Jain Irrigation Ltd: Invest in Flood

As shared from time to time, I see this year to be the start of something big in Indian agriculture especially Supply chain side (Click here for earlier post). I feel we need to solve our agriculture mess first of all in order to start a real meaningful growth. We are wasting too much of resources to achieve little in our agro efforts…wasting 150000 lac cr of products…precious water…pollution is unaffordable and will wreak havoc one day. If we can see then too much money is also wasted by our govt in feel good efforts like useless subsidies, free power and loan waiver etc. All these are implicit costs for not focusing on poor state of agriculture. 

An economy is never a GDP thing as is the general view (Click here for earlier study). In fact an economy is a cycle and growth is all about the speed and efficiency with which this cycle is completed and growth will sustain for long if this cycle is in our control. Like now farmers produce with their blood but they never get the price we pay for their produce as middlemen capture majority of the final price. GDP will capture the higher production but it’ll never capture the efficiency. GDP just counts the final value of production capturing the value added at each step but it don’t captures the fact that money is going into the hands of few who add minimal value and can’t affect the demand side of an economy due to their small number. 

Let’s take the economy of a small village with 1000 earners/producers out of which 600 are farmers and 20 are middlemen (Like Aarhtiya, commission agent or money lender) and then there are 380 others doing other works like shoe-maker, supplier of household items, electricians, carpenter, cinema owner etc. As the farmers have small land holdings (or some other issues like government regulations like selling the crop only in approved mandis) so farmers can’t afford to transport their crop to demand centres on their own. These 20 middlemen are buying entire crop at very low prices and selling the same at much higher prices in nearby cities. As a result of this, the village is having 20 very rich individuals with 600 poor farmers. These 600 poor farmers are having very limited capacity to procure goods/services from the other 380 suppliers in the village leaving these 380 also with very limited scope for high demand for their products. But our ultra-rich 20 also just can’t affect overall demand scenario very much as they have limits to their consumption resulting in the accumulation of majority of wealth among these 20. But GDP will still show the higher numbers and just can’t capture the plight of farmers. So due to this structure our village will remain poor with high GDP. Had we had more equitable distribution of wealth, the same could have prompted/motivated other individuals to produce more innovative/high-tech products. Only wealth motivates the novelty, research and the hunt for bigger challenges. Ancient indian civilizations could achieve high spiritual and technical expertise only because India was rich and people never had to other about the bread.

Here, in above example, we can see that the production/supply of 380 individuals is dependent upon the “DEMAND” created by the 600 farmers (Of course also by 20 privileged ones). They are the demand side of the economy So they can’t affect the economy much. As explained in earlier blog posts also (Click here) that there are always two segment of an economy…demand side and supply side. You focus on one side and everything will be in mess. Demand and supply are the forces pulling this cycle…enlarging it. In our case Agriculture is the supply side due to sheer size of the capital invested and people engaged and our economic cycle starts from here. So if we need to make more productive use of our assets (like power, road etc) and resources (water, soil, manpower) then agriculture is the first variable in the equation.

Jain Irrigation Ltd: Best Agriculture play

Heartening fact is that our Govt is focusing on this and serious efforts are underway to solve this mess. Warehousing, crop insurance, micro-irrigation, mega food processing parks, Commodity futures and options, contract farming law etc. are the right steps in solving our agro supply chain. So I have already invested in the likes of MCX, snowman, Tata chemicals, Insurance stocks. Crop collateral on the basis of registered warehouse receipts will be the another big area as farmer can take short term loan on the basis of warehouse receipts in case of a price fall. Farmer can sell the crop in the future after price recovers and pay back the loan. Star Agri warehousing and Collateral management and Sohan lal commodity management Pvt Ltd are into crop collateral financing business. I am waiting for the IPO of these two.

But Jain irrigation is one name which is covering a number of agriculture related areas. It is world’s 2^nd largest micro-irrigation player and recent droughts and hue and cry over water among states has made our govt serious about MIS…and jain will be the biggest beneficiary.

The next big revolution to be happened in Agriculture will be of precision farming. Now we need to produce bigger from lesser resources to feed the ever increasing population and precision farming is the only remedy. Water is scarce so as land and other inputs so we can't afford to continue our current careless form of agriculture where focus was only on Output and never the emphasis was put to measure the optimum use of various Inputs. So a big revolution is going to happen where wastage of resources will be brought down to are minimum. Jain can be the one of the leader due to its portfolio of water saver micro irrigation.

Jain is one of the biggest players in food processing with turnover of around 1700 cr…biggest mango processor, third biggest onion processor in the world. Coca cola procures all of its mango puree requirements for “Maaza” from Jains. It has now ventured into B2C with its “Farm Fresh” brand. In last funding rounds for its food processing business, it was valued around 3200 cr ( Current market value 5000 cr).

Its turnover is around 7000 cr (Target of 8400 cr this year) distributed in a number of high growth and niche businesses like irrigation, food processing, UPVC pipes, green/poly house, solar and tissue culture. It is building a 750 acre food processing park in AP. I think it will be a big player in food processing.  

Its technical capabilities in tissue culture and agro research are un-matchable. A case in the point is Jalgaon. Jalgaon is the Banana capital of India accounting for nearly 70 per cent of Maharashtra’s and 11-12 per cent of India’s annual output. But it is not best suited for producing bananas which requires tropical climate with 2,000 mm of rain…still it is the 7^th largest banana producer in the world with just 750 mm rainfall. All this is due to irrigation system and Banana tissue culture from Jain Irrigation.

Farmers here have seen their avg yields rising to 100 tonne per hectare from 30 tonne…income from 1 lac to 3 lac…all this to superior technology and tissue culture from Jain. Tissue culture is the next big thing in Agriculture and Jain is already a big player in pomegranate and strawberries…coffee tissue culture is the next one where Jain is the only indian firm to achieve the success.  Plant tissue culture is widely used to produce clones of a plant and can be initiated from almost any part of a plant and Plants regenerated from tissue culture will be clones genetically identical to the cell they originated from. So health disease free saplings can be used for big gains in crop production.

Jain is recovering from the debt trap where it was trapped due to subsidy delays from govt for its micro irrigation and its price nosedived from 270 to 50. But now it has changed its business model where farmer bears the upfront subsidy. Its working capital days have been in steady improvement since then…around 150 from 270. It has top class management having vision and passion for doing big. They are more than capable of solving the hiccup in its journey. Although the dip in the price to 50 has given the opportunity for people like me to enter at lower levels. 

It is already a big player in the export with 45% of its turnover as exports. But it is entering Africa and Latin America big time and recently acquired two companies in MIS.

Food processing is the final step in the agro supply chain and NITI aayog is drafting the contract farming law in India which so far have seen muted success but we'll see something big here very soon. Tata chemicals ltd (CMP 570, Click here for earlier study at 400) is another one going to be a biggie in the food processing.

I am buying Jain regularly from 50 levels and off late done major buying at 90 levels. Today made another entry at 98

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)