EPC – the business
- Company is an organized player in the agriculture space. It manufactures Micro Irrigation Systems (Drips & Sprinklers), provides landscaping services, agronomy services etc.
- Wondering what MIS is? – I am sure we all have seen those sprinklers on lawns and parks or golf courses. That is a part of landscaping. Use the same technique for farmers – it becomes mirco-irrigation.
- This has been an age-old technique used to save water. It is predominantly used to irrigate crop better and manage rainfall and harvesting needs efficiently. As a result, you get higher crop yield.
- You might want to study the “Knowledge Center” section of the company’s website. This is the layman’s guide to understanding what MIS is.
- Although the company is into this business since over 2 decades it has come into focus when M&M came into as a strategic promoter and acquired 54% stake. Management control and maximum holding lies with M&M
- What’s in it for M&M? If you are naïve and ignorant like me, Mahindra’s are into agriculture big time. And no, it’s not tractors! They are into end to end Agri-Solutions – see for yourself
- MIS industry has immense potential to grow. Majority of the cultivable land in India is rain irrigated. Penetration of MIS in India is very low. It stands around 5%. Israel is at 90%!
- One can scout through reports on the company’s website and also research papers as enough work has been done in this area
- Now let us talk risks to the inherent business model. And they are many – there is absolutely no moat here if you think so!
- Risk 1 – Mother Nature – Rains – unpredictable!
- Risk 2 – Government Subsidy and Policies – you may predict rain and be right at times but this is worse than unpredictable!
- Risk 3 – End customers – poor farmers – low income – pricing of product is capped as a result
EPC – the management
- M&M – skin in the game. No doubts they are in this to create a full end to end eco-system of sustainable agriculture.
- M&M has opened its network wide for this and shows that they are fully behind this venture and mean serious business.
- Salary, KMP’s compensation are well in-line with profit growth and no real eyebrow raising here.
- ESOPS are being regularly awarded and exercised – is it always bad? Well not competent enough to comment. Pros and Cons remain
EPC – the valuation & finances
- Growth – single digit CAGRs for 3 and 5 years. PAT abnormally high CAGRs due to low base effects for the same time frame.
- Margins – EBIDTA has averaged in single digit 7s over the past decade. PAT has averaged about 3-4% over the same time period
- Dividends – historically – 0! Period!
- Cash flows – stretched working capital is evident and CFO is erratic with some consistent years of negative cash and one year of bulky lump some positive cash flow.
- The company has minimal debt which is good as it aids the WC cycle. Accounts receivables have a component of debtors which are considered doubtful. 2017 this figure 12cr!
- Such write-offs and bad debts are an integral part and risk of the business – this is a loss of revenue by the way and has happened almost every year.
- The company has put in about 103cr of capital in the business to earn an additional 16cr of EBIDTA. Means it has been able to return 15% of its incremental invested capital.
- Also, it has needed to put more money that totally earned over the past decade. Meaning of the total EBIDTA of 85cr it employed a capital of 103cr. It had to manage the extra via outside sources.
- Currently there is no margin of safety at all – P/E is 44x and P/BV 3.29x
- The company has limited floating stock and is relatively illiquid counter.
EPC – my macro view
- There is an inherent tailwind due on the sector as a whole. Huge gap between the MIS penetration and a shift towards organized sector will help the company in the long run
- M&M has an increased focus on Agriculture. Its backing along with network of distributors should help the business grow and increase penetration
- Nature of business has grave risks – margins will not expand as product is regulated. Industry is policy dependent and government subsidies play a very crucial role
- If farmers don’t get subsidy – they don’t buy – they don’t buy – sales don’t grow. Farmers are not rich (well at least legally speaking). They will not pay up and switching cost for MIS products is very low. There needs to be shift in purchasing power and some brand play for sustained buying of these products.
- Industry is clustered with unorganized players. Cheap rip-offs that last for one cropping season are farmers favorite.
- Valuations are not that attractive at all. MoS is not in our favor. But it’s a business that can grow at a massive pace – should we pay up for growth? Who are the listed players doing the same thing?
- This micro-cap counter needs to be watched and kept on radar. Should the headwind play out over the long run – one can expect excellent growth. But it’s a big SHOULD!
Source of wisdom and wit
- Company Annual Reports, website, credit rating reports and management presentations
- People invested in the stock – why have they invested
- People NOT invested in the stock – why not?
- screener.in – which has a basic template that I use to glance financials
- Research paper – Spread and Economics of Micro Irrigation in India – Raman et al 2010
- My own brains!!
Disclaimer – This content is also covered on my personal blog. You may visit that here. This is not a buy sell recommendation. I am not a SEBI registered investment adviser. Please consult one before making an investment decision.