Mahindra EPC Irrigation Limited (523754) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Mahindra EPC Irrigation Limited Investors Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashok Sharma, Managing Director from Mahindra EPC Irrigation Limited. Thank you, and over to you, Mr. Sharma.

Thank you very much, Vivian. So good evening, ladies, and gentlemen, and a warm welcome to each one of you at the sixth investor call for Mahindra EPC Irrigation Limited. On behalf of Mahindra EPC, I would like to thank each one of you for joining this call, and also, I would like to take this opportunity to wish you and your family a very Happy Diwali in advance. So today, I'll be sharing with you the key developments in the agri environment, the micro-irrigation industry, the specific performance of the company in Q2 and H1 and briefly the outlook for the year. So some of you may be new, so I'll just quickly recap on the situation of water and how micro-irrigation is so crucial for solving the pending water crisis in our country. As I've been mentioning on the previous call that we are moving from a water-stretched economy to a water-scarce economy. And if no urgent actions are taken, it is forecasted that in few decades, we'll be facing severe water shortages. Already, few states are experiencing water shortage and are trying hard to drive micro irrigation so that they can overcome this problem. So hence, water conservation will be one of the most important priority for the future for our country for the planet at large. Now agriculture actually consumes almost 80% of the freshwater withdrawals. Hence, if our country has to conserve water, it has to conserve water in agriculture. And that's where micro irrigation comes in. So micro irrigation, as you know, is a very water-efficient technology, where you can save almost 30% to 35% of the water and even more in certain crops. And that's what makes it a very important priority for the government, for the planet and for the environment at large. So micro irrigation actually creates a win-win scenario for stakeholders. The farmers not only benefit by using lesser water but also, they're able to increase their crop production because of precision irrigation. The water gets into the right part at the right time and gives the required nutrition, and now with technologies like water-soluble fertilizers and fertigation, the output is much higher by using micro-irrigation. And also, because of micro-irrigation, the cost come down due to lesser need for labor for de-bidding, which is one of the costly operations which farmers have to do. So clearly, it's a win for the farmer and for the government, as I mentioned before, it's a very important priority. And hence, over the last few decades, the government -- they're announcing various schemes, subsidies to promote this technology. We are all aware of the plans of the government, it's been working very hard towards its mission of doubling farmers' income. The plan, as per the long-term plan is to add almost 2 million sectors under micro-irrigation every year. Of course, the reality is that we are almost at 40%, 50% of that, but the intention is that. And to the extent, central government has been allocating low funds. So for example, this year, almost 5/4 of INR 1 crores were allocated for micro-irrigation subsidies. So clearly, with these fundamentals, we are very excited about the future of this industry. The fact that it is so much environment friendly and from the ESG perspective, it really meets the requirement. So it's a priority for the government, for the community, and that's what really is driving the long-term attractiveness of this industry. Having said this, if you look at the country, there are a few states like Tamil Nadu, Andhra, Gujarat, Maharashtra, Karnataka, who have taken the lead in micro irrigation. And as you know, this is a state government subject. So these states actually are contributing almost 70% of the entire industry. And the policies of these state actually impact the industry, either favorable or unfavorable. So, moving to EPC. Mahindra EPC, most of you are familiar that this company is all about working towards farmer prosperity, using precision technology for auto management, for irrigation management. And our company always focused on customer satisfaction, getting in the latest technology water management and ensuring that we are able to contribute to farmer possibility. The reason why EPC has been successful over the years is because of its consistent high-quality products, focus on customer service, high-quality installation, design, and ensuring that our farmers are not only happy with the product, but they also get advice from the company for using the product effectively. As part of our strategy, if you -- some of you who were there on the last call would remember that we have decided to focus on few critical markets and few critical districts and increase our market share there. Huge focus has gone on construction all the time and more so in these difficult times, which I'll talk about. And also here, over the years, moved our mix towards higher-margin drip sales, and ensure that we are able to get better margins as we go forward. In this industry, one of the key success factor is managing working capital because the working capital is largely controlled by the state governments and their ability to pay actually decides how industry will perform in that market. So we are very mindful about that, and we keep good checks and balances to ensure that we are managing this efficiently. Another unique thing about Mahindra EPC is that it has a advantage of leveraging the Mahindra Agribusiness Ecosystem. We have businesses and fields, agrichemicals, sweet potato, grape exports, so we're also able to leverage those farmers, those businesses to promote our products and services. That was the background about the industry, about the priority, now let me talk about the performance of the industry in this year. What are the positives, what are the challenges, and I'll talk about our quarter 2 and H1 performance, and then we'll open the floor for questions, I'll be happy to answer them. So coming to this year. Now last year, if you recollect, F '21 for the year, which was a drop over F '20, and that was largely due to the impact of COVID in the first quarter, followed by limited funds by the State Government. And even at the start of this year, the phenomena almost replicated. Quarter 1 was again affected, our plants had to be closed for some time. The whole government machinery has stopped. There was also election in certain key states. And as a result, Q1 industry is quite dull, and there are estimates that the drop in the industry within the 20% to 25%. And please bear with me that the industry data are estimates because there is no official publication available for the data, but these are our estimates based on market feedback. Even in quarter 2, what we saw is a slight reduction in the drop instead of 10% and 25%, we think the drop would be in the range of 15% to 20%. So there was some improvement, because of the deadline in Tamil Nadu which was an election in quarter 1, started generating some business for the industry. So that was some improvement in quarter 2. But overall, if I were to give a sense, I think the industry would be down by almost 20% compared to half 1 of last year. So industry currently is at quite low levels. And just to use some perspective, in FY '19, the industry was around INR 5,000 crores. And this year, based on half 1's performance of, let's say, 15% to 20% drop and assuming another 8% to 10% drop in H2, we should close the industry INR 3,500 crores. So clearly, there's been a big drop in the industry. And we are hopeful that this industry will again go back to its original level in a short time. But before I come to that, there's another important point. So even 1 year ago, or even almost 1.5 years ago, we had mentioned on the call that we see a firming up of the raw material prices, and they have been increasing for the last almost 6 quarters, and the trend continued. And frankly, in this year, the raw material cost prices have gone up significantly. So for example, in Q2 of this year, the raw material prices have gone up by almost 30% over the previous year. And that has been a big challenge for the industry. So with this degrowth and this increase in raw material cost, which actually impacts almost 15% on the margin, the increase of raw material costs of 30%. So as a result of this, there has been a lot of efforts by the industry to oppose the government, seeking increase in the price because these prices are controlled by the State Government. And the positive development is that in this month itself, the central government has given notification to increase the indicative costs by around 11%. So that is a positive for the industry. Now based on Central Government's advice, it is expected that the State Government will increase their price, starting from November, December onwards. Having said that, the risk of increase in raw material prices still continues, and we are not having any indication that the raw material prices will drop in the near future. An indication, perhaps we have is that it might only increase, though marginally, but one cannot say for sure, given the way the crude oil is going, given the way the overall freight cost have increased, given the fact that the demand for polyurethane has overall increased globally. So this is one thing we see as a risk in the coming time. That's on the industry. Now I'll just give a quick update on our performance. You have seen the published results, and you would have obviously made your notes that the revenue has been for Q2 almost same as previous year, and we had a marginal loss of INR 1 crore, and the material cost has increased, which I mentioned before, to almost 60% compared to 47% of the previous year. Now in this backdrop, there are 3, 4 things which I would like to bring to your notice that despite a 14% increase in the material cost, we have been able to save close to 2% on this because of our efficient way of working and finding better solutions to reduce cost. So that has been some relief to our performance. And also, the fixed expenses, compared to last year, Q2 and H1, we approximately saved 6% over last year. So despite the inflationary pressures because of better utilization of resources, tighter cost control, savings on sales and distribution, and efficient utilization of resources, we could do that, that has been useful. Another thing, which I had mentioned in the last call is our focus on working and growing the non-subsidy business and focusing on thin wall, which is non-ISI. So there we have had some good growth. We almost grown by 60-odd percent in this first half, and that actually is also helping us to get better cash collection and also helping us to reduce our dependence on subsidy business. So this is on Q2 and H1. Going forward, yes, we also have certain challenges on our receivable collection. As we have seen, certain states have been a bit slow in making the payments, but we expect those payments to come in Q3, Q4. Already some payments have come in, in this month, so that is more of a timing issue, I would say. And the chronic issue on payment on receivable has been our payments stuck in one state, which for the whole industry is awaiting that, and we are expecting it soon. So that should -- once that payment comes in, next obviously is the receivable working capital situation. So ladies and gentleman, this is a brief overview of the industry of the agri environment and also a little bit on the financials, which you have -- must have seen in detail, and also an expectation that there will be some benefit in terms of price increase in the next few months. Raw material prices, they still increase, hopefully not so steep because they already have a big run up. And also, we expect that the industry should improve given that states like Karnataka and Tamil Nadu will get more active. And we also expect the degrowth in it to be quite less. And we look for the year to end at around 15% degrowth plus/minus and the industry around INR 3,500 crores. So with this, I would like to take a pause and then open the floor for your questions, and we will try our best to give the possible answer for that. So thank you very much. Over to you, Vivian. We can now move the question-answers.

