Mahindra EPC Irrigation Limited (523754) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the investors call hosted by Mahindra EPC Irrigation Limited for H1 FY '26 financial results. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ramesh Ramachandran, Managing Director from Mahindra EPC. Thank you, and over to you, sir.

Thank you, and a very good afternoon to all our investors. On behalf of Mahindra EPC, I'd like to sincerely thank all of you for joining this call. Thank you very much for continuing to take a keen interest in your company. As customary in my introduction, I will touch upon key insights and developments in the micro-irrigation industry, our industry outlook and also some points on your company's preparedness to address opportunities. And following this introduction, we will have our Q&A session. So let me start with a macro view of the micro irrigation industry in India. We all know that agriculture continues to be the backbone of our nation, engaging nearly 65% of India's population and contributing to around 18% of India's Gross Value Added, GVA. According to the Ministry of Statistics and Programme Implementation, the real GVA of the agriculture and allied sector is expected to be INR 23.9 lakh crores in FY '25 versus INR 23.04 lakh crores in FY '24, which is a growth of 3.8% on a very large base. India is also firmly placed as a net exporter of agri products with exports ranging from $48 billion to $53 billion annually. However, with 18% of the world's population, India has access only to 4% of global freshwater resources. Agriculture alone consumes over 80% of India's freshwater withdrawals. As per current estimates, per capita water availability in India is expected to drop from 1,545 cubic meters in 2011 to 1,140 cubic meters by 2050, classifying India as a potentially water scarce nation. Additionally, India is likely to see faster growth rates in the secondary sector, which comprises industries such as manufacturing, construction, electricity, utilities, et cetera, and also faster growth rates in the tertiary sector, which is mainly the services sector. Now to support the actual rates of growth and the required rates of growth in the secondary and tertiary sectors, a larger share of water available in India needs to be provided to these sectors. But since there's a natural limit on the sources of water, a lot of the water required for these sectors needs to come from a reduced water consumption in agriculture. This reduction will come from all types of water, surface water, groundwater conservation, recharge projects, but it will also come from what we call on-farm water management, and that includes farm water use efficiency improvement. It is this context that puts micro irrigation at the very heart of India's sustainability and economic transformation initiatives. Micro irrigation, in fact, addresses 3 of India's core goals. One is water use efficiency; two is productivity improvement; and three is doubling farmer income. As I've mentioned in previous investor calls, there are various studies that clearly prove that micro irrigation benefits the farmer by saving costs such as fertilizer, labor, electricity, all in the range of 20% to 30% savings of cost while improving the productivity by 30% to 40%. With this background, as we look at the potential and the existing penetration of micro irrigation in India, we see only about 18% penetration of the total identified potential for micro irrigation of about 72 million hectares. This estimated potential of 72 million hectares is based mostly on groundwater availability and some portion of surface water. If, however, most of the surface water available in India is also assumed to be available for agriculture, then the potential for micro irrigation doubles from 72 million hectares to 144 million hectares. Given all this, the Government of India has, therefore, set an ambitious target of 2 million hectares annually, aiming to cover 10 million hectares over the next 5 years. The commitment of the central government is evident from the fact that in the current financial year FY '26, for the first time in history, the central government has issued 43% of its annual fund allocations for the states as month sanctions and that too, just by the month of May 2025. However, for the micro irrigation industry to fully benefit from this, it requires not just central government push and policy, but also consistent state-level execution, availability of state-level funding and input cost-linked price mechanisms. It is, in fact, the synchronization of priorities at all levels that will help show a positive impact. Let's now talk about the first half of FY '26. This year, as we know, is