Mahindra eyes micro irrigation with EPC acquisition

Mahindra & Mahindra’s farm equipment segment (FES) is eyeing the business of micro irrigation through the acquisition of EPC Industries Ltd. Micro Irrigation Systems (MIS), divided into drip and sprinkler irrigation, is a market growing at 40% annually.

The size of this market in India is pegged at `2,700-3,000 crore, nearly three-fourths of which is for drip irrigation. Drip irrigation, also known as trickle irrigation, helps save water and fertiliser by directing them in a trickle to the roots of plants. Sprinkler irrigation is used in spraying water to irrigate the soil surface over a particular area.

At present, Jain Irrigation Systems (JISL) is the biggest player that controls over one-third of the market, followed by Israel’s Netafim, the world’s largest. JISL and Netafim, along with Finolex Plasson, Nagarjuna Fertilizers & Chemicals and Premier Irrigation Adritec, account for about 80-85% of the market.

But M&M is not perturbed by the competition. Pawan Goenka, president, FES, describes the company’s recent acquisition as wanting to go beyond selling tractors and promoting farm mechanisation and be an end-to-end provider in the agriculture space.

“Micro irrigation is a segment which has a significant impact on India as the country faces the problem of water shortage and the problem will only become acute with time. Agriculture consumes 80% of the water in the country and it makes sense for us to branch out into the allied areas of farming,” he said.

It was last year that M&M decided to enter this space and opted against an organic route. “Instead of starting ground up we looked at acquisitions and were looking at 4-5 companies that would fit our need. EPC is the right sized company for us, not too small that we would have difficulty molding it and not too large that it cannot be molded to suit our requirement,” Goenka said. It took the company six months to close the acquisition process.

The announcement was made on February 9 to acquire a 38% stake in EPC for around `43 crore. M&M will launch an open offer on April 6 to acquire an additional 20% stake in the company.
EPC is a 30-year-old company based in Nashik. The company generated revenues of Rs52 crore and a net profit of Rs5.24 crore in the last fiscal. It has operations primarily in Gujarat and Maharashtra.

It lacks a large manufacturing capacity (current annual capacity is 12,000 tonnes) and has limited working capital to support. Its distribution network consists of 600 dealers in a select number of states. M&M brings to the table sizeable investment in the working capital, expansion of the distribution network and technology upgradation, added Goenka. Over time, the number of dealers is expected to cross 1,000.

Goenka feels that this is a win-win situation for both M&M and EPC. “While Mahindra is a large organisation, EPC is a pioneer in the industry and is respected for its contribution. From the outset, both teams believed that they were more likely to achieve their common goal if they worked together as a team,” he said. Officials at EPC could not be contacted for comments.

Last year, M&M was reported to be looking to acquire Ahmedabad-based irrigation company Parixit Industries. US-based Driptech recently started selling MIS through the dealer network of Godrej Agrovet. An August 2010 JP Morgan report on JISL had said large players such as Coromandel International, M&M and Escorts, which have strong rural distribution muscle, are looking to enter the micro-irrigation business.

Till 1985, India used flood irrigation which had low efficiency and led to the destruction of crops. Of India’s total arable land of 140 million hectare (ha), about half is rain-fed. Of the rest, about 4-5 million ha have been covered by irrigation, which leaves nearly 65 million ha unirrigated. In the past few years, over half a million ha has been irrigated per annum. “Moreover, the systems have to be replaced every 4-5 years,” Goenka noted.

The market is also quite fragmented with 40-50 state-level companies. There are more in drip irrigation than in sprinkler. The leader, Jain Irrigation, caters to the organised farmer segment or the elite segment.

M&M’s strength lies in close ties with the moneylender class or the unorganised segment of the market. “Over the years M&M has built a strong relationship with this group of marginal/unorganised farmers and it will capitalise on this strength to grow in the micro irrigation space,” said Prakash Diwan, head of research, Networth, a domestic research firm.

According to Diwan, M&M will rival JISL in a significant way as it has a ready customer base and the manufacturing part of the business is not complex. The only challenge is in the marketing and distribution, which should not be a problem for M&M as it enjoys strong brand equity in rural areas. Micro irrigation is set to grow in India as farm loans come under priority sector lending and collateralisation of cash crops is rising. This will augment the usage of micro irrigation.

Sageraj Bariya, a research analyst with Angel Broking who tracks micro irrigation firms, said  there is no immediate threat to the market leaders from M&M’s entry.  Experts believe that M&M has got the much-needed headstart in the MIS segment by acquiring a company in that space instead of going it alone.

Lalit Mishra, strategic business unit head, business development, Netafim India, welcomed M&M’s entry. “There are only a few big players, competition is always good.”

Bariya said it’s a good move for the company. “The key is the network. They can use their tractor dealers to push MIS. They can also pump in the required capital.”

However, Mishra felt that the expertise required to sell MIS
is very different from that used to sell tractors. “It requires
work in terms of collection of subsidies from the government,” he observed.