Management Meet Note

August 26, 2014

Rating matrix
Rating
Target
Target Period
Potential Upside

:
:
:
:

EPC Industrie (EPCIND)

Unrated
NA
NA
NA

Key Financials
| Crore
Net Sales
EBITDA
Net Profit
EPS (|)

FY11
86.8
8.0
1.3
0.8

FY12
125.1
9.9
6.7
3.9

FY13
161.4
7.6
5.4
2.0

FY14
174.7
10.4
7.8
2.8

FY11
246.2
63.1
9.4
2.7
7.4

FY12
47.7
52.9
8.5
11.7
9.0

FY13
94.6
62.5
4.8
6.5
5.2

FY14
65.5
48.3
4.5
7.1
6.4

Valuation Summary
P/E
EV / EBITDA
P/BV
RoNW
RoCE

Price movement
9,000

250

8,000

200

7,000
6,000

150

5,000

100

4,000

50

3,000
2,000

0
Aug-13

Nov-13

Feb-14

Price (R.H.S)

| 185

Micro-irrigation: Niche segment

May-14

Aug-14

Nifty (L.H.S)

Analysts name
Chirag J Shah
shah.chirag@icicisecurities.com
Shashank Kanodia
shashank.kanodia@icicisecurities.com

We recently met the CEO of EPC Industrie (EPC), Mr Ashok Sharma, to

understand the domestic micro-irrigation industry and the companys role
in the entire irrigation supply chain. EPC, a Mahindra & Mahindra
subsidiary, is a micro-irrigation system & component manufacturer based
out of Nashik, Maharashtra. The company was acquired by Mahindra &
Mahindra (M&M) way back in February 2011 (38% stake). Later, M&M
increased its stake to 54.8% through a rights issue in FY13. EPC
commands a market share of ~5% (topline of | 175 crore in FY14) out of
the total industry size estimated at ~| 4000 crore as of FY14. Among
states, the company has a healthy presence in Gujarat, Maharashtra and
Andhra Pradesh. EPC has recently ventured into the greenhouse & agri
pumps segment with the aim of becoming a total agri solutions player
catering to the needs of the Indian farmer. With an increasing thrust on
increasing domestic crop yields, focus on minimising wastage of scarce
natural resource (i.e. water) and strong brand recall (Mahindra brand) the
company is poised for an exciting growth journey ahead.
Micro-irrigation way forward for Indian agriculture!!
Micro-irrigation (MIS) is essentially an irrigation technique wherein small
quantum of water (in a regulated way) is released at necessary time
periods to the most appropriate parts (roots and leaflets) of the plant. The
benefits of this technique include: increase in crop yield and reduction in
labour, water & and power usage. It is implemented through the drip &
sprinkler irrigation techniques. According to industry sources, the current
micro-irrigation industry size is ~ | 4000 crore with ~6 million hectares of
land under MIS out of the total net sown area of 140 million hectares and
70 million hectares of irrigated area. The main players in the segment
include Jain Irrigation, Netafim India and EPC Industrie.
Government providing much needed support!!!
The government has been promoting MIS through its flagship
programme National Mission on Micro irrigation (NMMI) in the past. It has
been providing a subsidy of 50% (40% central governments share +
10% state governments share) of the cost of MIS to farmers with a cap of
five hectares per farmer. The government, however, on the back of a
better payback period coupled with an increasing farmer base benefiting
out of it, has reduced the subsidy to 35% (25% central governments
share + 10% state governments share). The total quantum of subsidy
allocation has, however, not been reduced this fiscal year.
Balance sheet strength to grow; well poised for growth
EPCs revenues have grown at a CAGR of 24.6% in FY10-14. With debt to
equity at 0.1x as of FY14 the company possesses strength to grow both
organically as well as inorganically, going forward.
Exhibit 1: Financial Performance
(Year-end March)
Net Sales (| crore)
EBITDA (| crore)
Net Profit (| crore)
EPS (|)
P/E (x)
Price / Book (x)
EV/EBITDA (x)
RoCE (%)
RoE (%)

