Jain Irrigation Systems Limited

Growth Strategy

A report submitted in partial fulfillment of the requirements of the course

Written Analysis and Communication II (2012-13)

To Instructor: Prof. M.M. Monippally Academic Associate: Ms. Pakhi Atre Sharma

Submitted by
Shrey Rathi (Roll no. 12302) and Sushil Kumar Meena (Roll No. 12339)

Section: B

On Date: 3rd February 2013

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

Dr. Bhavarlal H. Jain, Chairman, Jain Irrigation Systems Limited (JISL) Jalgaon, Maharashtra From, Shrey Rathi Sushil K. Meena Executive Assistants Date: 3rd February 2013 Subject: Strategy proposal for growth of JISL and subsidiaries during 2013-2020. Dear Sir, With regard to the discussion we had about the strategy to be followed during the next phase of growth for Jain Irrigation Systems Limited from 2011-2020, please find attached the analysis of performance of current business divisions of JISL, an overview of the market dynamics and proposed action plan to achieve the goal of 450 billion INR revenues by 2020. We have analyzed various scenarios, possibilities and courses of action and recommend focusing upon our core competencies in Micro Irrigation Systems and Agri-businesses as the prime growth drivers for the next decade. For a more detailed analysis please refer the report attached.

Regards, Shrey Rathi Sushil K. Meena Executive Assistants

Encl: Report

Contents
Executive Summary................................................................................................................................ iii Business Model ....................................................................................................................................... 1 JISL Aspirations........................................................................................................................................ 1 JISL in Micro Irrigation Systems (MIS) ..................................................................................................... 1 JISL in Agro Processed Products .............................................................................................................. 3 Sustainable Agro-Commercial Finance Limited (SAFL) ........................................................................... 3 Energy, bio technology, research............................................................................................................ 4 Pipes and Plastics Division ...................................................................................................................... 5 HR Issues ................................................................................................................................................. 5 Focus in the future .................................................................................................................................. 6 Action Plan .............................................................................................................................................. 6 Micro-Irrigation Systems (MIS) Division ............................................................................................. 6 Energy Vertical .................................................................................................................................... 7 Agri-Business Division ......................................................................................................................... 7 SAFL ..................................................................................................................................................... 8 HR Policy ............................................................................................................................................. 9 Conclusion ............................................................................................................................................... 9

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Executive Summary
Jain Irrigation Systems Limited (JISL) has consistently exhibited excellent performance across years. It had an overall growth of 21% CAGR over last five years. It aspires to become a 456 billion INR company by end of 2020. There are a number of challenges that hinders its growth path. Irregular rainfall patterns, threats to new entrants, difficulty in finding quality employees, capacity constraints, and over-dependence on government subsidy are a few challenges that JISL needs to consider. It has come up with a strategy that will help it to achieve its target, while maintaining its values. In MIS business, JISL will expand both nationally and internationally. It will move to southern states, northern states, Africa and America. In energy sector, it will develop low cost solar energy devices and provide support for bio-gas plants. It will expand the portfolio in Agri-Business division by including more fruits, vegetables and cash crops. It will also improve quality control. It has taken an initiative of SAFL, to meet the credit requirement needs of farmers. In order to facilitate the expansion of MIS, it will install new plants. It has decided to follow a different HR policy. JISLs HR recruiting policy will be attitude driven. More effort will be given on training. [207 words]

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Business Model
Agriculture has been the mainstay of Indian economy. Jain Irrigation Systems Limited (JISLs) business model encompasses a full circle of the agriculture value chain. JISL provides seeds (biotech), micro-irrigation systems (MIS) and training to farmers to obtain high yield, which is then purchased by its agro-business division (ABD). The ABD then processes them and sells in both domestic and export market. Thus, JISL reaches out to the farmers as both seller and buyer. Over the years, JISL has achieved tremendous growth while remaining true to its mission leave this world better than you found it. However, multiple challenges abound it in future. Growing population is increasing the demand for food while the land under cultivations is decreasing. Poor monsoons and climate change add to the variability of agricultural output. Despite the great opportunity to expand, JISL is constrained by high cost of capital due to high interest rates. To further complicate matters, Indian economy is opening up to allow more investments from foreign players which increase the threat from competitors. These external factors are both a threat and opportunity to JISL.

