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

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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

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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]

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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.

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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

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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.

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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

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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.

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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.

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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]

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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

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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

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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

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