FY10
72.4
6.2
1.0
0.9
204.1
11.9
87.2
10.5
4.3

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

FY11
86.8
8.0
1.3
0.8
246.2
9.4
63.1
7.4
2.7

FY12
125.1
9.9
6.7
3.9
47.7
8.5
52.9
9.0
11.7

FY13
161.4
7.6
5.4
2.0
94.6
4.8
62.5
5.2
6.5

FY14
174.7
10.4
7.8
2.8
65.5
4.5
48.3
6.4
7.1

Other management meet highlights

The domestic micro-irrigation business (industry) can be classified into
two - project business and non-project business. In the project business,
the state government gets the subsidy from the government on the
farmers behalf, which is ultimately paid to the company installing MIS,
post verification. In the case of non-project business, the farmer receives
the subsidy directly from the central government and, in turn, incurs the
cost of MIS installed in his crop field to the company. The project
business model is followed in Gujarat and Andhra Pradesh among others
while the non-project business is prevalent in Maharashtra among others.
Key challenges of the micro-irrigation industry are:
1) Disbursement of subsidies by the state government
2) Lack of transparency, IT & logistics at the state government level
3) Less than optimal product realisations
The micro-irrigation industry is expected to grow at a healthy rate of 1520% CAGR in the long term, going forward. The company also expects to
achieve the industry growth rate, going forward.
The company believes that working capital management is key to
maintaining healthy equitable growth, going forward. The company does
not tend to increase its account receivable days beyond 130 days while
the inventory days are expected at ~30 days. The net working capital is
expected at ~120 days, going forward.
EPC has 200 ready demo plots depicting the benefits arising out of MIS to
farmers.
The company has 12 Samriddhi centres, which are equipped with soil
testing equipment and agri professionals, which guide farmers on the
usage of right agri inputs for their fields. The stores are owned by the
group i.e. M&M while for EPC it acts as a dealer.
EPC realises healthy demand for micro-irrigation systems post the harvest
seasons and typically performs well in March, April, May, October &
November of a calendar year.
In the long term, the company is targeting an RoCE of 20% from its
micro-irrigation business (FY14 RoCE at 6.4%). EPCs EBITDA margins are
expected to improve once it reaches scale (topline) as fixed costs will
spread over a larger base (FY14 EBITDA margins at 6%).
The company has a major focus on Maharashtra and Gujarat due to
timely and more rapid payments.
In terms of new states, the company is seeing increasing traction in Tamil
Nadu, Karnataka and Bihar.
EPC also has a presence in the cash & carry business through thin walled
products, which are priced at one-third or one-fourth of the thick walled
products while they have only two or three years of useful life as
compared to seven or eight years for thick walled products.
The company considers the Indian arm of global market leader Netafim
(Israel firm) its real competitor and benchmarks its performance relative
to Netafim India both in terms of quality as well as service.

ICICI Securities Ltd | Retail Equity Research

Page 2

Key financials
Exhibit 2: Revenues grow at CAGR of 26.3% in FY11-14

Exhibit 3: Topline bifurcation (finished goods vs. components)

180

200

160
140
| crore

| crore

150
100
50

12.7

60

174.7

161.4

21.7

100
80
40

125.1

50.4

47.9

120

74.7

103.5

111.3

118.5

FY12

FY13

FY14

20

86.8

0
FY11

0
FY12

FY13

FY14

Finished Goods

Exhibit 5: PAT & PAT margins trend

7.6

2.0
0.0
FY11

FY12
EBITDA

FY13

FY14

4.5

3.0

1.5

2.0
1.0
0.0

FY12

EBITDA Margins

FY13

PAT

FY14

PAT Margins

Source: Company, ICICIdirect.com Research

Exhibit 6: RoE & RoCE trend

14.0
12.0

11.7

10.0
%

8.0

9.0
7.4

6.5
5.2

6.0
4.0
2.0

7.1
6.4

2.7

0.0
FY11

FY12

FY13
ROCE

FY14

ROE

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 3

3.3

FY11

Source: Company, ICICIdirect.com Research

5.0
4.0

7.8

9.9

4.0

4.7

10.4

6.0
8.0

| crore

8.0

6.0
5.4

5.4

7.9

9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

6.7

10.0

10.0
9.0
8.0
7.0
6.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

1.3

9.2

Exhibit 4: EBITDA & EBITDA margins trend

12.0

Components

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

| crore

FY11

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey

Head Research

pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No. 7, MIDC,
Andheri (East)
Mumbai 400 093
research@icicidirect.com
ANALYST CERTIFICATION
We /I, Chirag Shah PGDBM Shashank Kanodia MBA (Capital Markets) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report
accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific
recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:
ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading
underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of
companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities
generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts
cover.
The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and
meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without
prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and
employees (ICICI Securities and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities
from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities
policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.
This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This
report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their
receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific
circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate
the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any
loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the
risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to
change without notice.
ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received
compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment
banking or other advisory services in a merger or specific transaction. It is confirmed that Chirag Shah PGDBM Shashank Kanodia MBA (Capital Markets) research analysts and the authors of this report
have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities,
which include earnings from Investment Banking and other business.
ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the
research report.
It is confirmed that Chirag Shah PGDBM Shashank Kanodia MBA (Capital Markets) research analysts and the authors of this report or any of their family members does not serve as an officer, director or
advisory board member of the companies mentioned in the report.
ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use
of information contained in the report prior to the publication thereof.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,
publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities
described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and
to observe such restriction.

ICICI Securities Ltd | Retail Equity Research

Page 4