USD in 10 years b) This would also require reorganizing its current capital structure which is highly leveraged, with establishment of NBFC a probable solution

ii)

MIS expansion: Reaching out to as many farmers as possible with MIS products and helping them reach economic prosperity, increased productivity and better yields

iii)

Geographical expansion: Expanding to other parts of India as well as international expansion, with focus on domestic expansion

iv)

Continued Investment in R&D: Continuing to engage in R&D processes with the motive of creating various innovative and commercially viable product offerings

v)

Aggressive Expansion of Food Processing: Investing in this business to obtain revenues in excess of 1 billion USD

vi)

Human Capital Management: Processes should be created that attract the best talent and middle level managers should be formally groomed

PRIORTIZATION OF OBJECTIVES Taking into account the above analysis and JISL’s aspirations, these objectives can be prioritized based on a) feasibility b) instrumentality in achieving core objective of growth along

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT with serving the farmers c) trade-offs required. With due focus, all of these objectives seem feasible. However, most of them will require a trade-off. The prioritization of these objectives is discussed as follows: a) Financial goals: Instrumentality in achieving core objective: Aligned with the core objective Trade-off involved: Achievement of this objective paves the way for achieving other capital intensive objectives b) MIS expansion: Instrumentality in achieving core objective: Aligned with the core objective Trade-off involved: Required capital infusion will have to contend with growth across other segments like food processing c) Geographical Expansion: Instrumentality in achieving core objective: Required for sustainable growth but several other methods of expansion are also possible like increasing the penetration in areas currently under MIS Trade-off involved: Achievement of this objective requires huge capital investments and efforts. International expansion will constrain efforts on R&D and exploitation of opportunities in food processing d) Continued Investment in R&D Instrumentality in achieving core objective: Source of our competitive advantage and central to our core objective Trade-off involved: Requires capital infusion over time which will sacrifice growth in other business segments of JISL

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT e) Aggressive expansion of food processing: Instrumentality in achieving core objective: The increased revenue streams from this high profit segment can help achieve capital expenditure for other expansionary objectives Trade-off involved: Achievement of this objective requires huge capital investments. While this may constraint growth in some areas in the immediate run, sustained cash flows over the long term will aid in their achievement f) Human Capital management: Instrumentality in achieving core objective: It is necessary for sustainable growth Trade-off involved: This would require some amount of management bandwidth and capital infusion, but wouldn’t restrict the ability to invest for other objectives Thus, each of the objectives is closely tied with other objectives and not necessarily independent. Thus, while achieving financial goals would assume top priority due to its centrality, vehicles for it would be sustainable MIS growth and aggressive growth in food processing. Competitiveness of this expansion would rely on continual investment in R&D and human capital management. This expansion will be initially focused on domestic markets.

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT ACTION PLAN 1. JISL must target reaching 14 million farmers in India by 2022 primarily through expansion in northern states with poor existing irrigation infrastructure. JISL would need to recruit associates in the villages that it targets for sale of MIS systems. JISL would also need to create a network of ‘model farmers’ that can demonstrate productivity and income gains possible from a shift to MIS from traditional irrigation forms. 2. JISL must set up an NBFC in order to reduce the receivables amount on JISL’s balance sheet and shift the cost of financing the subsidy through a short term loan on to the farmers. Under the NBFC model, the farmer would have to take a loan equivalent to the amount of subsidies from the NBFC. This loan amount would be paid to JISL in lieu of the subsidy receivables. After receiving the subsidy amount from government, the farmer would close the loan and pay the interest amount to the NBFC. Our estimate is that the NBFC would reduce cumulative working capital investment by ₹75 billion over a 10 year period [EXHIBIT C, F]. This would reduce JISL’s financial leverage and increase its capacity to substitute short term loans with lower cost long term loans in order to fund its investments in R&D and manufacturing capacity. 3. In order to achieve ₹53.5 billion (US$ 1.2 billion) sales from agro processed foods segment by 2017, JISL would have to invest in order to expand its food processing capacity, increase product portfolio, build linkages with the global food supply chain through acquisitions, and acquire more institutional clients. An increased capacity must allow JISL to process almost double the number of varieties of food and vegetables that it procures from farmers in current scenario. We expect that agro processed foods will contribute to almost 45% of JISL’s total revenues by 2022 as compared to 17% in 2012. The shift in revenue mix to a more profitable business would boost PBIDTA margin to 26% by 2022, up from 20% in 2012. [EXHIBIT C, E]

