RESEARCH REPORT 5th March 2020

MAHINDRA EPC IRRIGATION LIMITED BSE : MAHEPC Sector: MICRO IRRIGATION SYSTEMS BSE: 523754

View - BUY CMP : Rs. 112.50 Target Price: Rs 186 (In next 12 to 18 mths) Suggested Buying Range (Between Rs 110 - Rs 125) BUSINESS BACKGROUND KEY DATA

INVESTMENT HIGHLIGHTS

SHAREHOLDING PATTERN

KEY FUNDAMENTALS

vScore: vScore (Value Score) is our proprietary company rating system f

Precise Advice

Assured…

Long term Drivers for DHFL look good in view of the follow18

Mahindra EPC Industries (MEPC), a Mahindra & Mahindra (M&M) subsidiary, is a micro-irrigation system (MIS) and component manufacturer based out of Nashik, Maharashtra. The company was acquired by M&M in February 2011 and has been well capitalised over the years by M&M M&M increased its stake to 54.8% through a rights issue in FY13. EPC commands a market share of 5% (sales of Rs 260 crs in FY19) out of the total industry size, which is pegged at Rs 12000 crs as of FY19. EPC has recently ventured into the greenhouse farming & agri pumps segment with the aim of becoming a total agri solutions player.

PROMOTERS - 55%

BANKS, MFs & DIIs - 1%

FIIs - %

PUBLIC - 44%

Strong Financial Performance in FY19 & 9MFY20 –

MEPC reported a steady set of FY19 numbers with net sales at Rs 260 crs as

compared to a revenue of Rs 205 crs last year, with EBIDTA placed at Rs

20.33 crs from Rs 12.21 crs last year with the PAT placed at Rs 11.22 crs from

Rs 4,95 crs MEPC has declared a dividend of 10% for FY19.

For MEPC 9MFY20 was also steady with Sales at Rs 202 crs, EBIDTA of Rs

22.87 crs with PAT at Rs 13.37 crs from Rs 11.22 crs in last full year

Micro-irrigation (MIS) - way forward for Indian agriculture – MIS is essentially an irrigation technique wherein regulated quantum of water is applied to the most critical part of the plant i.e. roots. It is implemented through the drip & sprinkler irrigation techniques. The benefits of MIS vis-à-vis traditional method of irrigation include higher crop yield (20-30%) and savings of labour (30-50%), water (30-40%) & power (20-40%). Therefore, with increase in yields & associated savings, MIS is one of the most environment friendly way of increasing farm productivity

The current domestic industry size of MIS is pegged at around Rs 4000 crs with market penetration at around 9% [6 million hectares (MH) out of the net irrigated area of 70 Mh. More importantly MIS is essentially a niche segment with oligopolistic industry structure, the main players being Jain Irrigation, Netafim India & MEPC. There are also many smaller unorganised players operating here.

