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)

Updates on Zydus Wellness Ltd: Well Well Well !!!

Zydus wellness was earlier advised at 770 (Click here for earlier study). I am regularly sharing the updates on it via emails and it is one of my favorite and I am seeing it making it big…may be in this year itself. I am done with my buying and invested more around 800-830 in last 2-3 months. Zydus wellness is doing most of the things right now. Earlier people's perception about "Sugar free" was some sort of Diabetic supplement...some sort of medicinal or pharma thing attached to it. But then Zydus changed the packaging (Looks more like an FMCG product now)...roped in celebrities for branding and presenting it as life style product for health conscious. Now "Sugar free" is viewed differently and people are using it as healthy sugar substitute.

Sugar free is also changing with time...earlier it was just a chemical product (Aspartame based) but now it has one variant “Sugar free Natura” which is based on Sucralose (Natural Sugar). It has recently launched herbal variant (Stevia based) “Sugar free Green" which is 100% herbal and safe for children also.

They are spending big on ads now. They have re-launched "Everyuth" also which is a great skin care product but has been forgotten. So Zydus may see the benefits of restructuring very soon.

In the March-17 quarter, turnover was at 130 cr vs 114 cr last year, NP was at 30 cr vs 27 cr. Though looked average but it is commendable keeping in the view the recent headwinds in the economy due to demonetization. Economy was sluggish in March quarter due to demonetization but still Zydus managed to break the ice. I think their efforts on branding of Sugar Free as lifestyle product and re-launch of Everyuth is bearing fruits. I am expecting even better days in the future.

They are now aggressively promoting their stevia based “sugar free Green”. I am sure this will bring even better results as it’ll settle all the pre-conceived notions associated with sugar free products. Nutralite is another brand in their kitty which is table margarine used as a substitute for conventional butter. Margarine is a fat derived from animal and vegetable oil sources. Nutralite is sourced from Veg oils. It is cholesterol free and many health conscious people prefer it now a days as their low energy lifestyle makes butter unaffordable (Not economically) for them. Nutralite does not contain hydrogenated fats compared to butter. It also has PUFA (poly unsaturated fatty acid ) and MUFA (monounsaturated fatty acids ) which are known cholesterol fighters. But Nutralite still failed to gain an extensive market share and I feel the main reason for it was the taste. I also tried it but left it as it was greasy and devoid of any taste. I turned back to butter although I still prefer homemade white butter in place of Yellow butter from the likes of Amul, Hatsun etc. as I find it too salty and taste less.

Once I even thought of writing to the Zydus management to add 1/3^rd original butter in their margarine spread in order to increase the taste. But I think they realized this and recently they have launched two flavours Garlic & Oregano and Pudina & Coriander under Nutralite brand. The launch of new flavours will cater to the consumer demand for new tastes. Zydus has also changed the packaging of these spreads to make them look more contemporary and premium. Celebrity chef Sanjeev kapoor is the face of their brand campaign and high end branding is underway.

So Zydus is focusing and investing big in refurbishing the brand promotion, product variety and look. This aggressive focus was missing for last 5-6 years so I am sure that these efforts will surely bring the fruits. Zydus wellness is one stock about which I am very optimistic and I am sure that this year will be the growth catalyst. Its return ratios and balance sheet is very strong. On a turnover of Rs.495 cr net profit is 110 cr. Inventory is just 30 cr and debtors are meager 4 cr!!! ROE is good around 20%, cash in the books is 440 cr which is sufficient to meet any future expansion and marketing campaign. But still what we are seeing at present is nothing...turnover from Sugar free is just around 300 cr when there is huge diabetic population in India along with growing health conscious people. Zydus' Sugar free brand has 93% market share in sugar free market in India...so one can imagine the scope of future growth when demand for sugar free substitutes will leapfrog to more realistic levels...i can see a potential of more than 3000 cr. As i have shared many times future scope of scale is the biggest factor of growth and major determinant of the valuation. So keeping in view the high growth potential , Zydus wellness at a PE of 30 is cheap. Great buy at CMP of 850.

(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)

Economic and Stock Market Growth: More a Reflection than Correction

A small correction in the market and time is for Doomsday analysts…they are here all the time. Almost all of a sudden everybody is shouting for a big correction in the Indian market. Nobody knows the basis of their calls most of the times and but some of these Doomsayers are expecting a big crash for long time (I remember Marc faber). But as we all know even a broken clock is right twice in a day. Crashes are imminent in stock market. They are an inbuilt part of the system. Economies and stock markets are like liquids…they can take any shape any time. It depends upon the situation and circumstances which are almost impossible for anyone to predict at least for current interconnected globe where things are very complex as thousands of variable forces are interacting and affecting each other.