JISL Aspirations
JISL, a 34.2 billion INR company, aspires to become the largest agricultural firm in the world with revenue of 456 billion INR by end of 2020. In the process, it is committed to ensure a positive impact on the triple bottom line (TBL) people, planet and profit. Its endeavors are targeted to add value to people (farmers and employees), should be eco-friendly and economically feasible.

JISL in Micro Irrigation Systems (MIS)

MIS is the main revenue driver for JISL accounting for over 50% of its revenues. JISL focuses on researching, developing and installing low cost MIS for small scale farmers.
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However, farmers are highly price sensitive and skeptic of benefits of MIS. JISL, due to its farmer friendly business policies and highly motivated employees, has been able to gain the faith of farmers. Sales of MIS can be to new customers and existing customers (replacement sales). As the life of a MIS system is only 3-7 years, capturing replacement market is essential for long term sustainability. Though JISL holds over 60% market share, its replacement sales as percent of total sales have been decreasing (refer exhibit 2). A potential cause can be farmers shifting to local manufacturers after their first purchase. Geographically, JISL operations have been concentrated, with Maharashtra owning more than 50% of domestic revenues. In India, 57 million hectares of irrigated land is not under MIS. There is a huge potential of growth in Africa, Americas and Middle East. Around 27 million hectares of irrigated land in North and South America is not under MIS. Furthermore, cultivation of only a few vegetables, fruits and cotton is under MIS currently. There is an opportunity to build MIS facilities for other crops as well. Due to cost barriers in reaching out to small farmers, current competition is low, but due to industrys huge potential threat of new entrants is high. There is a significant first mover advantage in gaining farmers trust. JISL needs to scale up and diversify into new regions both domestically and internationally, before new players enter the market. Key to JISLs success has been its employees and their ability to understand farmers needs. Expansion in other states and countries will require JISL to start from scratch. This can be done only by hiring local candidates and imbibing in them the JISL values. JISLs field work makes it unattractive to talented individuals. Further to support global expansion highly qualified middle managers will be required. Selecting, recruiting, training and motivating employees, at a large scale, is another big challenge.
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JISL in Agro Processed Products

As a part of JISLs strategy of providing complete value to farmers, it contracts with them before cultivation for buying the agricultural produce with a floor price. If the market price is higher, then JISL buys at the market value. If the market price is low then the difference is shared by the B2B customers of JISL. JISL sells the farm products to big agri-business companies like Coca Cola after processing under the brand name Farmfresh. This business contributes 16.9% to the revenue and is growing at a staggering 29%. Currently JISL buys only 8-10 varieties of fruits and vegetables. There is a great opportunity of expanding to other vegetables, fruits and cash crops. The customers are committed to quality and want traceability of the produces. IT system can be set up to improve the traceability. Customers are ready to pay premium prices for fresh, stable and traceable supply that JISL can provide. There is also an opportunity of possible forward value chain integration by entering into retail business. Although, this business has high margins, it will be very challenging for JISL because they dont have B2C marketing expertise. Another possibility is to enter into retail through a partnership. Backward integration of the agri-business companies is a big threat to this business.

Sustainable Agro-Commercial Finance Limited (SAFL)

Subsidy provided by the government for the installation of MIS has been a key factor for the success of JISL. Currently, 50-70% of the cost of first installation is subsidized but that subsidy is received after 6-12 months. To help farmers JISL arranges for bridge financing from banks for the subsidized part. This increases the cash to cash cycle (119 days) and ties up the capital in the receivables. The increase in debt to finance working capital requirements
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negatively impacts debt to equity ratio (1.33 in 2010) and current ratio (1.37 in 2010). As a result the interest rate, at which the firm can raise money, increases. Farmers pay the unsubsidized portion, usually by borrowing from local money-lenders who exploit them. Incorporation of SAFL, a Non-Banking Financial Company (NBFC), can overcome these problems. Farmers will finance the MIS installation by borrowing from SAFL. This will transfer the receivables from JISLs balance sheet to SAFLs Balance Sheet and free up the tied cash for JISL which can be used to finance expansion. SAFL will also reduce the dependence of JISL on Government subsidy. SAFL will also look into providing loans to farmers, at a rate cheaper than money lenders, for purposes like purchase of farm equipment, seeds etc. However, there are some inherent risks in the model as well. SAFL will be assuming the full risk of default of farmer. Loan collection from farmers will also be a challenge. If JISL doesnt diversify in locations, SAFL would be in trouble in case of crop failure in the region. The two main challenges of implementing SAFL will be (1) convincing financial institutions to extend credit lines and (2) gaining acceptance of farmers, who typically prefer local money lenders over banks. But if SAFL can prove its operation profitable, the scope to reach out to a large number of farmers will entice banks to provide finance to SAFL. Further, as half of the loan is secured by the Government subsidy, the credit rating for SAFL loans will be high and it will be provided by easy and cheap access to loans.