YE FY19 FY20 FY21

Rev Gr% 27 11 15

EBIDTA Gr% 67 42 27

PAT Gr% 126 60 33

EPS Gr% 126 60 33

EPS (Rs) 4.05 6.51 8.67

ROE % 8 11 14

ROCE % 9 12 13

P/E(x) 22 17

FACE VALUE Rs 10.00

DIVD YIELD % 0.68

52 WK HI/LOW 166/75

NSE CODE MAHEPC

BSE CODE MAHEPC

MARKET CAP RS 406 CRS

advisory

Business Background of MEPC before its takeover by the Mahindra Group – EPC Industries was established in 1981, by Mr K Khanna, a technocrat and an alumnus of IIT, Mumbai. The company pioneered micro-irrigation systems (MIS) in India in 1986 and was listed in December 1992; IPO @ Rs 30/share On account of a working capital crunch (increase in announced subsidy by government without corresponding increase in grants), EPC filed for BIFR in 2001. In 2006, it reached a one-time settlement (OTS) with its lenders and came out of BIFR in 2007. The company received a total investment of Rs 40 crs, in 2007, from New York-based PE player Credit Renaissance Partners LLC Mahindra acquired EPC and made its foray into micro irrigation in February 2011 (through preferential issuance of equity shares @ Rs 66/share). Credit Renaissance Partners’ LLC stake got reduced from 43.6% to 32.4%. In FY11, the company clocked sales of Rs 87 crs with EBITDA at Rs 8 crs and PAT of Rs 1 crs. However, post the acquisition by M&M, in FY12 the company clocked sales of Rs 125 crs, EBITDA of Rs 10 crs and PAT of Rs 7 crs. As on FY19 MEPC has recorded a top line of Rs 260 crs, a EBIDTA of Rs 20.33 crs and a PAT of Rs 11.22 crs. In FY13, through a rights issue (3:5 @ Rs 40/share; total amount raised was Rs 40 crs) M&M increased its stake further from 38.1% to 54.8% Currently, as on date MEPC is registered in 18 states under subsidy programme in India. It has more than 600 channel partners Micro-irrigation; niche segment; under penetrated domestically – As of 2016, according to the International commission on irrigation & drainage, the total area under irrigation is 223.6 MH while the area under micro-irrigation is 55.8 MH, implying a penetration of 25%. Among regions, the penetration has saturated in Europe (61.7%) and America (50.9%) while the same remains low in Asia & Oceania at 13.7%. Among developing regions, the penetration in India stands at around 8 to 9% (6 MH under MIS out of total of 70 MH of irrigated area) while the same in China stands at 8%, implying a huge untapped opportunity. In India domestically, MIS is more prevalent in Maharashtra, Gujarat, Rajasthan, Tamil Nadu and Andhra Pradesh. among others. The domestic industry has grown at a CAGR of 15% in FY09-14 to Rs 12000 crs in FY19. The payback period for farmers domestically is in the range of one or two years. With an increase in yields and associated savings, MIS is one of the most environment friendly ways of augmenting the farm productivity domestically On account of subsidy support and delay in release of subsidy payments, the domestic micro-irrigation industry requires quite high working capital. In its initial years, EPC, post acquisition by the leading tractor player Mahindra has showed discipline with controlled working capital cycle with current debtors days as on FY19 standing at 175 days from 190 days last year.

Limited investing opportunity in listed space, MEPC looks a dark horse here – The main credible players in the segment include Jain Irrigation, Netafim India and MEPC within the total industry size of around Rs 12000 crs. Jain Irrigation commands a market share of 35%, (MIS India sales of Rs 4093 crs as on FY19), Netafim India comes second with close to 15-20% market share while MEPC has around 5% market share (sales of Rs 260 crs in FY19). With Netafim India being a private entity and Jain irrigation embroiled in its own leverage issues with low promoter holding at 29% and high pledging of 50% there exists a scarcity of credible names with a sound balance sheet in the listed MIS space. MEPC promoted by M&M (54.8% stake), looks well placed in the long term. On a net worth of Rs 150 crs, MEPC has a debt of Rs 3.36 crs as on FY19 which is a good sign that company can grow both organically & inorganically, going ahead. MEPC is a quality play in micro-irrigation industry – MEPC, post its acquisition by M&M in FY11 has progressed on the path of robust growth with sales and PAT growing at a CAGR of 26% and 75%, respectively in FY11-14 with latest performance as on FY19 showing sales of Rs 260 Crs. EBITDA which was at Rs 8.20 crs in FY11 before its takeover has moved up to Rs 20.33 crs in FY19 and PAT has increased from Rs 1.44 crs in FY11 to Rs 11.22 crs in FY19. MEPC is a major micro-irrigation player with drip irrigation contributing 60% to its FY19 topline and sprinkler contributing the rest 40%. It expects the share of drip to increase progressively, going forward. MEPC is strongly present in Gujarat, Maharashtra and Rajasthan. MEPC, with the aim of de-risking its business profile, has also ventured into greenhouse farming & agricultural pumps, the percentage share of which in total sales is expected to reach 20% in the next 2 years Mahindra & Mahindra, apart from EPC, also has other active agri businesses wherein it operates under two segments. One segment, namely, ShubhLabh Services Ltd operates in export of fresh fruits to Europe and other foreign countries while another segment agri inputs & advisory operates in the agrochemicals and seed space. The agri inputs division also operates Samriddhi (a one shop stop for farmers for their agri needs) stores, which also helps MEPC leverage the distribution network and create MIS awareness among farmer community There also exists a possibility wherein the promoter group (M&M) may consolidate all its agri services related business (crop care, seeds, fresh fruits exports, etc) into MEPC ahead.