a year of La Nina effect, and hence, the Southwest monsoon, we all saw there was an above-normal rainfall, 107.9% of the long-term average, of the LPA. While this means groundwater availability will be better in the longer term and a better rabi season for F '26, it has, however, posed challenges for the micro-irrigation business in H1 F '26. The incessant rains from May as to -- as late as October impacted micro irrigation demand as well as installation. Hence, Q2 F '26 was affected. But riding on your company's diversification into other revenue streams like irrigation projects, non-subsidy business as well as a focus on certain key states, your company's revenues grew over the previous year's first half by 17%. In what we estimate as an industry that had a degrowth or at best flattish performance versus H1 F '25, your company has registered a growth of around 17% with a revenue of INR 111.6 crores versus INR 95.3 crores over a similar period last year. Also, the company has improved its bottom line delivering a PBT of INR 1.9 crores for H1 '26 versus a loss of INR 7.3 crores in H1 F '25, which is a positive swing of more than INR 9 crores. This performance was delivered through a combination of: number one, growth in the irrigation projects business; number two, improved performance in certain key states of opportunity; number three, an improved product mix; number four, good commercial discipline; and number five, good cost controls. Raw material prices have been favorable. And during this period, raw material prices were stable. That, along with our strategic sourcing initiatives have enabled your company to deliver a material cost saving of 0.4% versus H1 F '25. The rest of the total 1.7% material cost saving versus H1 F '25 can be attributed to the impact of a better mix, a better mix in terms of businesses, states and products. For Q2 F '26, your company registered a flat revenue of INR 50 crores versus Q2 F '25, which was also INR 50 crores. However, there was a good turnaround in the bottom line with the PBT for Q2 F '26 coming in at INR 0.6 crores versus a loss of INR 0.7 crores for Q2 F '25. The receivables in H1 F '26 were higher versus F '25 by about INR 9.4 crores. This was on account of an increase in receivables during H2 F '25, and that skewed towards certain opportunity states with longer collection cycles and the delayed fund release in these states also led to increased receivables. However, it is noteworthy to mention that the receivables in days has gone down by about 6 days versus F '25. As mentioned earlier, we do think that the industry is nearing an inflection point. After the challenges and subdued growth in the last few years, some encouraging trends are visible. First, a stable raw material price environment. And though these are not enough to take us to material cost levels that we've seen in the past, such as in financial year '20. Nevertheless, they have been softer in the recent past. The only caveat we would mention here is that geopolitical events could obviously change these things going forward. The second encouraging trend is that we've had successive years of good monsoons, which was the case this year, too. And riding on this, we do see a better rabi season ahead of us. Thirdly, riding on efforts by the government and industry as well as the visible benefits of micro irrigation, we do believe that an increased number of farmers are getting aware of the benefits of micro irrigation, which may lead to improved demand. The fourth encouraging trend we see is an increasing sustainability awareness in urban regions. And that we believe could lead to improved usage of micro irrigation and it is likely to improve demand in retail markets as well. The fifth encouraging trend is the policy environment, which is showing some encouraging signs. Let me just list out a few of them. A, the Honorable Prime Minister is pushing for 1 crore hectares to be covered in the next 5 years, which translates to an average of 2 million hectares a year versus 1 million hectares a year of FY '25. B, key states such as Andhra Pradesh have requested additional assistance to cover a larger area under micro irrigation over the next 4 years. C, several current active states such as AP, Telangana, Gujarat, Tamil Nadu are active, giving a positive push to the industry. D, the recent GST changes, i.e., the reduction of GST on micro-irrigation from 12% to 5% is likely to have a positive impact on demand in the medium to long term. And F, finally, multiple ministries are working actively on laying a road map and looking at convergence of schemes and policies. For instance, groundwater use efficiency through Atal Bhujal Yojana, the modernizing of the