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT 4. We estimate that JISL’s workforce would expand to more than 20,000 by 2017 and more than 40,000 by 2022 thereby requiring significant investment in recruitment and training activities to manage the business growth. JISL should establish partnership with universities offering courses in agriculture in order to satisfy its huge intake requirements of young professionals each year. Internship programs would provide JISL opportunities to identify candidates with a strong aptitude and willingness to work with farmers in the tough rural environment. Robust training and incentive based compensation systems would allow the firm to identify top performing candidates best suited for management roles. Thus a focus on recruiting motivated individuals at the beginning and developing leaders within the firm would promote a culture of meritocracy and allow the most deserving candidates to take up more responsibilities for managing JISK’s rapid growth. 5. We anticipate JISL would have to invest ₹61.9 billion by 2017 [EXHIBIT G] in order to build capacity and R&D expenses for sustaining rapid growth across all its business segments. This investment would have to be mobilized through external sources of financing. We project that the total debt would increase to ₹80 billion by 2017 from ₹38 billion in 2012. The firm would also have to issue additional equity shares to raise equity financing till 2017. However, positive cash flows that would result from higher profitability and lower investment requirements in successive years would allow JISL to completely pay-off its debt by 2022. Based on our financial model [EXHIBIT C to H] we estimate a 20% IRR for the JISL’s business based on our 10 year projections. Thus, we expect our strategy to yield positive returns with lower business risk. [Word Count: 2396]

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT EXHIBITS EXHIBIT A: INDIA MARKET FOR MIS Supply of agricultural land in India

140 million ha

Supply of Irrigated land

62 million ha

Based on total agricultural land

₹1,278 billion

Based on irrigated land

₹566 billion

Assuming ₹45,650 as cost of installation of an MIS system per ha of land with an average lifecycle of 5 years we estimate the annual sales

EXHIBIT B: INDIA MARKET FOR MIS Additional Interest Burden On Farmers Due to NBFC

₹2000 (assuming 12% p.a. interest for 9 months)

Minimum Assured Increase In Farm Income

₹22,285 per ha

Assuming cost of MIS as ₹45,650 with 50% subsidy. The increase in farm income outweighs the additional interest cost

EXHIBIT C: GROWTH ASSUMPTIONS 5 year CAGR in Revenues Micro Irrigation Piping Products Agro Processed Products Plastic Sheets Other Products Operating Assumptions* Cash to Cash Cycle (days) Net Fixed Assets (% of revenues) Depreciation (% of Net Fixed Assets) PBDIT Margin

2013 - 2017 30% 15% 45% 5% 30% End of 2017 160 55% 6% 23%

2018 - 2022 15% 10% 31% 5% 15% End of 2022 100 53% 6% 26%

* For the years in between 2012-2017 and 2017-2022 we assume a linear interpolation of the above values

Other Assumptions Marginal Tax Rate Terminal Growth Rate Cost of Capital

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34% 3% 15%

JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT EXHIBIT D: REVENUE SCHEDULE All figures in ₹ millions