MEPC enjoys a strong balance sheet and both Topline and Bottomline growth is likely to

remain steady going ahead –

MEPC has maintained a strong balance sheet over the years with virtually no debt as on March 2019. In the first half of FY20 the company has taken some debt totaling Rs 26 crs for its ongoing working capital and expansion plans but this is not significant as compared to its cash flows. The company has always had a challenge in maintaining positive operating cashflows. Operating cashflows have been negative for last 3 years between FY16-FY18 and became marginally positive in FY19 on better operational efficiencies. However again in H1 of FY20 operational cashflow has again become negative at Rs 16.56 crs due to slower payments made by debtors and slower cash cycle due to govt subsidies. However we believe that with Mahindra Group as the main promoter this will be sorted out and longer

term the company is making efforts to diversify in the greenhouse business which is less government

dependent and not prone to subsidy.

MEPC has reported average RoE of 8% and a average ROCE of 9% during the past 3 years, and

going ahead we expect this to improve to around 15% and 14% ROCE and ROE in the next 2 years.

We expect that going ahead overall bottom-line growth in the next 3 years starting FY19 onwards

should easily increase at a CAGR of 18-20% and going ahead also we believe that net cash flows

generated will remain healthy going ahead.

Business Outlook & Stock Valuation –

On a rough cut basis, in FY20, Top line will see a steady rise wherein Top line is expected to touch

Rs 290 crs in FY20E.

On the bottom line level we expect the company to record a PAT of Rs 18 crs in FY20E. Thus on a conservative basis, MEPC should record a EPS of Rs 6.51 for FY20E. For FY21E our expectation is that earnings traction for MEPC would continue to be strong wherein we expect a EPS of Rs8.67 respectively. Also going ahead ROCE and ROE are expected to improve ahead to around 15% and 14% by FY22 from current levels of around 9% and 8% at present MEPC is strongly present in Gujarat, Maharashtra and Rajasthan. MEPC, with the aim of de-risking its business profile, has also ventured into greenhouse farming & agricultural pumps, the percentage share of which in total sales is expected to reach 20% in the next 2 years. MEPC promoted by M&M (54.8% stake), looks well placed in the long term. We hence like MEPC given the prudent management pedigree, steady & planned expansion across verticals funded largely through internal accruals, lean balance sheet and a growing market In conclusion we believe that MEPC is supported by a competent management team and promoters, and is well positioned to ride the next growth wave and believe that MEPC is well positioned for long term sustainable growth. Hence we believe that the MEPC stock should be purchased at the current price for a price target of around Rs 186 over the next 12 to 18 months.

FINANCIALS

For the Year Ended March RsCrs FY17A FY18A FY19A FY20E FY21E FY22E

Net Sales 200.74 204.67 260.10 290.00 333.50 383.53

EBIDTA 12.38 12.21 20.33 29.00 36.69 43.15

EBIDTA % 6.17 5.97 7.82 10.00 11.00 11.25

Interest 1.52 0.50 1.93 1.90 2.20 2.50

Deprecia�on 3.04 3.14 3.50 4.10 4.65 5.10

Non Opera�onal Other Income 1.86 1.79 1.06 0.50 0.76 0.75

Profit Before Tax 9.68 10.36 16.94 23.50 30.60 36.30

Profit A�er Tax 9.88 4.95 11.22 18.00 24.00 28.00

Diluted EPS (Rs) FV Rs 10 3.57 1.79 4.05 6.51 8.67 10.12

Equity Capital 27.67 27.67 27.67 27.67 27.67 27.67

Reserves 106.50 112.23 122.22 135.72 155.22 178.22

Borrowings 0.21 3.61 3.36 26.00 25.00 25.00

GrossBlock 65.15 66.86 69.81 72.81 76.00 80.00

Investments 4.51 0.00 1.80 0.00 0.00 0.00 Source Company our Estimates

KEY CONCERNS

Cut down of subsidy by Centre and state governments: Given the savings arising out of using MIS (namely water, power, fertilisers, labour etc.), a wide array of incentives are being provided by the central & state governments towards its implementation. Any reduction in the quantum of subsidies by the central and the state governments may derail the growth of the MIS industry and for MEPC also

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