Saturday, February 23, 2013
This stock initially recommended ( HERE) during August 2010 around Rs.61.At that time I mentioned EPC as a potential take over target. As expected, one of India’s largest business group – Mahindra and Mahindra (M&M) later took over this company in February 2011.It is two year now and let us re look at the initiatives taken by the new management and its future prospects.
First of all , it was two bad years for micro irrigation companies due to delay in releasing subsidies by various state governments.This resulted in serious working capital issues to companies operating in this sector.Mounting debt was the end result and due to this reason market cap of Industry leader Jain Irrigation nosedives.Earlier most of the companies in this sector was following a business model which put the burden and responsibility of collecting subsidies from governments on the shoulders of companies itself and not on the farmers . They realized the risk of this business model only after frequent cases of delay in the releasing of subsidies in recent times.Now it is a transformation phase of this business model and company’s are now only helping the farmers and it is their responsibility to collect subsidy from the state governments.Normally ,as a result of this change in strategy ,sales growth of MIS shows lower growth during this transformation phase .Now most of the companies including Jain Irrigation is adopting this new model and expecting significant improvement in business in another few quarters once this shift completes.
Being a pioneer in farming related business ,Mahindra’s took a careful step and begin with a prudent decision to start with the new model.Initially ,to strengthen the capital base and support working capital requirements M&M infused further funds into EPC through a rights issue priced @ Rs.40. Through this rights they hiked their stake from 38 % to 55 % ( M&M subscribed the unsubscribed portion of Schroder Credit Renaissance Fund ,as part of take over agreement)
Then ,M&M formed a new board and appointed well experienced executives to lead the company .Mr Ashok Sharma appointed as the ED and CEO of EPC .He is also serving as Chief Executive -Agri and Allied Business of M&M,Mr Subhash Modak as COO ( Vice president M&M) and Mr Pavan Deolia as Head Sales & Marketing (General Manager- M&M ltd)
Under this new leadership ,company get a new direction and started fresh initiatives to become a leader in agri space.First of all ,EPC amended its object clause of Memorandum of Association to enable it to diversify into other agri related areas like seeds, fertilizers, pesticides, agri chemicals, tractors implements, pumps, greenhouses, power, fruits and vegetables, meat and poultry, dairy, aquaculture, marine culture, grains and fast moving consumer goods..etc.
Further the company increased its offering by adding new products in its portfolio including pumps and new models of micro irrigation systems.This will help EPC to become a one stop shop for all MIS needs .Company started strengthening its marketing network by adding dealers in un represented areas.
One drawback of this company during the erstwhile management was its inability to offer complete solutions rather than just selling MIS products.But company now started Agronomy Support Services including Educating farmers in the areas of Introduction of new crops,Crop selection,pest and weed management ..etc. Agri Helpline is another new initiative by EPC for farmers .Farmers can call or mail for clearing any agri related doubts .If necessary, company’s expert will personally visit the farm and give advices free of cost. All these efforts will ensure a close relation with farming community and increase the brand value of EPC as a complete farming solutions provider.
EPC recently started an agri show room ( a one stop shop for all agro products and solutions ) in Buldhana district of Maharashtra.I believe it is only a first step of a long journey and company will start many such shops at various parts of India once they started own production of other items like Seeds,agri chemicals,green house accessories..etc.
Another most important development in the history of EPC is its recent tie-up with State Bank of India( SBI) .Last week ,company entered into tie-up with SBI to finance farmers for micro irrigation systems.Considering the vast network of SBI even in the nuck and corner of India ,clinching such an arrangement with India’s biggest bank is a very important development for EPC .For financing farmers ,even some market leaders are forced to start financing facilities for their own which need additional capital end extra struss in their balance sheet .I strongly believe such a an arrangement materialized only because of the goodwill and credibility of Mahindra Group.( Read more details about this event HERE)
Financial Performance and Change in Share Holding
Even after following a conservative business model ,company could improve its business.During the latest quarter ,EPC reported a Sales of Rs.50 Cr ( Rs.40 Cr in same period last year) and a net profit of Rs.2.70 Cr (Rs.1.98 Cr) .This may not be a big figure but we should realise it is just a beginning for the new management and the initiatives they are taking now will need some time to deliver in its full potential. Change in share holding during the last one year is another point to note. Earlier about 34 % stake was held by Credit Renaissance Fund. ( who took preferential allotment to pump money for working capital during the time of old management).Now they exited completely and these shares are mopped up by reputed Institutional and Individual investors including Morgan Stanley,Reliance Capital,SCIL Ventures..etc.This means, exit of 35 % stake by one stake holder not increased the level of floating stock in market .Another source of supply coming to the market is from the remaining stake held by the old promoters .I strongly feel ,their exit is part of the take over agreement with M&M .At the end of December quarter old promoters ( Trenton Investments Co Pvt Ltd ) holding 934985 shares .Tracking the trend of trading of this stock for the past many years , I believe they are selling around Rs.140 and this is the only source of major supply at this point . Their holding may be reduced further due to selling in January and February.
As I mentioned above about 85 % of shares are held by promoters and institutions in this company .Management is taking careful steps to develop EPC as a full fledged farming solution provider.At present , sales of micro irrigation systems are promoted by producers and central and various states and government .I believe this scenario will change in another few years and due to scarcity of water and introduction of modern farming techniques MIS will be a necessity for farming and farmers itself will demand it .If everything goes well ,with an experienced management with vision and ability to tap opportunities , I strongly feel EPC will evolve as a front runner in Indian Agri space and become a feather in the cap of Mahindra Group in another few years.CMP of EPC Rs.143 /-
Stock is expected to move to another range once the supply from old promoters absorbed.Hence recommending to tightly HOLD it for long term .
LINK TO VIDEO PRESENTATION BY CEO HERE
LINK TO COMPANY’S NEW WEBSITE HERE