[Operator Instructions] We have the first question from the line of Aditya Shah from Vikram Advisory.

Sir, I have 3 questions from my side as of now. One being that we would like to know that what is the sustainable margin that you can guide for some years to come? And if at all, you have one, then how would you plan to achieve it? Because I see, obviously, there are raw material prices changes that you already mentioned but the volatility is too much for a company to have. So how do you plan to sustain a particular margin for many years to come? That's my first question. The second question is that, what is your vision for the company in the coming 5 years? As in where do you see the company to have a turnover like or a profit margin to be like or the profit after tax to be like? And the third question is that since you already mentioned a lot of times that there are so many synergies possible with Mahindra Group as the promoter and the agribusiness of it, could you please quantify the synergies that you have been able to gather in these years? And what are those?

Thank you, Mr. Shah. Thanks for these wonderful questions. I will start with the first question, in terms of what are the [Audio Gap] margin than from a long-term point of view. See, this industry dynamic structure is such that the prices are maintained by the government, so we are largely influenced by the state government pricing, so that's at one level. And the input is also dependent on -- largely depending on the PE cost, lower PE cost. So clearly, these are -- the PE costs are quite volatile, and it will be the last 5 to 7 years. So we have had situations where the metal cost has ranged from 45% to 60%. That has been the range in the last 5 years and that is what perhaps is something we have experienced on even a long-term average. So going forward, we are aware of this volatility. Now what are we doing to sustain our margins? That's most important. So one is, we have a very tight control on our fixed costs. So even as I mentioned before, that year-on-year, we are trying to see how we can maintain our fixed costs and wherever possible reduce. And also, we are looking at operational efficiencies for reducing material consumption. That also has been happening over the years. The general strategy focus on businesses where there is better pricing power, like the non-ISI. It's something we are focusing more on, and we are now slowly trying to build that business. Just to give you some numbers, last year, half 1, we have almost 3% to 4% business coming from non-ISI, which is called our in-valve business. And now this year, half 1, we are almost at 8% to 9% on non-ISI. So that is one shift. There, we have better controls on the pricing and we can at least predict that these margins would be doable. So looking at the situation. Now also we have seen in '18 we had a similar situation, where the material cost has gone up because of the global supply-demand. And it took 6 -- 4 to 6 quarters for it to kind of come back to original level. So when I look at our operations, given our drive on efficiency and cost management, I think this is helping us to create a good base for our fixed expenses and our variable expenses. So for me to forecast exact margins, this will be difficult because 2 factors, which is the global raw material input cost and the end price are not in our control. But what is in control is our business model in terms of focusing on products and services, which are less capped by government prices and our cost. So on a long-term basis, I would definitely expect the margins to improve. And one more thing we have seen is that when the raw material cost goes up with a lag of maybe 6 months to 12 months, prices fall in place. There's a lag because government takes some time to adjust to the new price. And that is the -- like we see. So from a long-term 3 to 5-year perspective if you see, we expect that the margins would kind of move in the range of, let's say, the way we call our gross margins gross contribution, it could range from 50%, 55% to 45% to 55%, depending on how the year goes. So perhaps we are at the lower end now and as things improve, should get better and better. Coming to the next question about the coming 5 years. So clearly, in the last 3, 4 years, year-on-year, we've been increasing our market share. And the average growth we are seeing in market share is of almost 0.5% every year. So now we are close to 6%, 6.5% market share. And I think our aspiration is that we need to come to double-digit market shares in the next 3 to 4 years. And then we, amongst the leading 3 -- top 3 companies in the micro-irrigation industry. And obviously, we are looking at margins which are better than the industry margins, given our tradition we are working. And given our focus on quality and cost, so we would expect to be in line or slightly better than the industry. Beyond that, it's difficult to project the numbers and give set of figures in terms of revenue because it's all a function of how the industry growth. For example, next year, if things are conducent, this is a high priority because 2 or 3 states, which have not been active for some time like Andhra, for the last several last years they have not been active. The moment Andhra comes in, we are talking about jump of at least 20%, 25% revenue for the industry and for us. So [indiscernible] market share advantage. So hence, exact revenue is difficult to project for anybody. And coming to [indiscernible] we actually have forms of leveraging a common database of our farmers. We have joined campaigns which we run, where we are able to reach out to our seed customers of vendor agri or agrichemical customers. And also, we have a good base of crepe rolls in -- and around Nasik. They're also approached by our sales team. And in terms of -- in fact numbers, it's not a very big number. It's not like 30%, 40% business is there, so it varies from year-to-year, season to season. Well, let's say, it's a single-digit contribution, we have 1 percentage point to our business and we are able to leverage that. And the brand minder, of course, helps us to reach out to new customers and new markets. So overall, there is this -- farmer feels that Mahindra is a holistic agricompany, even when they are seeing us is for micro-irrigation, they do keep in mind that we have high-quality seeds and agrochemicals, which also we sell in the market. So I hope that answers your question, Mr. Shah?