command area development and water management for storage, recharge and improved water use efficiency. The effect of all of this will be realized in improving area under micro irrigation in the future and also including pressurized piping systems in the detailed project reports for major irrigation projects. All these are early signs of a positive environment. However, to unlock opportunity, we also need strong coordination between the central government and the state governments, and we also need the regularizing of fund disbursement. Just to note, as the business environment gets favorable, the industry does show a good growth. Example, during F '16 to F '20, the industry did register a 20% CAGR. While that is good for the long-term prospects of our industry, how are we, as Mahindra EPC geared to tap these opportunities? How are we gearing to tap these opportunities? As we've mentioned in previous calls, your company is learning from the past, and it is working on shock-proofing itself by reshaping its businesses. Just in the last 18 months, the industry has seen many events that have impacted it, such as the Election Code of Conduct, the temporary market impact of GST change, unseasonal and extended rains, which impose challenges, et cetera. In fact, the industry was a bit subdued and was pegged at 1 million hectares in F '25 versus 1.1 million hectares in F '24. Despite all these odds, your company has shown a better-than-industry consistent growth, both on top line as well as on PBT. Steadily improving the consistency of the business is extremely important for us. And so we've done a lot of groundwork in the following areas. First, in the subsidy business, we have recalibrated our presence in various states to reduce business concentration risks. Second, as an internal effort to make the growth smoother, we have strengthened processes and defined a tighter commercial policy for optimizing revenue, profitability and working capital. Third, we've continued to improve cost efficiency and productivity. Just to quote a few examples. Manpower cost for F '25 was INR 31.8 crores, which is a single-digit growth compared to F '20 levels despite inflation over these 6 years. Also, the manufacturing rejections are at sub -2% levels, which is much better than industry average. Fourth, for a better control over freight and processing costs for the last few years, we've been efficiently managing distributed manufacturing with satellite units, while our main unit continues to be in Nashik. This also has improved our asset utilization. Fifth, we have started improving our coverage in emerging markets such as the north of India, and we have seen some early success in northern states such as UP. Sixth, we have strengthened internal capabilities to address the non-subsidy segments such as the thin wall business, institutional sales and small, midsized irrigation projects. In fact, you would be happy to note that we have reached a 37.8% contribution of the non-subsidy business to the total business in H1 F '26 compared to a mere 3% contribution in F '20. Today, we've got an unrecognized work order pipeline of INR 76 crores for irrigation projects. And besides this, we are also exploring export markets in coordination with Mahindra & Mahindra's international operations. As we create a more stable, more consistent and steadily growing revenue base, we will look at margins. With the improvement in the subsidy business, our margins will improve, particularly through our business in the higher-margin states. In the non-subsidy business, meanwhile, as our brand gets established like it has in the subsidy business, we will start commanding a better price and better margins to reflect our quality. As I come to the end of my information sharing session, I would like to briefly touch upon one more point, and that is the M&M parentage of Mahindra EPC. As you know, Mahindra & Mahindra is a blue-chip company with the highest standards of corporate governance and transparency, which we, as Mahindra EPC benefit from. M&M also has a strong track record of manufacturing and marketing excellence, which we are benefiting from and will continue to benefit from in the following years. To summarize and conclude, we feel that the micro irrigation industry will let any other industry go through some ups and some downs. But the long-term outlook is very compelling. And in the medium term, we as Mahindra EPC are well placed to take advantage of both our unique advantages as well as the emerging opportunities in order to deliver above-industry performance. That brings me to the end of my session. Thank you very much for listening patiently. I now open up the session to questions and answers.