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Micro Irrigation

26,798

34,837

45,289

58,875

76,538

99,499

114,424

131,588

151,326

174,025

200,128

Piping Products

9,855

11,333

13,033

14,988

17,236

19,822

21,804

23,985

26,383

29,021

31,923

Agro Processed Products

8,352

12,110

17,560

25,462

36,920

53,534

70,130

91,870

120,350

157,658

206,532

Plastic Sheets

1,995

2,095

2,199

2,309

2,425

2,546

2,673

2,807

2,948

3,095

3,250

Other Products

2,400

3,120

4,056

5,273

6,855

8,911

10,248

11,785

13,553

15,585

17,923

49,206

63,496

82,137

106,908

139,974

184,312

219,279

262,034

314,558

379,384

459,756

18%

29%

29%

30%

31%

32%

19%

19%

20%

21%

21%

Eliminations Total Revenue Revenue Growth

-194

EXHIBIT E: PROFIT AND LOSS SCHEDULE (PARTIAL) All figures in ₹ millions

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

49,206

63,496

82,137

106,908

139,974

184,312

219,279

262,034

314,558

379,384

459,756

Revenue Growth

18%

29%

29%

30%

31%

32%

19%

19%

20%

21%

21%

PBDIT

9,706

12,928

17,245

23,125

31,167

42,210

51,480

63,025

77,468

95,616

118,518

PBDIT Margin

20%

20%

21%

22%

22%

23%

23%

24%

25%

25%

26%

Depreciation

1,599

2,070

2,687

3,508

4,606

6,082

7,184

8,521

10,154

12,155

14,620

Depreciation (% of Net Fixed Assets)

6%

6%

6%

6%

6%

6%

6%

6%

6%

6%

6%

Total Revenue

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JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT EXHIBIT F: WORKING CAPITAL AND NET FIXED ASSETS SCHEDULE All figures in ₹ millions except % and days

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

23,457

29,782

37,896

48,504

62,432

80,794

88,913

97,635

106,864

116,414

125,961

174

171

168

166

163

160

148

136

124

112

100

Net Fixed Assets

25,715

33,531

43,825

57,628

76,219

101,372

119,726

142,022

169,232

202,591

243,671

Net Fixed Assets (% of revenues)

52%

53%

53%

54%

54%

55%

55%

54%

54%

53%

53%

Working Capital Cash to Cash Cycle (days)

EXHIBIT G: FREE CASH FLOW AND TERMINAL VALUE All figures in ₹ millions

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

After tax PBIT

7,166

9,609

12,947

17,530

23,844

29,235

35,972

44,427

55,084

68,572

Depreciation

2,070

2,687

3,508

4,606

6,082

7,184

8,521

10,154

12,155

14,620

Working Capital Investment

6,325

8,114

10,608

13,928

18,362

8,119

8,721

9,229

9,550

9,547

Capital Expenditure

9,886

12,981

17,310

23,197

31,236

25,538

30,817

37,364

45,514

55,700

-8,799

-11,463

-14,989

-19,671

2,762

4,955

7,988

12,175

17,946

Free Cash Flow to Firm (FCFF)

-6,975

154,032

Terminal Value in 2022

Total Cash Flow to Firm

-6,975

-8,799

-11,463

-14,989

-19,671

Cumulative financing of ₹61.9 billion required till 2017 as cash flows are negative

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2,762

4,955

7,988

12,175

171,978

JAIN IRRIGATION SYSTEMS LIMITED: STRATEGY REPORT EXHIBIT H: FINANCIAL RATIOS All figures in ₹ millions except %

2012

Reinvestment Rate

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

226%

220%

216%

212%

208%

115%

110%

105%

100%

95%

Debt/Equity

2.2

2.1

1.5

1.1

0.9

0.8

0.6

0.4

0.3

0.2

0.1

Sales/Capital Ratio

1.0

1.00

1.01

1.01

1.01

1.01

1.05

1.09

1.14

1.19

1.24

Return on Assets

5%

7%

8%

9%

10%

10%

12%

13%

15%

16%

18%

Return on Equity

13%

22%

20%

19%

18%

18%

19%

19%

19%

19%

20%

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