Merger of JAIN irrigation with ITC

Merger of ITC & Jain irrigation

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Submitted by :

Kausik Iyer

Sushant Rane

Prachi Trehan

Executive Summary:

Introduction: The report was commissioned to examine the Merger Proposal between Jain Irrigation ltd and ITC. This is proposed by ITC to diversify and integrate in agriculture activities of growing Tobacco and Spices. This can in turn give an opportunity o ITC to produce tobacco and use in its operations of cigarettes and Jain irrigation is thereby has the expertise to advice on the solutions for the same.

ITC: ITC Limited  is an Indian public conglomerate company headquartered in Kolkata, West Bengal, Ind. Its diversified business includes four segments: Fast Moving Consumer Goods (FMCG), Hotels, Paperboards, Paper & Packaging and Agri Business.

 Jain Irrigation Ltd: I t is  is a multinational organisation with global presence in 120 countries based in Jalgaon, Maharashtra, India. JISL employs over 7,500 workers, having 24 manufacturing plants, manufactures a number of products, including drip and sprinkler irrigation systems and components, integrated irrigation automation systems and Solutions on Agriculture.

Objective: 1. To enhance the earning power the target assests2. To create a sustainable competitive advantage for the firm.3. To tap market opportunities through merging company strength.

Methodology: Secondary data to investigate and understand the Business Proposal between ITC and Jain Irrigation Ltd.

Conclusion: Both the strengths combined with opposite market opportunity will help us to achieve the greater heights. This is a profitable venture which would enrich the operations of both the organizations with visible future growth opportunities. Thus this would uplift the Countries agricultural and rural base

Table of Contents :

SR.No TOPIC Pageno

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1. Introduction 4

2. Business description of Jain irrigation 6

3. SWOT of Jain irrigation 8

4. SWOT analysis of ITC 10

5. Value chain model of ITC 11

6. Value chain model of Jain irrigation 12

7. Company due diligence 13

8. Efficiency of both companies 15

9. Staffing and Administration 19

10. Financials 22

11. Conclusion 26

INTRODUCTION: The Business Proposal is suggested between ITC and Jain Irrigation.

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ITC:-

ITC Limited  is an Indian public conglomerate company headquartered in Kolkata, West

Bengal, Ind.

It started off as the Imperial Tobacco Company, and shares ancestry with Imperial

Tobacco of the United Kingdom, but it is now fully independent, and was rechristened

to India Tobacco Company in 1970 and then to I.T.C. Limited in 1974.

 Its diversified business includes four segments: Fast Moving Consumer Goods (FMCG),

Hotels, Paperboards, Paper & Packaging and Agri Business.

The company is currently headed by Yogesh Chander Deveshwar. It is listed on Forbes 2000.

ITC Limited completed 100 years on 24 August 2010.

While ITC is an outstanding market leader in its traditional businesses of Hotels,

Paperboards, Packaging, Agri-Exports and Cigarettes, it is rapidly gaining market share even

in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal

Care and Stationery.

In FMCG, ITC has various Brands in Under it segments which are mentioned as below::

Cigarettes: W.D. & H.O. Wills, Gold Flake Kings, Gold Flake Premium, Gold Flake Super

Star, Navy Cut, Insignia, India Kings, Classic (Verve, Menthol, Menthol Rush, Regular,

Citric Twist, Mild & Ultra Mild), 555, Benson & Hedges, Silk

Cut, Scissors, Capstan, Berkeley, Bristol, Lucky Strike, Players and Flake.

Foods: (Kitchens of India; Aashirvaad, Minto, Sunfeast, Candyman, Bingo, Yippee, Sunfeast

Pasta brands in Ready to Eat, Staples, Biscuits, Confectionery, Noodles and Snack Foods);

Apparel: Wills Lifestyle and John Players brands

Personal care: Fiama di Wills; Vivel; Essenza di Wills; Superia; Vivel di Wills brands of

products in perfumes, haircare and skincare

Stationery: Classmate and PaperKraft brands

Its Hotel segment is well diversified as mentioned below:

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Hotels: ITC's hotels under brands including Welcom Hotel have evolved into being India's

second largest hotel chain with over 80 hotels throughout the country. ITC is also the

exclusive franchisee in India of two brands owned by Sheraton International Inc.- The

Luxury Collection and Sheraton which ITC uses in association with its own brands in the

luxury 5 star segment. Brands in the hospitality sector owned and operated by its subsidiaries

include Fortune and Welcome Heritage brands.