But the most complex thing about the economies is not these variable forces but the notion that man, material, money and technology are the most important forces driving the economies. But this is not true. Actually economies are just like a big truck. But which part of the truck bears the maximum weight of the cargo/truck? I ask this question so many times and every time I get answers like axle, wheel etc. But this is not correct as it is the humble AIR in the tyres which bears the maximum weight. So the most insignificant, subtle and least-physical part holds together the most significant. On the same lines, Confidence of the people in the economy and the Government is the most important factor driving the investments and thus growth. Opposite is true for fear. Businessmen invest when they are optimistic, general public consumes when they are hopeful. The moment there is environment of fear; fear of war, government frauds, incapability and everybody is cautious…spending stops, investments blocked. There is another fear…fear created by Doomsayers especially when people have faith in them…this is catastrophic. But still before fear or optimism gets any role to play, first requirement is the existence of wheel.

That’s why I always feel the main objective of a government is to maintain an environment of positivity and faith among general public. Here I remember recent policies of RBI where they are trying to control inflation for years. RBI thinks that by keeping interest rates high they can control the inflation. They owe this to the Great Milton Friedman’s quantity theory of money as per which excess money supply (provided other things being equal) is the only cause of Inflation. Friedman was dead right but this is true under certain conditions. Our inflation is not due to excess money supply (due to Govt policies) but it is due to demand-supply mismatches. Our agriculture production is not under our control, agro supply chain/irrigation is not under our control, Oil is not under our control…and these comprise the major part of price index. We take loans for housing, cars…not for food. So when so many things are not under our control…how can we control prices just by lowering the interest rates? But yes, there is one way…high interest rates means low investments, low employment, low demand and so low (Comparatively) inflation but then from where the growth will come, employment will come.

So we can see here there are always two segment of an economy…demand side and supply side. You focus on one side and everything will be in mess. That is why even after the hard policies of RBI, inflation is never under control. Although high interest rates have created another mess in the form of bank NPA’s. So we can impose high taxes on earners and distribute that hard earned money as freebies (like MGNREGA) but this will only affect the demand side of the economy in the form of food, dairy etc which is the supply side about which we haven’t done anything. So no doubt inflation will spike. Another way of doing the same mistake is to build temples in villages so that people will get employment but again they are creating the demand. China is doing the same thing by making unnecessary roads, bridges. We are unable to comprehend the other side of the coin which restricts our ability to take the balancing course of action.

Same thing happens when there is almost perfect employment in an economy and it is in good shape but we need more growth. So we create excess supply (factories of cars, housing, junk food) and try to create more demand by offering cheap money. The same is happening in USA and developed world although they first of all should have looked out of USA for creating the demand. But this cheap money backfired as things went out of control as people were not that fool as huge money was invested in housing/stocks (Old houses mainly) instead of consumption resulted in asset bubble which got punctured just by a small pinch of fear.

Still I always feel we are too obsessed with this GDP growth thing and I also feel that it may have inflicted the worst possible damage to the mother earth and on real future growth prospectus. GDP has made us to count for coal mined and power produced but it hasn’t taught us to deduct the loss inflicted on forests and adjoining water resources due to coal mining and power generation. So we can see we have forgotten even the basic mathematics. I have already explained the fallacy of our GDP thing in detail in an earlier post (click here for earlier post on GDP).

Actually we have become infatuated by this GDP growth phenomenon and can’t even comprehend a stage of stability and peace. We are running after a nonsensical race of producing and consuming more and more and in the process brought havoc in our lives and of Mother earth’s. We are blind to a state of economic culmination which doesn’t necessitate more production related growth but it is a state of peace and calmness and we should take rest and relax after reaching the destination.

Here I want to mention the tiny Himalayan country, Bhutan, which has developed its own index for measuring the real growth called Gross National Happiness Index (GNH). Bhutan developed GNH as an alternative for GDP to measure the real progress. So they have provided space for various material and non-material but more relevant factors in measuring the growth. It is based on measuring the nine domains related to factors like Income levels, Psychological well-being, health, culture, environment diversity and resilience, cultural well-being etc. Bhutan has put environmental conservation and sustainability at the heart of its political agenda. In the last 20 years Bhutan has doubled life expectancy, enrolled almost 100% of its children in primary school and overhauled its infrastructure. Environmental protection and GNH is built into the constitution of Bhutan and it has vowed to remain carbon neutral and to ensure that at least 60% of its landmass will remain under forest cover in perpetuity. In Bhutan, one day in a month is all pedestrian day and all the vehicles are off the roads for that day. It has included the GNH principles of conservation and care for the environment in the education system and students are taught basic agriculture, conservation and waste management.