[Operator Instructions] The first question is from the line of Aditya Shah from Vikram Advisory Services.

I have 2 questions as of now. I'll take one by one. The first one is regarding -- I heard you saying that we have 37% contribution from non-subsidy business. What I would be interested in knowing is that, what is the margin of that 37% business and the remaining margin? The second question, I'll ask later.

Okay. So Aditya, there is obviously a difference in the margin of the subsidy business and the non-subsidy business. In fact, there is also a difference in the margin of the subsidy business by states. And as we mentioned in the investor call, the performance that we've had reflects also a good skew in terms of the fact that we have more subsidy sales in the higher-margin states in this half. Now coming to your point specifically in the non-subsidy business, our margin is lower. However, as we've mentioned in previous calls, we want to grow the business on all fronts. We want to grow in terms of scale. We want to grow in terms of our working capital profile, and we also want to grow the business in terms of profit. So different revenue streams bring different benefits to us. And the non-subsidy business does have a lower margin, but we believe that as the brand gets established, in the non-subsidy business like it has in the subsidy business, we will start commanding a better price and better margins. Does that answer your question, Aditya?

No, sir. My specific point was like, what is the contribution to the margin from the 37%. Why I'll ask you is that, let's say, on a quarterly basis, we have a 2.7%, 2.8% operating margin for the entire INR 50 crore turnover. Now as per my understanding, the subsidy business has a higher margin profile. So from what it looks like is that we would be losing money in the non-subsidy business currently. Is it true? And probably for the first 6 months or this quarter -- and if not, then why is our margin only this 3%, 2.8%? Because if I understand correctly, the subsidy part of the business would be contributing a very high margin considering the material cost.

Yes. So Aditya, I just want to confirm that we are definitely not losing money on our non-subsidy business. So there is definitely no negative impact on our total margin in terms of loss-making because of our non-subsidy business. I just want to clarify that.

Correct. Okay. So exact number, I can have it later with you, sir. No -- I don't need to worry about that. The second question was regarding, as you already mentioned in your brief remarks, is that the debtor days as in the debtor days were lower, but the absolute receivables increased. So the entire 6 months yielded us a negative operating cash flow. So do you expect the next 6 months to be on similar lines? Or do we -- would we have a better cash flow in the next 6 months?

Yes. So we do expect an improvement in the next 6 months. So obviously, the mix that we have of different states impacts us on an ongoing basis. And in the following 6 months, we do expect an improvement because we are seeing a better cash flow. We are seeing better subsidy release, and we think some momentum is definitely building there. So we are positive looking forward to the next 6 months from a cash flow perspective.

Correct, sir. And the third question is that recently, in the last 1 month, we hear in Gujarat that because of this unseasonal rains, there's a lot of farmers, some -- I forgot the number, but around 11 lakh farmers have applied for a waiver of their loans or interest or something like that. So would these kind of things impact the remaining part of the season? And how much have they impacted our first 6 months?

Yes. So the impact of -- as I mentioned in the investor call, we have been impacted in Q2, you saw that our revenue was similar to what it was last year. And a lot of that is -- and it's not just Gujarat, it's different states. And it's not just us, it's an industry-level phenomenon. The incessant rains have definitely impacted the industry. And that is really something that is by way of suppression of demand, suppression of installation, et cetera. So it's a direct linkage there. And Gujarat is not an exception in that sense. That is a phenomenon that we see across the country. By way of, is there going to be an impact on the fact that there are farmers now asking for some kind of relief from the government, I think time will tell. We can't really see any impact right now, but we'll watch the space carefully because finally, it is the state government's decision.

Correct. Okay. Sir, then the fourth one is that the 37% of non-subsidy revenue is expected to -- by the year-end. Do we expect it to go to 40% for the full year? Or would remain around the same level as of now or maybe 45% for the full year, I'm asking.

Yes. So we think, frankly, that we've done very well to get it to 37%, 37% plus already. And we would be -- yes, so thanks. And we would be hoping to maintain it at these levels for the rest of this year.

Okay. Sir, it's -- the last question is a bit not on the company, but just the Mahindra Investor Day was celebrated today, and they had -- they have shared a presentation on their website regarding whatever their plans are about the future and all of that. So I believe that our business is a part of the FES business in the presentation that they've shared. But my question is that in any of their presentations, it's never mentioned about our business or they don't see it as a growth gem or as they market other businesses or they have the plans for other businesses of the Mahindra Group. So any reason for them to not showcase our business? Or where do we find and how is it -- like what's playing on their mind as a group? Because nothing of our business, either the agri business or anything is mentioned in their presentation anywhere.

Yes, yes. So I think that the fact that I'd like to emphasize is the contribution that Mahindra EPC makes to the group when it comes to -- sorry?

It's very miniscule right now.