ITC Rural initiatives

ITC's Agri-Business is India's second largest exporter of agricultural products. ITC is one of

the India's biggest foreign exchange earners (US $ 2 billion in the last decade).

The Company's 'e-Choupal' initiative is enabling Indian agriculture significantly enhance its

competitiveness by empowering Indian farmers through the power of the Internet. This

transformational strategy, which has already become the subject matter of a case study

at Harvard Business School, is expected to progressively create for ITC a huge rural

distribution infrastructure, significantly enhancing the Company's marketing reach.

The company places computers with Internet access in rural farming villages; the e-Choupals

serve as both a social gathering place for exchange of information (choupal means gathering

place in Hindi) and an e-commerce platform that is also a low-cost fulfillment system

focused on the needs of rural India.

JAIN IRRIGATION:

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Jain Irrigation Systems often known as Jain Irrigation, JISL, or simply Jains.

It was founded and started back in 1887 by the young law graduate Bhavarlal Jain in the

deserts of Rajasthan with a Vision : “We will establish Leadership in whatever we do”.

Since then it’s been growing with sky as the limit second-largest irrigation company and

third-largest dehydrated onion producer in the world. It is also largest processor of fruits &

vegetables within India.

It is a multinational organization with global presence in 120 countries based in Jalgaon,

Maharashtra, India.

JISL employs over 7,500 workers, having 24 manufacturing plants, manufactures a number

of products, including drip and sprinkler irrigation systems and components, integrated

irrigation automation systems, PVC and PE piping systems, plastic sheets, greenhouses, bio-

fertilizers, solar water-heating systems, biogas plant on turnkey basis, wind hybrid energy

and photovoltaic system.

JISL also processes dehydrated, concentrated and frozen fruits and vegetables. It's Equity

Shares & FCCB listed in Exchanges Bombay Stock Exchange as JAINIRRIG, National

Stock Exchange of India as JISLJALEQS also in Luxembourg.

Jain Irrigation Systems Ltd (JISL) in 2005 ranked 100th on the list of conglomerates in

Maharashtra

The Jain Iriigation Model is made with an objective to Enable small farmers to increase

Production, generate income and improve quality of life. Also with it major Goal to provide

water security.

Business Description of Jain Irrigation:

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Jain Irrigation has been involved in Industries like Agriculture, Irrigation, Pipe, Solar energy.

It was founded by Bhavarlal H. Jain and is Head Quartered in Jalgaon, Maharashtra, India

(1989).

The company is currently headed by Anil B. Jain, managing director

The financial holding in Revenue is 3791.51 crore (US$700 million) (FY 2011 -2012)

Jain Irrigation has acquired and expertise in various fields of agriculture and Irrigation

enhancement. The following are mentioned below

Agricultural Services

Agricultural R&D, Demonstration, Training and Extension

Turnkey Agro Project Consultancy and Implementation

Wasteland Reclamation & Soil Conservation. Water Harvesting and Storage

Supply of Agricultural Inputs

Drip Irrigation Systems

Sprinkler Irrigation Systems

PVC Piping Systems

Water Well Casing, Screens and Sure-Loc Pipes

Along with the huge product line; it also provided Solutions with respect to below details:

HDPE and MDPE Piping Systems

Jain Spray Pipes

Tissue Culture Banana Plants

Small Farmer

Urban Household

Urban Housing

Sugar Factories

Oil & Gas Exploration

Optic Fibre Ducting

Advertisement & Signage’s

Landscaping

Water Shed development

Waste Land Development

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Fruit and Vegetable Processing

Farm Production & Management

SWOT ANALYSIS OF JAIN IRRIGATION

STRENGTHS:

Strong marketing and distribution network. Margins are very high Strong management Strong brand portfolio Unparalleled soft Infrastructure

Flexible and Scalable Production Facilities

WEAKNESS:

High Debt

OPPURTUNITIES

Apart from agri-products, JISL also derives its revenues from nonagricultural sources and diversified industries such as: piping systems to commercial, industrial and government entities, fruit pulp and dehydrated onion to large global food companies such as Coca Cola etc.

The penetration level of micro irrigated area should grow strongly, This will improve the revenue mix of JISL

The Company is planning to work with its agri customers by taking their agricultural projects on turnkey basis providing services such as engineering,

soil and water analysis etc.

