Upload
sushil-kumar
View
43
Download
1
Tags:
Embed Size (px)
DESCRIPTION
Analysis of JISL and its possible future strategy
Citation preview
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 RathiSushil K. MeenaExecutive 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 RathiSushil K. MeenaExecutive Assistants
Encl: Report
i
ContentsExecutive Summary...............................................................................................................................vi
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
ii
Executive SummaryJain 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. JISL’s HR recruiting policy will be attitude driven.
More effort will be given on training.
[207 words]
iii
Business ModelAgriculture has been the mainstay of Indian economy. Jain Irrigation Systems Limited
(JISL’s) 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 AspirationsJISL, 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.
1
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.
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
industry’s 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 JISL’s 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. JISL’s field work
2
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.
JISL in Agro Processed ProductsAs a part of JISL’s 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 don’t 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.
3
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
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 JISL’s balance sheet to SAFL’s 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
doesn’t 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.
4
Energy, bio technology, researchMeeting 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 DivisionAlmost 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.
5
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
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 futureJISL 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
6
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
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 NGO’s and other institutions to share the training cost and
adapt the best technologies available. Capital funding for these projects will be provided
through SAFL.
7
Agri-Business DivisionNew 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.
8
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 decade’s 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]
9
Exhibit 1: Consolidated Revenue Forecast for 2011-2020
Figures in million INR
Division 2010* 2011* 2012* 2013 2014 2015 2016 2017 2018 2019 2020
MIS 18722 23311 26798 37753 47487 60060 78904 104567 140145 190636 264607
Piping Division 8418 9464 9855 10348 10865 11408 11979 12578 13207 13867 14560
Agri- Processing 5015 7875 8352 11693 16370 22918 32085 44919 62887 88041 123258
Plastic Division 1768 1736 1995 2099 2209 2325 2446 2574 2709 2850 3000
Other 656 1247 2400 3360 4704 6586 9220 12908 18071 25299 35419
SAFL 0 0 489 675 832 1032 2929 4255 5778 7467 9846
Total 34579 43633 49888 65928 82467 104328 137563 181801 242796 328161 450689
*Based on actual data
Exhibit 2: MIS Division Operations Forecasted growth Strategy (2011-2020)
2011* 2012* 2013 2014 2015 2016 2017 2018 2019 2020
MIS Total Sales(in mn INR)
23311 26798 37753 47487 60060 78904 104567 140145 190636 264607
Domestic as % of Total Sales
93 91 89 88 86 82 77 74 70 66
Domestic Sales(in mn INR)
21703 24450 33756 41610 51575 64369 81040 103182 133338 175822
International Sales (in mn INR)
1608 2348 3997 5876 8485 14535 23528 36963 57298 88785
Domestic Operations
New MIS systems installed (in
hectares)260000 351000 473850 639698 767637 921164 1105397 1326477 1591772 1910126
Cost per MIS System in INR per hectare
45650 45650 45650 45650 45650 45650 45650 45650 45650 45650
Revenues from new MIS installations (in
mn INR)16023 21631 29202 35043 42051 50461 60554 72664 87197 104637
New Sales as % of Domestic MIS
revenues73.83 88.47 86.5 84.2 81.5 78.4 74.7 70.4 65.4 59.5
Replacement Sales as % of Domestic
MIS Revenues26.17 11.53 13.5 15.8 18.5 21.6 25.3 29.6 34.6 40.5
Replacement Sales 5679 2819 4554 6568 9524 13907 20486 30517 46141 71185
Replacement Area 124412 61746 99753 143866 208636 304655 448761 668508 1010749 1559366
*Based on actual data
Exhibit 3: Gantt chart for staging of MIS by regions
Plan for MIS2013 2014 2015 2016 2017 2018 2019 2020
Southern StatesNorthern StatesAfricaNorth and South AmericaMIS in wheat cultivationMIS in rice cultivation
10
Exhibit 4: SAFL Growth and Staging Plan (with Capital Expenses from JISL) from 2012-20
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenues from MIS – India(in mn INR)
No
Ope
ratio
ns S
tart
ed fo
r SAF
L
24450 33756 41610 51575 64369 81040 103182 133338 175822
Subsidy % 60% 60% 60% 60% 30% 30% 30% 30% 30%
Subsidy Amount(in mn INR)
14670 20254 24966 30945 19311 24312 30955 40001 52747
% subsidy to transfer to SAFL 50% 65% 80% 80% 80% 80% 80% 80% 80%
Total Subsidy Capital with SAFL(in mn INR)
7335 13165 19973 24756 15449 19450 24764 32001 42197
% of farmers funded for loans for MIS 50% 50% 50% 50% 65% 75% 80% 80% 80%
Farmer Funding (in mn INR) 4890 6751 8322 10315 29288 42546 57782 74669 98460
Total Capital Required (Subsidy + Farmer Funding)
12225 19916 28295 35071 44736 61995 82545 106670 140657
Revenues (Interest Inflow on Farmer loans only) @ 10% interest charge
489 675 832 1032 2929 4255 5778 7467 9846
Staging of New Branches and Capital Expenditure Requirement
Cumulative Branches 50 100 200 350 500 700 840 960 1060
New Branches 50 50 100 150 150 200 140 120 100
New Capital Investment Required 1200 600 1200 1800 1800 2400 1680 1440 1200
JISL Shareholding in SAFL (in %) 49% 48% 47% 46% 45% 44% 42% 41% 40%
JISL’s contribution in Capital Expenditure
588 288 564 828 810 1056 705.6 590.4 480
Exhibit 5: Gantt chart for staging of SAFL by regions
Plan for SAFL2013 2014 2015 2016 2017 2018 2019 2020
BranchesJalgaon AreaOther parts of MaharashtraSouthern StatesNorthern StatesLoan for farm equipment’s
11
Exhibit 6: Planned growth of dealers in India (2011-2020)
Revenue Share (2010)
State 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Forecasted
Revenue share (2020)
50% Maharashtra 950 1000 1050 1100 1150 1200 1250 1300 1350 1400 1450 14%
10% Andhra Pradesh
289 339 389 639 789 864 889 914 939 964 989 10%
10% Karnataka 193 243 293 543 793 868 893 918 943 968 993 10%
10% Tamil Nadu 65 115 165 465 765 865 890 915 940 965 990 10%
4% Madhya Pradesh
158 183 208 233 258 508 658 808 833 858 883 9%
4% Gujarat 189 214 239 264 289 539 689 839 864 889 914 9%
6% Rajasthan 46 71 96 121 146 446 646 846 871 896 921 9%
0% Haryana 0 0 0 15 40 340 490 640 665 690 715 7%
0% Punjab 0 0 0 15 40 340 490 640 665 690 715 7%
0% UP 0 0 0 15 40 340 590 840 865 890 915 9%
6% Others 274 299 324 349 374 399 424 449 524 599 674 7%
Total Dealers 2164 2464 2764 3759 4684 6709 7909 9109 9459 9809 10159
12