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


CONTENTS

EXECUTIVE SUMMARY ___________________________________________________________ 1

ASPIRATIONS, VISIONS AND GOALS _______________________________________________ 2

OBJECTIVES _____________________________________________________________________ 5

ACTION PLAN ____________________________________________________________________ 9

EXHIBITS _______________________________________________________________________ 11


Page 1

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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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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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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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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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 well-

defined business model and extensive network of dealers. International expansion would


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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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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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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.


Page 9

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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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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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 2013 - 2017 2018 - 2022

Micro Irrigation 30% 15%

Piping Products 15% 10%

Agro Processed Products 45% 31%

Plastic Sheets 5% 5%

Other Products 30% 15%

Operating Assumptions* End of 2017 End of 2022

Cash to Cash Cycle (days) 160 100

Net Fixed Assets (% of revenues) 55% 53%

Depreciation (% of Net Fixed Assets) 6% 6%

PBDIT Margin 23% 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 34%

Terminal Growth Rate 3%

Cost of Capital 15%


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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

Eliminations -194

Total Revenue 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%

EXHIBIT E: PROFIT AND LOSS SCHEDULE (PARTIAL)

All figures in

₹ millions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Total Revenue 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%


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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

Working

Capital 23,457 29,782 37,896 48,504 62,432 80,794 88,913 97,635 106,864 116,414 125,961

Cash to

Cash Cycle

(days)

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%

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

Free Cash Flow to Firm (FCFF)

-6,975 -8,799 -11,463 -14,989 -19,671 2,762 4,955 7,988 12,175 17,946

Terminal Value in 2022 154,032

Total Cash Flow to Firm -6,975 -8,799 -11,463 -14,989 -19,671 2,762 4,955 7,988 12,175 171,978

Cumulative financing of ₹61.9 billion required till 2017 as cash

flows are negative


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EXHIBIT H: FINANCIAL RATIOS All figures in ₹

millions except % 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Reinvestment Rate 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%

Jain Irrigation Systems Strategy Report (HBS Case Study)

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