THREATS

Change in Government Policy Competition from unorganized sector Seasonality in agriculture Highly working capital intensive business Highly dependent on monsoon

SWOT ANALYSIS OF ITC

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Strengths:

Managing diverse business. ITC has 105 subsidiaries connected with its various

operations.

Wealth of local knowledge & international expertise helps it to be globally competitive.

High quality standard products & services

Excellent export earnings.

Highly professional management.

Excellent distribution network.

Excellent brand making capability helping it to diversify it into Retailing, IT & Hotel

segments

Agro-export segment showing excellent growth of 28 % & earning Rs. 4 billion foreign

exchange.

A lasting impression by catchy ads.

ITC ltd is one of the most liquid scripts in the capital market. With domestic institutions

having a considerable stake this is likely to improve liquidity in De-mat trading.

Good returns by way of dividend per share every year. In 31.3.2002 the dividend

declared is 13.50 Rs per share

The lifestyle retailing segment has won acclaim & moving towards higher sales.

The expression greeting card is widening its base all over India & it is available at most

retail shops.

Steady increase in the return on capital employed.

Sophisticated research & development facilities.

Weakness:

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Diversification into various lines in which it does not have much knowledge would be

very risky proposition.

High competition from established brands which has resulted in reduction in profit

margins.

Steep increase in cigarette taxes has adversely affected the revenue earned.

Due to high price of cigarette, consumers are switching to other cheaper forms of

tobacco.

Its hotel industry has still not created a big share in the market size.

Opportunities:

Big untapped market available. For cigarettes, hotels, it, retail garment, packaging &

agricultural products.

High growth potential could be achieved.

Good source of revenue & foreign exchange available by way of exports of agricultural

products, hotels & cigarettes.

Its competitors don’t have the financial banking like it so it can take advantage of this.

Proper publicity of the hotels would increase its brand image & revenue.

Threats:

Negative publicity for smoking could affect its cigarette segment.

Government is under huge pressure from public organizations for banning tobacco

products which could affect it adversely.

High competition from established brands.

Competition from unbranded products.

Due to terrorist attacks the tourism industry has taken a back seat which would affect the

hotel segment.

Poor monsoon leads to poor agricultural growth which would affect the agro-exports.

VALUE CHAIN MODEL OF ITC

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Value chain model is an important tool to be calculated in merger.

What we will offer Jain irrigation?

Wealth of local knowledge & international expertise helps it to be globally competitive.

Excellent distribution network.

Excellent brand making capability

Sophisticated research & development facilities.

Strategies to achieve low cost of production

VALUE CHAIN MODEL OF JAIN IRRIGATION SYSTEM

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The e- choupal is a village meeting place developed by ITC. The main attractiveness of e-

choupal is that it can be used for connecting large producers/small producers and small users/

large users. It is a place where vendors and customers come together. As it’s an activity related

to farmer and is connected to 40000 villages till 2011, merger with Jain irrigation will also help

to boost e-choupal initiative. The value chain of both the companies will act as an advantage of

the company. The value which is created in every process is finally passed on to the consumer

which creates profit for the company.

Company due diligence

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Why ITC and Jain irrigation should merge?

The Following are the reasons:-

1. Market analysis

a. The market opportunity is widening since ITC is basically involved in

producing tobacco and due to government restrictions and ban on tobacco the

company is losing its competitive position in this field. Hence it is moving

towards other avenues such as agricultural produce. Jain irrigation is very well

known for its state of the art irrigation facilities and its expertise will help ITC

exclusively to overcome its market competitors.

b. Trend and forecast:- The big corporate giants are moving towards rural areas

and trying to penetrate them. Since India is primarily and agricultural country ITC

entering into this venture would be a new experience since this will boost the

market as well as help company to generate more profit with less investment.

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c. Regulatory and Framework:- Since there is not much government hassles the

company can easily setup its project. One of the innovations done by ITC is the E-

choupal.

2. Competitive benchmarking:- The company does not have much of competition in this

sector. Since only few companies are into agro business the company will have a markup

pricing strategy and will use penetration strategy to position itself as a massbrand. The

cost of vegetables would be less than the competitors which would be reliance fresh and

other outlets which are into agro business.

3. Internal analysis:- Both the companies have a strong management. With a strong

financial backup and with merger both will have economies of scale. And with the huge

human resource available the logistics and the operational capabilities of both the

companies increase to an great extent.