Yes. Can I squeeze in one more question? It's just regarding the coming 5 years that you had spoken about. My question to that was that how do we plan to safeguard ourselves from the sort of volatility or dependence on the government? Because I completely agree with you on this, that a lot of things is dependent on the state government and the central government and the policy and sort of the payment deadlines and all that. But as a company or as a shareholder that -- obviously, we would like to know that is there any way where the company is thinking of diversifying it to something else, which can have a steady profitability and revenues and cash flows. So that as investors like we can understand that.

I totally agree with you. I think that's one of the key requirement as a investor. So there are 2 levels. One is as I mentioned, that we are focusing on non-subsidy business, which is not so much government dependent in terms of payments and pricing. And from 8%, we would like to move that to 15%, 20%, so that would be one very specific step in the next 2 to 3 years. And second is, of course, we keep various options, keeping in mind that there is consistent value inflation for our shareholders. So as and when there is something worth informing we'll definitely inform you.

The next question is from the line of [Rajendra Shah], an individual investor.

Ashokji, I've few questions. Sir, in your opening remarks -- first of all, I would like to congratulate you on the performance because, yes, the company has gone into loss, that's fine but considering the challenging situation and the circumstances in which the company operates, I think the results are reasonably fine. So congratulations for this. You mentioned in your opening remarks that the central government is considering a hike of 11% in the end-product prices. So my question was that is this 11% hike in the end product price enough to take care of this raw material cost increase, which we have seen over the last 6 months? My point is that assuming that this price hike comes from, let's say, November, so in the December quarter, considering that the raw material prices are at the same level as they are now, would you be comfortable with this 11% hike? And will the company get back into profit, if at all, raw material prices stay at this level, and there's 11% hike in the end product price? So that is my first question. Second question, sir, you mentioned about the non-ISI business, which is about 9% approximately, 8% to 9%. And my question was, how much would this non-ISI business be in the next 2, 3 years? Are we planning to scale it up to, let's say, 15%, 20%, 25%? And if at all, are the margins in that business much better than these existing business? And sir, your employee cost has gone up by 20%, so is it because of addition of manpower or is it because of pay hike? So that was in the question. And if at all, employee has been added, so what are the plans? Are we expanding in any new region or anything like that? And sir, something on the greenhouse business, did we see any growth over there? So these are my 4 questions, sir.

So Rajendra, thank you very much, first, for congratulating our team and performance. Yes, it's been a tough quarter when I look at the bottom line but given the industry, given the raw material cost increase, the team has tried to see how best we can save costs and maximize our business. But clearly, there's a lot to be done in terms of future growth. Now coming to your specific 4 questions. First question is on the central government price increase. So if you look at the central government 11% increase, obviously this increase is not in line with the raw material cost increase, it is lesser than that. And I had mentioned to you that the impact on the margin is almost 15% for the industry because of raw material. And I must also hasten to add that 11% is what the central government has notified. It is not binding to the state government, and it is possible that the state government might not pass the full 11%. So this is something we need to also keep in mind. Assuming they pass on the full amount, which could be the best case scenario, definitely, it will help significantly in terms of the financial performance. And also, we have seen that H2, historically, is a much better season for the micro-irrigation business. And anyway, the volumes and revenue is much higher so that will definitely help. So with the passing of this price increase, industry will benefit, and I think that will definitely benefit EPC also to improve its financial performance. Now coming to the question of non ISI, we do around 8%, as I mentioned. Clearly in the next 3 years, we would like to move it to close to 15%, 12% to 15% is what we would like to focus on. And -- because that is a business where we can do the pricing based on our quality and based on our brand. And also, we are able to collect the money on cash basis or on a very limited period depending on our policy. So that's a positive thing for the -- us. And the good thing about our experience in the last 1.5 year is that the customers have appreciated the quality of our product, and we are able to enjoy some price premium compared to other players in the market. Now are the margins similar to the current businesses? So the margins, which are there in this non-ISI actually are 20%, 25% lower than the current margins because it's selling at a lower price point. But where it offsets and benefits is in the cash flow and also in the additional business. And as we are able to see better raw material costs, we'll be able to get better margins to be in this business. So it's reasonably profitable for us to promote non-ISI. Moving to employee cost. On employee cost, if you can see, there has been no major addition of people, number one. There has been -- last year, we had not given the salary increase because of COVID so there has been some minor salary increase which has been given. And also, we have had some costs related to COVID expenses to take care of the COVID management for our employee. So that has been the reason. And the percentage, of course, is higher because the revenue is lower in this half 1. Coming to Greenhouse. Greenhouse, we have developed some very interesting products, which can be offered to -- at a low cost to farmers, which we are encouraging. In the early days, frankly, up till now, the numbers are not really very significant, we're still talking about 2%, 3% contribution. But we are hopeful that maybe from a 3% to 5% perspective, given the climate change, given the farmer's ability to absorb this technology, we will see some more growth in this segment. But the growth in non-ISI actually is going to be much more and much faster because that's where there is an established market. So we know it will take some more time, but we are quite uniquely poised to grow in that segment. So I hope that answers your question, Rajendra and I appreciate your encouragement and thank you very much for your support.