Energy, bio technology, research

Meeting growing demand for food whilst decreasing the land under cultivation is possible only through the use of hybrid seeds, pest resistant and fast maturing varieties of crops, development of climate change resistant crops etc. This requires proactive research in bio-

technology. Having strong linkages with small farmers, JISL can also help in distribution of these seeds. Additionally, regular supply of electricity is essential for working of MIS and hence JISL need to focus on research and development of new technologies for harnessing renewable energy, especially solar energy. Considering the increasing prices of diesel and kerosene, promoting the use of renewable energy sources, like Bio-energy, can help in reducing the operating cost for farmers. These measures will be mutually beneficial for JISL (as a crop buyer) and farmer (better yields and income).

Pipes and Plastics Division

Almost 50% of the cost of MIS system is due to pipes and tubes involved in its setup and hence having in-house production facilities helps in better cost control, reduce dependence on vendors and improve forecasting of pipe demand. Piping and Plastic division products are sold in open market also. This helps in aggregating demand leading to better economies of scale thus reducing costs for internal consumption and also availability of additional buffer capacity. The excess capacity is utilized and revenues generated from it. Thus, though selling pipes is not a core competency for JISL, having in-house production facilities is a strategic decision. Due to high demand of MIS, demand of pipes is also going to increase and seasonal demand pattern for pipes make situation worse. There are two alternatives one to spend on research to produce pipes fast at low cost and to establish new plants.

HR Issues
The key success driver for JISL is the highly motivated workforce. But, as JISL will grow aggressively, attracting right set of talent will be a challenge. Since this is a field job
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requiring associates to go to remote villages, young graduates are not interested in this job. Middle management is a weak part of JISL. Global expansion will require talented managers. Attracting talents will be a big challenge. Another challenge will be to imbibe the values of JISL in the employees at large scale.

Focus in the future

JISL will focus on aggressive expansion in four industries - SAFL, MIS, Agro-Processed products and energy.

Action Plan
Micro-Irrigation Systems (MIS) Division
JISL will approach a three dimensional expansion of MIS geography, replacement sales and more crops under MIS.

Because of its existent network of dealers in southern states (Andhra Pradesh, Tamil Nadu and Karnataka), MIS will be expanded to that region first (2013-16). Expansion into Northern state (Rajasthan, Haryana, Punjab and Uttar Pradesh) will take place in 2015-18. The capital freed up due to operations of SAFL can be used to promote this. Expand into northern states of Rajasthan, Haryana, Punjab and UP during 2015/17. The financing of these expansions will be done through the money freed up by SAFL, retained earnings and long term loans. JISL will look into aggressive international expansion in 2017. It will enter Africa first by establishing business from scratch and then North and South America in 2019 through JVs, mergers and acquisitions because they have a developed economy. Expansions will be done using a hub and spoke model enter two or three villages in a district and then expand to nearby villages. Higher cost of customer acquisition will be
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incurred in establishing the hub, but subsequent expansion to spoke will be easy because of word of mouth publicity that will be generated from hubs.

To increase replacement sales, a loyalty program will be launched under which discounts on installations, longer credit repayment time, additional training etc. will provided to repeat purchases. Further, integration of contract farming agreements with MIS installations will help in developing a closer relationship with farmer. The complete eco-system of providing seeds, MIS, training and then buying back output, will make farmers loyal.