4. Technological assessment:- The strength of Jain irrigation is the technology it uses for

agriculture. This expertise would be shared with ITC and this will be beneficial for the

organization to get an competitive edge over its rivals.

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Efficiency of both the companies

Best

Portfolio

Best

Equity

Good Returns

Average Returns

Small Returns ITC

Cash Small

Risk

Average

Risk

High

Risk

Huge

Risk

Negative Returns

This indicates that the company is best for investing and it is profitable phase of the company. So

this would be a suitable time for the company to go for expansion strategies because the risk is

low. The company must try to adopt new strategies such as acquiring a company since they have

more reserves with them. The merger will try to create a strategic alliance and will try to create a

strategic position with the company. Hence creation of a new market will try to create new

opportunities..

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Best

Portfolio

Best

Equity

Good Returns

Average Returns

Small Returns JAIN

Cash Small

Risk

Average

Risk

High

Risk

Huge

Risk

Negative Returns

This diagram shows that jain irrigation is high risk and small returns company. This can be

avoided if the company goes for diversification. This strategy would help the company to hedge

its risk and give its investors more value for money. The company can go for mergers or

acquisitions. But since the reserves of this company is low. Merger would be a better choice.

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This diagram indicates the correlation between the two companies. This shows a positive co-

relation which shows that both companies is related to closely to each other which shows that

they will have a positive growth. The correlation of ITC is greater than Jain irrigation which

shows that the company is a profitable avenue to invest. That means if these two companies

come together then the company will have a positive relation and will be beneficial avenue for

both the companies.

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This is an performance indicator for both the companies which suggest that ITC is an

profitable avenue for Jain irrigation.

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This Diagram indicates that it is good for both the companies to merge since the risk can be diversified by both the companies

Staffing and Administration

VPVP

Staffing plan for the Organisation ITC Jain Agro:-

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CEO – Bhavar Lal Jain

PRESIDENT

VP

Operations

VP

Marketing

VP

Finance

VP

HR

VP

R & D

DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR

GENERAL

MANAGER

GENERAL

MANAGER

GENERAL

MANAGER

GENERAL

MANAGER

GENERAL

MANAGER

ASS. MANAGEROPERATIONS

ASS. MANAGERMARKETING

TREASURER ASS.

MANAGERFINANCE

ASS.MANAGERHR

ASS.MANAGERR&D

SR.GENERAL

MANAGER

SR.GENERAL

MANAGER

SR.GENERAL

MANAGER

SR.GENERAL

MANAGER

SR.GENERAL

MANAGER

Chairman – Y.C Deveshwar

The Following is the man power planning:-

1. The top level employees are merged and new positions are created so that both peoples

expertise are used to the fullest.

2. Each departmental head will have a senior person appointed as a director who will work

as the mentor and guide to the employees of middle management

3. Each senior manager will act as a link between top management and middle management

4. Each Manager will act as a link between middle and lower management.

There are 7,500 employees currently working for ITC and the employees would be

repositioned according to the qualification. The senior most employee will be given a

preference. All the rewards will be judged on the basis of the performance and seniority

and the atmosphere will be filled with energy and happiness. The employees will be

engaged with the organization so that they are motivated and work for the betterment of

the organization. The employees will not be terminated and the employees who wish to

discontinue will be given a grand farewell so that they don’t have any hard feelings

against the organization. The employees’ interest will be protected and a sense of

belonging will be promoted in the organization. The department wise division is as

follows:-

Lower level management :- This would compromise 60% of the employees

(4500)

Middle level management:- This would compromise 30% of employees (2100)

Top level management :- This would compromise the elite 10% of employees

(900)

The performance appraisal would a mix of both the companies and will be custom

made i.e. A combination of 360 appraisal and rating method would be used.

On the basis of decision making power-

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Employees-

The Company is currently headed by Yogesh Chander Deveshwar. It employs over 29,000

people at more than 60 locations across India and is listed on Forbes 2000. ITC Limited

completed 100 years on 24 August 2010.

