Merger of ITC & Jain irrigation

Submitted by :

Kausik Iyer Sushant Rane Prachi Trehan

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 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 assests 2. 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

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Table of Contents :
SR.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. TOPIC Introduction Business description of Jain irrigation SWOT of Jain irrigation SWOT analysis of ITC Value chain model of ITC Value chain model of Jain irrigation Company due diligence Efficiency of both companies Staffing and Administration Financials Conclusion Pageno 4 6 8 10 11 12 13 15 19 22 26

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

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Its Hotel segment is well diversified as mentioned below: 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.

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JAIN IRRIGATION:

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 its 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, biofertilizers, 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.

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Business Description of Jain Irrigation:

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 & Signages Landscaping

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Water Shed development Waste Land Development 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

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SWOT ANALYSIS OF ITC

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.

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Weakness:

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 dont 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.

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VALUE CHAIN MODEL OF ITC

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

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VALUE CHAIN MODEL OF JAIN IRRIGATION SYSTEM

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

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Company due diligence

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 Echoupal. 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
Good Returns

Best Equity

Average Returns

Small Returns

ITC
Small Risk Average Risk High Risk Huge Risk

Cash
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
Good Returns Average Returns Small Returns

Best Equity

JAIN Small Risk Average Risk High Risk Huge Risk

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

This is an performance indicator for both the companies which suggest that ITC is an profitable avenue for Jain irrigation.

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Staffing and Administration

Chairman Y.C Deveshwar

CEO Bhavar Lal Jain

PRESIDENT

VP VPVP Operations

VP Marketing

VP Finance

VP HR

VP R&D

DIRECTOR

DIRECTOR

DIRECTOR

DIRECTOR

DIRECTOR

SR.GENERAL MANAGER

SR.GENERAL MANAGER

SR.GENERAL MANAGER

SR.GENERAL MANAGER

SR.GENERAL MANAGER

GENERAL MANAGER

GENERAL MANAGER
ASS. MANAGER MARKETIN G

GENERAL MANAGER

GENERAL MANAGER

GENERAL MANAGER

ASS. MANAGER OPERATIONS

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TREASURER ASS. MANAGER FINANCE

ASS. MANAGER HR

ASS. MANAGER R&D

Staffing plan for the Organisation ITC Jain Agro: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 dont 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.

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On the basis of decision making power-

Board of directors

Managing directors Group internal audit

Business development department

Human resource development

Management service department

Property development

Financial accounting

Industry

Management accounting

Agribusiness & services

Group company secretary

Workout

Risk management

Research & public relation

Information technology

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EmployeesThe 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 Cost ratios before merger ITC 2012 Raw material consumed Wages and salaries Manufacturing expenses Selling and Distribution expenses Administration expenses 9,933 1,265.41 634.8 2,691.41 1,339.60 2011 8,601 1,178.46 560.57 2,408.03 1,120.89 Jain 2012 2,123.72 172.19 3.52 0 533.16 2011 2,194.53 150.32 100.58 606.93 15.48

Cost ratios after Merger

ITC Jain Agro

2013 Raw material consumed Wages and salaries Manufacturing expenses Selling and Distribution expenses Administration expenses 7,140.69 1,014.87 1,008.91 2,093.87 1,008.91

2014 6,864.96 903.37 516.9 1,684.41 516.9

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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.

Profitability ratios Before merger ITC Return on capital employed net profit Earnings per share 42.64 25.17 6.45 Jain 15 7 7.45

Profitability ratios post-merger ITC Jain ITC Agro Return on capital employed net profit Earnings per share 42.64 25.17 6.45 15 7 7.45 50.14 28.67 10.175 Jain

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Share exchange ratio ITC No.of Shares Average profit for 3 years Average market value for 3 years Face value of share Net worth 781 9000 295 1 18791 Jain 500 5000 66 2 1911

Methods EPS method Net worth Market value of shares Fair value 11.52369 60 295 169.857 10 3.822 66 35.822

EPS A EPSB Total

60 3.88 15.46392

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

Name company

of

the Name of the merging Capital company structure Equity &

Means payment

of Exchange ratio

ITC

Jain irrigation

debt

Equity

1:15

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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. What should be the profit sharing ITC Eca Em-Eca Jain Em-Ecb Em 250-80 80 170 80 100 250-100 100 150

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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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 Revenue Per Executive Net Income Per Employee Net Income Per Executive Working Capital Per Employee Working Capital Per Executive 20.4 M 10.6 B 4.8 M 2.5 B 692.6 K 360.2 M

Return on Jain Manpower Revenue Per Employee Revenue Per Executive Net Income Per Employee Net Income Per Executive 6.5 M 9.9 B 291.9 K 446 M

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