Yes. No. So I was about to say something slightly different but -- no problem. No problem. I'm saying that the contribution that Mahindra EPC makes to the group when it comes to some of the environmental-related aspirations of M&M is unparalleled within the group. And it has the most significant impact on M&M's water positive aspirations, which is a very powerful reason for a responsibly minded company like M&M to be in this business. Now if I come to the numbers, I think the numbers are what they are. We are obviously a very large group and Mahindra EPC is a business that is smaller in proportion to some of the other businesses. But of course, we've got aspirations for growth. I think when businesses get mentioned in the various investor reports, there's always a reason for them to get mentioned. So what the report looked like a few months ago or a few years ago will be very different from what it looks like in the future. So I would not draw too many conclusions from the fact that this company is not mentioned in whatever you've seen on the website. What I would leave you with is the fact that this has the most significant impact on the group when it comes to some of our environment and water-related aspirations, number one. And number two, we've got a growth aspiration. We've got a scaling aspiration as well. And I'm sure at the right time, we will also be mentioned in these reports for various reasons.

I will be the most happy when that happens, and I'm always positive about it. It's just that right now, it feels like a CSR part of the Mahindra Group, just joking. But so yes, let's -- I definitely hope for the future, which is very bright as you say and in your vision. And definitely, I see a point where all of these things are so important for the farmer as in doubling the farmer incomes and how it benefits them and the technology with which they can save a lot of money. But it's just that the dependency on the state governments is so deep that even if the central government wants to do good things, some things just won't happen or takes its own sweet time. So hence, we have diversified that 37% of non-subsidy, which is a great move. And I hope we can sooner reach 50%, and that makes our cash flows and numbers more positive and stable and more predictable as I had requested in the last call as well. So thank you, sir. I really hope for the future. And we -- I trust your vision for the company. And yes, that's it.

Aditya, thank you, as always, for your excellent questions and keep us -- keep engaged with us, and we look forward to working with you together in the -- for many years to come.

[Operator Instructions] We'll take the next question from the line of [ Rajan Shah ], an individual investor.

Sir, I have a few questions actually. I think most of -- I mean thank you for the update actually in the initial remarks. We got a lot of information. And plus Aditya also asked you a lot of questions. So many of those have got answered. My questions also were much similar. So many of them have got answered, but I have still a few questions. Sir, how much revenue actually we lost in the first half because of excess monsoon, INR 10 crores, INR 15 crores? If you can get some idea on that, how much exactly we lost approximately?

Yes. So I would probably say that it is better to look at the impact on revenue by days rather than by rupees crores. So perhaps 15 days to 30 days would be our estimate of the impact on revenue.

15 to 30 days. Okay. So maybe approximately about INR 15 crores or something we can expect we would have lost if...

Yes, it depends on the month because the revenues change by month. So -- and that is staggered across different months, the impact. It's not all born in 1 month. So I would just -- I would more -- I think it would be more realistic to think about it like that.

Okay. So at least 15 days of business we lost, we can take it that way?

Yes, I would say that there has been an impact, and it's at an industry level.

Okay. Okay. Fine. And actually, sir, you said that the subsidy business -- non-subsidy business was at about 37% in the first half, and it would remain around the same level -- approximately around the same level at the end of the year -- by the end of the year, current year. So assuming that even if you do INR 200 crores of top line in the second half because last second half -- last year second half, you did, I think, about INR 180 crores. So this year, assuming since you have done 17% growth in first half, we can expect at least 20% growth in the second half because things are looking bright. So let's say, we clock about INR 220 crores of top line in the second half. In that case, the subsidy business -- non-subsidy business would be about 37%. So what I want to tell is that our non-subsidy business is still much lower than what we clocked in '19, '20 because '19, '20, we did a revenue of INR 285 crores and only 3% came from non-subsidy. That was about INR 10 crores. Let's say, INR 10 came from non-subsidy and INR 275 crores came from subsidy business, where the margins are very high compared to the non-subsidy business. So that INR 275 crore subsidy business of '19, '20 will be still much lower in the current fiscal, assuming that you do 37% of non-subsidy sales on a turnover of about INR 320 crores. Any thoughts on that, sir? I mean why is it so low even after 5 years? And last year, we did -- the industry did 1 million hectares. This year, sir, what is your take like? We'll do 1.1 million, 1.2 million? I mean how much are we expecting? And why is still the subsidy business still much lower than '19, '20 levels, sir?