Special efforts will be made in R&D to develop MIS system and farming techniques so that wheat and rice can also be brought under MIS. It is expected that JISL will be ready to expand to wheat and rice cultivation in 2015 and 2017 respectively.

Energy Vertical
In addition to on-going solar research, consultation services for set-up of biogas plants, windmills, bio-waste plants etc. will be provided. Dealer training for installation and operation of these technologies will be done. Since most of these technologies are already available, JISL will partner with NGOs and other institutions to share the training cost and adapt the best technologies available. Capital funding for these projects will be provided through SAFL.

Agri-Business Division
New fruits and vegetables will be added to the existing portfolio as they have the potential to double the growth rate. Expansion to new territories will help in sourcing for these new crops. To ensure traceability of food products, development of a robust IT system is required. This system would track details for each basket of crops bought location, harvesting date, etc. Also, stricter quality controls will be set up for contract farming to ensure that the crops

are grown following the accepted guidelines. Associates will be given the responsibility of ensuring the quality control. By increasing product portfolio, developing technology for better traceability and ensuring crops are cultivated as per standards will help in retaining market share even in face of backward integration by food companies.

SAFL
License from RBI for SAFL is expected in the middle of 2012. SAFL will begin its operations in 2013 in Jalgaon region. 50 branches will be set up each year. Loan processing will be done centrally at Mumbai office. Branches will be thinly staffed so as to incur minimum operational expense. In 2014-16, expansion will take place in other parts of Maharashtra. Expansion to other states will be done in parallel to the expansion of MIS i.e. Southern states (Karnataka, AP, TN) in 2013-16 and Northern states (Rajasthan, Haryana, Punjab and UP) during 2015-18. A detailed expansion plan is shown in exhibit 4 and 5 Gaining trust of farmers for an outsider lending institution is very difficult. To gain that trust existing distribution network of JISL will be used. Representatives called Jain Gram Sewaks (JGS), having good social stature, in each village will be appointed to carry the task of loan collection. Also the representative should be well educated. Selection of JGS could be done in consultation with dealers and our own employees.

Initially SAFL operations will be restricted to loan processing for MIS purposes only. But after gaining expertise in operating a financial institute in this segment, SAFL will diversify its portfolio. It will start giving loan for farm equipment and seeds in 2018.

HR Policy
Since, attraction of talent is very difficult, JISL will hire employees with right kind of attitude. Knowledge will be a secondary criterion while recruiting. The task of providing knowledge and imbibing values of JISL will be done during the extensive training program at the time of hiring.

JISL will try to attract middle managers by providing them incentives of international exposure and world class training.

Conclusion
The overarching strategy for the next decades growth will be to focus on core competencies, i.e. MIS and agri-business, while phasing out plastic and piping divisions (Refer Exhibit 1).

[2393 words]

Exhibit 1: Consolidated Revenue Forecast for 2011-2020

Figures in million INR Division MIS Piping Division Agri- Processing Plastic Division Other SAFL Total *Based on actual data 2010* 18722 8418 5015 1768 656 0 34579 2011* 23311 9464 7875 1736 1247 0 43633 2012* 26798 9855 8352 1995 2400 489 49888 2013 37753 10348 11693 2099 3360 675 65928 2014 47487 10865 16370 2209 4704 832 82467 2015 60060 11408 22918 2325 6586 1032 104328 2016 78904 11979 32085 2446 9220 2929 137563 2017 104567 12578 44919 2574 12908 4255 181801 2018 140145 13207 62887 2709 18071 5778 242796 2019 190636 13867 88041 2850 25299 7467 328161 2020 264607 14560 123258 3000 35419 9846 450689

Exhibit 2: MIS Division Operations Forecasted growth Strategy (2011-2020)

2011* MIS Total Sales (in mn INR) Domestic as % of Total Sales Domestic Sales (in mn INR) International Sales (in mn INR) 23311 93 21703 1608 2012* 26798 91 24450 2348 2013 37753 89 33756 3997 2014 47487 88 41610 5876 2015 60060 86 51575 8485 2016 78904 82 64369 14535 2017 104567 77 81040 23528 2018 140145 74 103182 36963 2019 190636 70 133338 57298 2020 264607 66 175822 88785

