Godrej Agrovet

Focused on agri-based businesses

The company is into animal feed, oil palm, dairy, crop protection and poultry products

CM RATING

47/100

Incorporated in 1991 and a part of Godrej group and promoted by Adi Godrej and Mr. Nadir Godrej and Godrej Industries, Godrej Agrovet (GA) is a diversified research and development focused agri business company with operations across five business verticals: animal feed, crop protection, oil palm, dairy and poultry and processed foods.

In the animal feed business (constitute around 46.5% of total revenue for the quarter ended June 2017 and 53.2% for FY 2017), company’s portfolio of products comprises cattle feed, poultry feed (broiler and layer), aqua feed (fish and shrimp) and specialty feed. The company is the leading compound animal feed company in India, on the basis of installed capacity for the financial year 2016. (Source: CRISIL Animal Feed Report). The company’s 50:50 joint venture , ACI Godrej, was incorporated in 2004 and produces cattle, poultry and fish feed in Bangladesh.

The animal feed products are manufactured at 35 facilities, of which 10 facilities are owned by GA and 7 are operated by GA and are located near major consumption canters across India, with an aggregate production capacity of 2.36 million tonnes per annum, as of June 2017. The pan - India distribution network for animal feed products includes approximately 4,000 distributors.

In the crop protection cusiness (constitute around 9.6% of total revenue for the quarter ended June 2017 and 10.3% for FY 2017), GA manufactures a wide range of agro chemical products that cater to the entire crop lifecycle of the crops including organic manures, seed treatment, fungicides, plant growth regulators, herbicides, insecticides and fungicides. In Oct 2015 GA acquired a majority equity stake (56.8%) in Astec LifeSciences which manufactures agrochemical active ingredients (technical), bulk and formulations as well as intermediate products and sells its products in India as well as exports them to approximately 24 countries.

The distribution network of the crop protection business in India includes approximately 6,000 distributors, as of June 17. GA and Astec Life Sciences had an aggregate of 212 registrations under the Insecticides Act, 1968.

In the oil palm business (constitute around 20.4% of total revenues for the quarter ended June 2017 and 15.5% for FY 2017), GA is the largest crude palm oil producer in India, in terms of market share, as of March 31, 2017. It produces a range of products including crude palm oil, crude palm kernel oil and palm kernel cake. GAVL has set up 5 palm oil mills in India with an aggregate FFB (fresh fruit bunches) processing capacity of 125 tonnes per hour and a palm kernel processing capacity of seven tonnes per hour, as of March 31, 2017.

The company entered into the dairy business (constitute around 22.9% of total revenue for quarter ended June 17 and 20.6% for FY 2017), in 2005 and in October 2015 they acquired a 51.9% equity stake in Creamline Dairy, which currently sells milk and milk based products under the ‘Jersey’ brand. The company operates in states of Telangana, Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra.

As of June 2017, GA owned and operated 9 milk processing units and has distribution network of 4,000 milk distributors, approximately 3,000 milk product distributors and 50 retail parlors,

The company also manufactures and markets processed poultry and vegetarian products through their brands ‘Real Good Chicken’ and ‘Yummiez’. With an objective to further grow the poultry and processed food business, in 2008, GA entered into a joint venture with Tyson India Holding Limited, a subsidiary of Tyson Foods Inc., U.S.A which is a Fortune 500 company. The company has set up 2 processing plants with integrated breeding and hatchery operations and they have a diverse customer base comprising of retail customers as well as institutional clients such as quick service restaurants, fine dining restaurants, food service companies and hotels

GA also operates a 11.25-MW wind power project comprising 4 windmills in Dhule, Maharashtra.

The Offer and the Objects

The offer comprises fresh issue of Rs 291.51 crore, which at lower price band of Rs 450 per share, works out to 64.78 lakh shares and at higher price band of Rs 460, the offer works out to 63.37 lakh shares. The offer also comprises offer for sale of 123 lakh shares by V-Sciences Investments Pte Ltd (an indirect wholly owned subsidiary of Temasek Holdings (Private) Limited), which at lower price band of Rs 450 per share, works out to Rs 553.50 crore and at higher price band of Rs 460, the issue size works out to Rs 565.80 crore. The offer also comprises of offer for sale of Rs 300 crore by the Promoters Godrej Industries which at lower price band of Rs 450 per share, works out to 66.67 lakh shares and at higher price band of Rs 460 per share, works out to 65.22 lakh shares.