Financials

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Managing directors

Group internal audit

Business development department

Human resource development

Management service department

Property development

Industry

Agribusiness & services

Workout

Research & public relation

Risk management

Information technology

Group company secretary

Management accounting

Financial accounting

Cost ratios before merger ITC Jain

2012 2011 2012 2011

Raw material consumed 9,933 8,601 2,123.72 2,194.53

Wages and salaries 1,265.41 1,178.46 172.19 150.32

Manufacturing expenses 634.8 560.57 3.52 100.58

Selling and Distribution expenses 2,691.41 2,408.03 0 606.93

Administration expenses 1,339.60 1,120.89 533.16 15.48

Cost ratios after Merger ITC Jain Agro

2013 2014

Raw material consumed 7,140.69 6,864.96

Wages and salaries 1,014.87 903.37

Manufacturing expenses 1,008.91 516.9

Selling and Distribution expenses 2,093.87 1,684.41

Administration expenses 1,008.91 516.9

From above we can see that how the costs are affected after the merger a change of 71% can be

seen in the 1st year of merger and a further 96% change is visible. This is possible because most

of the raw materials of ITC agro was bought from outside which included the additional cost.

Thus to avoid this ITC came up with E-choupal and with the advanced technology of jain

irrigation they can gain the competitive edge. Jain irrigation is known for its modern irrigation

facilities and the state of art drip irrigation methods.

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Profitability ratios Before merger

ITC Jain

Return on capital employed 42.64 15

net profit 25.17 7

Earnings per share 6.45 7.45

Profitability ratios post-merger

ITC Jain ITC Jain

Agro

Return on capital employed 42.64 15 50.14

net profit 25.17 7 28.67

Earnings per share 6.45 7.45 10.175

Share exchange ratio

ITC Jain

No.of Shares 781 500

Average profit for 3 years 9000 5000

Average market value for 3 years 295 66

Face value of share 1 2

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Net worth 18791 1911

Methods

EPS method 11.52369 10

Net worth 60 3.822

Market value of shares 295 66

Fair value 169.857 35.822

EPS A 60

EPSB 3.88

Total 15.46392

Conclusion: 15 shares of Jain to 1 share of ITC is the share exchange ratio

Name of the

company

Name of the merging

company

Capital

structure

Means of

payment

Exchange

ratio

ITC Jain irrigation

Equity &

debt Equity 1:15

Expectations of Shareholders of both companies (Bargain zone)

The company expects to make profits of 250Cr , The current profit of the company is 100cr and

the current profit of the merging company is 80Cr.

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According to the

synergy concept,

the companies

expected profit

should be greater than the current profits combined. Thus this merger has value and should be

taken into consideration.

From above table we can conclude that from a range of 100 to 170 profits if shared among the

shareholders of ITC then they will be satisfied and a profit of 80 to 150 if shared among the

shareholders of jain irrigation then they will be satisfied.

Synergy Concept

1. What the companies will benefit from the merger:-

a. Revenue:- Presently ITC is earning 3000 crore from agriculture produce mainly tobacco and

spices. The revenue of Jain irrigation is 4000 crore if both the companies combine, the expertise

of jain along with the investment capacity of ITC would be beneficial for both and would be able

to attain higher profits then if they were working separately.

b. Expenses:- ITC is shelling out 2500 crores for agriculture and Jain irrigation is shelling out

3,000 crore. If both companies work together economies of scale could be attained and the

company can drive down the cost and increase the profit.

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What should be the profit sharing

ITC

Eca 100 100

Em-Eca 250-100 150

Jain

Em-Ecb 250-80 170

Em 80 80

c. Cost of capital:- Since the companies have a good mix of equity and debt. Combining them

would be a profitable avenue. Since the cost of investment will go down.

Return on ITC Limited Manpower

Revenue Per Employee  20.4 M

Revenue Per Executive  10.6 B

Net Income Per Employee  4.8 M

Net Income Per Executive  2.5 B

Working Capital Per Employee  692.6 K

Working Capital Per Executive  360.2 M

Return on Jain Manpower

Revenue Per Employee  6.5 M

Revenue Per Executive  9.9 B

Net Income Per Employee  291.9 K

Net Income Per Executive  446 M

Sustainability:-

The company would have new parameters on which it would be maintained. The

company’s core values would be kept intact and the culture of the organization would not

be much changed. The employees from another organization would be gracefully

accepted and they would be treated in a fair manner. It would be ensured that the

employees feel safe and feel that they are under the same management. The growth of the

organization would be based on continuous innovation in the field of agriculture. It would

be ensured that everything is done properly and is done with precision.

Conclusion:- To conclude we want to propose that this is a profitable avenue for your

organization. Your strength combined with our market opportunity will help us to

achieve the greater heights. This is a profitable venture and we would be more than happy

to have your company join hands with our company and begin a new endeavor.

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