Domestic Operations New MIS systems installed (in hectares) Cost per MIS System in INR per hectare Revenues from new MIS installations (in mn INR) New Sales as % of Domestic MIS revenues Replacement Sales as % of Domestic MIS Revenues Replacement Sales Replacement Area *Based on actual data 260000 45650 16023 351000 45650 21631 473850 45650 29202 639698 45650 35043 767637 45650 42051 921164 45650 50461 1105397 45650 60554 1326477 45650 72664 1591772 45650 87197 1910126 45650 104637

73.83

88.47

86.5

84.2

81.5

78.4

74.7

70.4

65.4

59.5

26.17 5679 124412

11.53 2819 61746

13.5 4554 99753

15.8 6568 143866

18.5 9524 208636

21.6 13907 304655

25.3 20486 448761

29.6 30517 668508

34.6 46141 1010749

40.5 71185 1559366

Exhibit 3: Gantt chart for staging of MIS by regions

Plan for MIS 2014 2015

2013 Southern States Northern States Africa North and South America MIS in wheat cultivation MIS in rice cultivation

2016

2017

2018

2019

2020

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Exhibit 4: SAFL Growth and Staging Plan (with Capital Expenses from JISL) from 2012-20
2011 Revenues from MIS India (in mn INR) Subsidy % Subsidy Amount (in mn INR) % subsidy to transfer to SAFL No Operations Started for SAFL Total Subsidy Capital with SAFL (in mn INR) % of farmers funded for loans for MIS Farmer Funding (in mn INR) Total Capital Required (Subsidy + Farmer Funding) Revenues (Interest Inflow on Farmer loans only) @ 10% interest charge 2012 24450 60% 14670 50% 7335 50% 4890 12225 489 2013 33756 60% 20254 65% 13165 50% 6751 19916 675 2014 41610 60% 24966 80% 19973 50% 8322 28295 832 2015 51575 60% 30945 80% 24756 50% 10315 35071 1032 2016 64369 30% 19311 80% 15449 65% 29288 44736 2929 2017 81040 30% 24312 80% 19450 75% 42546 61995 4255 2018 103182 30% 30955 80% 24764 80% 57782 82545 5778 2019 133338 30% 40001 80% 32001 80% 74669 106670 7467 2020 175822 30% 52747 80% 42197 80% 98460 140657 9846

Staging of New Branches and Capital Expenditure Requirement 50 50 1200 49% 588 100 50 600 48% 288 200 100 1200 47% 564 350 150 1800 46% 828 500 150 1800 45% 810 700 200 2400 44% 1056 840 140 1680 42% 705.6 960 120 1440 41% 590.4 1060 100 1200 40% 480

Cumulative Branches New Branches New Capital Investment Required JISL Shareholding in SAFL (in %) JISLs contribution in Capital Expenditure

Exhibit 5: Gantt chart for staging of SAFL by regions

Plan for SAFL 2014 2015

2013 Branches Jalgaon Area Other parts of Maharashtra Southern States Northern States Loan for farm equipments

2016

2017

2018

2019

2020

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Exhibit 6: Planned growth of dealers in India (2011-2020)

Revenue Share (2010) 50% 10% 10% 10% 4% 4% 6% 0% 0% 0% 6% Forecast ed Revenue share (2020) 14% 10% 10% 10% 9% 9% 9% 7% 7% 9% 7%

State

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Maharashtra Andhra Pradesh Karnataka Tamil Nadu Madhya Pradesh Gujarat Rajasthan Haryana Punjab UP Others Total Dealers

950 289 193 65 158 189 46 0 0 0 274 2164

1000 339 243 115 183 214 71 0 0 0 299 2464

1050 389 293 165 208 239 96 0 0 0 324 2764

1100 639 543 465 233 264 121 15 15 15 349 3759

1150 789 793 765 258 289 146 40 40 40 374 4684

1200 864 868 865 508 539 446 340 340 340 399 6709

1250 889 893 890 658 689 646 490 490 590 424 7909

1300 914 918 915 808 839 846 640 640 840 449 9109

1350 939 943 940 833 864 871 665 665 865 524 9459

1400 964 968 965 858 889 896 690 690 890 599 9809

1450 989 993 990 883 914 921 715 715 915 674 10159

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