[Operator Instructions] We have the next question from the line of [Gokul Tarapura], an individual investor.

I have 2 questions. One is respect to the product portfolio. So does that already exist or a plan to expand the different types of irrigation business, namely to forgers, misters, and automatic water controlling system because I couldn't see them in your website? And secondly, in order to overcome the dependence on government subsidies, are you planning to foray into household, farming space or growing more on the commercial landscape irrigation space where the margin could be probably much higher?

Gokul, thank you very much for joining us. I think it is the first time, perhaps you're asking question to me. So thanks for taking interest in this company. So fortunately, for us, Gokul, our portfolio is pretty complete and we have got a very good range of different types of drip equipment, sprinkler equipment and our products are very well appreciated by the farmers, and we are across different segments in terms of discharge per minute in terms of spacing of the drips. And we are one of the early manufacturers, we also introduced some automation in our products, where the farmer can set up the time for irrigation by using his mobile phone, and he can automate the irrigation, depending on the water availability in his farm. So we are -- of course, there's always scope for improvement. We can always improve. And since we are in greenhouse business also -- so we also have access to good product for other and other search equipment to help the farmers. So on this pace, we are reasonably well covered, and we have a good partnership for bought-out items so that we are able to give good quality at a attractive price. So that part seems to be okay. Now the question which you asked is that diversifying into non-government subsidy business. So at the first phase, we are looking at non-ISI, which I talked at length. We are evaluating some more ideas in terms of possibilities, but at this point, we have not concluded so it will be not right for me to give a very firm answer on that. But definitely, we're evaluating, and we would like to leverage our current strengths. But at the same time, we are also mindful that we should not get into unlit area and refocus from our core strategy of serving the farmer. So we'll take a balanced view depending on overall analysis of the situation. But immediately, there is nothing I can tell you there that oh, we are moving into this business tomorrow. So nothing like that. So I hope that answers your question, Gokul?

Yes. I just want to follow-up because I see that there is more growth on the household farming space. And usually, as the farming system developed, you've seen a lot of retail selling on the drip irrigation systems. So I just wanted to know if you were marketing to the retail segment more than the farmers because there the margin could be higher with fewer products. And so I just wanted to know more on that side.

So see, we have -- to be honest, we have done some concepts. We've got some -- do-it-yourself kits we have but we are still at the POC stage. We are looking at the segment carefully. And the good thing is now with digital and online, it's not so complicated to reach out to the consumers compared to the gruel days where you had to have a very physical distribution setup. So these idea are being there, and our teams are working on it. So maybe even something concrete is there, we can give you a very concrete answer, but yes, we are in the evaluation phase for sure.

Ladies and gentlemen, that was the last question. I now hand the floor over to Mr. Ashok Sharma for closing call.

So it's really wonderful for you guys to come over and have this conversation. I really want to thank each one of you. And I've tried to answer all the questions to the best of my ability. And we look forward to connecting with you again in April. Until then, please take care of yourself. And once again, best wishes for the festive season ahead. And may all of you be safe and happy. So thank you very much. And Vivian, thank you very much for coordinating session so well. Thank you, everyone.

Thank you, sir. Ladies and gentlemen, on behalf of Mahindra EPC Irrigation Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.

Thank you.