Bhutan has low population of around 8 lac only, around 70% land mass is under forest cover, its major export is renewable energy. In order to save the forests it provides free electricity to its citizens in winter so that they won’t cut the forests for wood for fire. I feel Bhutan is a real heaven to live and it resonates with me so well.

Coming back to stock market fears; any stock market Guru can test the situation with a narrow microscopic view and predict the hell. But things are never so simple in today’s surficial growth monger economies otherwise there should be no economic catastrophe. But at least Indian growth story is simple…our growth is natural as it is based on natural demand. We (at least 40-50 cr among us) badly need food, healthcare, housing, electricity, dairy…we need so much and we barely eat quality food. So we have huge demand side leverage…for supply side we can repair our agriculture (the foundation) for more production with better management of resources, can save around 2 lac crore of agro/dairy/meat waste by strengthening and creating efficient supply chains, we can build infra with local resources, can substitute imports like Electric vehicles for oil.

We are nowhere close to the edge of the growth to take resort to push factors…to push the economy into growth. Just like USA is trying…China is trying it for long time but high on debt. USA is trying to force consumption for long….so people have 5 cars, 4 houses, wearing another underwear over pants (superman), mixing chilled coke into Starbucks cappuccino…they have everything in excess for long but consumption has a limit. China has a strange growth model…build a road, destroy it, then rebuild it and thus create jobs…GDP grows. But all this with low cost debt. China has and still is creating unnecessary roads, bridges all the time to create false employment. But it has never tried to create a self-sustaining economic model. So far it has managed the show with huge foreign trade surplus which it has accumulated with over exploitation of its resources although it also creates massive value addition by re-exporting the imported raw material.

But this is not natural as resources are not being allocated for best use. China has massive over capacity in everything…so they have wasted resources all the way…all they have is massive quantity of dollars which is now shrinking fast. China forgot to create an internally-dependent economy…instead they focused too much on exports. So China may get a hard landing any time. Some fear for the Indian war with China…but I think China just can’t afford a war for at least 8-10 years or may be forever. Actually China is a business man….it is a mercantile country…it lives by selling to other countries so the survival of those others is very essential for its own survival. China has huge trade deficit with India just like it has with USA and almost all of the countries of the world.

Here I want to add something on export based economic model. If I am a Potato farmer then in an ideal situation, I would like to produce and exchange extra potatoes only if I need the eggs from Mr. X. If I am happy with my potatoes then there is no need for me to put extra efforts and resources in producing more potatoes as the same will limit my future productive capacity. I would like to conserve my production. So common sense says that if I have limited drinking water then I would exchange it with medicines only in case of need. I shouldn’t just sell my water and accumulate unnecessary things in exchange and thus putting my future survival in danger. It is always give and take thing but countries are exporting scarce natural resources just to accumulate excess dollars and then they have to scratch their heads to use these for something. China has created havoc with its ecosystem in its mad race to accumulate more and more dollars now it is near an environmental catastrophe. Now it is running around the globe to find the use of its massive paper dollars and excess factory output but all the other countries are looking for ways to stop the inflow of cheap Chinese goods into their territories to save their economies. So China is in a very difficult situation.

It is just like India providing scarce water for free to farmers to produce more rice and wheat and then exporting the same to import more Gold. We can see it is a sheer wastage of valuable resource in exchange for nothing. We are wasting money in farm loan wavers when we can use the same money for repairing the agro supply chain.

But still India is really in a sweet position. Commodity prices are low, china wages are rising fast because if you want most of your citizens to own an Apple iPhone, they need high wages. So India can take the baton for global manufacturing from China. But India needs to sort out its agriculture mess first of all. Bank NPA issue is serious but RBI is very strict and I think this will be sorted out. Govt has accumulated huge funds from taxes on OIL after the fall in oil prices so it can use this for bailing out the banks.

Also most of our infra assets (turned NPA) are not due to over capacity…in fact we badly need them just like power plants. People say we are surplus in power but we are not although we failed in creating the demand for these new power plants. We couldn’t bring the electricity to remote villages but still we could have used these power plants for electric vehicles, cold chains and warehouses. So our Infra assets are not a waste. There will be takers for these. But still some pain is imminent in banking but these things are expected in a growing economy and these corrective steps are just a re-allocation of scarce resources for most productive use.

So coming 2-3 quarters are very important but there are very high chances that we’ll taste the success. Stock markets always try to guess the probability of future growth…and if chances are high it discounts them into the valuation…but nothing is fixed here. Stock markets are actually like a Glass…neither liquid nor solid…but you paint the other side with fear or optimism…and it’ll reflect the same to you.