The minimum bid lot is 32 equity shares and in multiples of 32 equity shares. The issue is made through the book-building process and will open on 4 October and will close on 6 October, with anchor investor bidding date of 3 October 2017.

The objects of the issue is to spend around Rs 100 crore on repayment of working capital facilities availed by the company, Rs 150 crore for repayment of commercial papers and rest for general corporate purposes, apart from the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Strengths

Strong parent and established brand. The strength of the ‘Godrej’ brand and its association with trust, quality and reliability helps GA in many aspects of their various businesses, particularly the businesses that involve direct sales to retail consumers.

Pan India presence with extensive supply and distribution network. The nationwide footprint also allows the company to leverage the competitive advantages of each location to enhance its competitiveness and reduce geographic and political risks in the businesses.

Strong procurement base, diversified product portfolio and large - scale operations enables the company to achieve economies of scale in sourcing of raw materials and the distribution of the products.

Astec LifeSciences also undertakes contract development and manufacturing services for other agro chemical companies. Astec LifeSciences sells all its products to institutional customers, while GA sells its products primarily to retail consumers thus resulting in overall synergies for the company.

The company has entered into memoranda of understanding with nine state governments, which provides the company with access to approximately 61,700 hectares under oil palm plantation, which is equivalent to approximately one-fifth of India’s area suitable for oil palm cultivation, as of March 31, 2017. This public-private partnership model, which, has been promoted by the Government of India, allows GA to maintain an asset-light business model.

The company offers a variety of cattle feed to enhance milk production, reproductive ability and the overall health of cattle. Their product offerings range across the life span of cattle starting from calf stage to lactation stage. This veterinary segment is the fastest growing segment in the agri industry and is expected to grow around 20% for the next five years.

Continue to grow the overall market share by leveraging the presence in existing business verticals. Company’s presence in key agricultural verticals provides with significant business inter -linkages which enables them to improve the overall operating efficiencies by leveraging strengths from their different businesses as well as benefit from the economies of scale.

Several sectors in which the company operates are largely unorganised and thus GST will benefit the company in long run

Weaknesses

Agi based company and is dependent on weather conditions and rainfall across India.

Operating in diverse businesses and most of the business is seasonal and dependent on agriculture, which makes forecasting on future revenue and operating results difficult.

Raw material accounts for around 72.3% of total cost of the company end June 2017. Maize, extractions, animal proteins, petroleum solvents, intermediates, fluro chemicals, raw milk, cultures, sugar, oil palm seedlings etc are some of the major raw materials of the company and the company has little control on prices and is dependent on macroeconomic and geo political conditions for the prices.

All the business verticals are seasonal in nature which will result in fluctuations on quarterly results and difficult to predict.

An outbreak of disease could result in governmental restrictions on the import, export and domestic sale of poultry, shrimp and dairy business.

Some major operations like 52.3% of oil palm plantation, a significant amount of raw milk, significant portion of aqua feed products are located and concentrated in Andhra Pradesh, and any political disruption or changes in policies in this state can affect the business.

Most of the business verticals are subject to extensive government regulation and statutory and regulatory permits under central, state and local government rules and any changes can affect the business model of the company.

The company has been constantly pursuing inorganic growth in the past and will do so in the future as well. Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and increased operating expenses, all of which could adversely affect the business, financial condition, results of operations and prospects.

Valuation

For FY 2017, net sales were up 31% to Rs 4911.03 crore. The OPM stood at 8.9% as compared to 7.9% in FY 2016, which resulted in a 48% increase in OP to Rs 439.21 crore. Other income stood at Rs 57.05 crore down by 9%. Interest cost was down by 12% to Rs 86.34 crore while depreciation was up by 43% to Rs 74.67 crore. Thus, profit before tax stood at Rs 335.25 crore up by 60% YoY. There was an EO income of Rs 20 crore as compared EO income of Rs 94.59 crore for FY 16, thus restricting the overall growth in PBT after EO to 17% to Rs 355.25 crore. After providing total tax of Rs 99.60 crore up by 32% and Share of profits of associates of Rs 18.75 crore, down by 43%, consolidated profit after tax for March 2017 stood at Rs 274.39 crore, up by 5%.

For the June 2017 quarter, net sales stood at Rs 1342.70 crore with OPM of 9.3% resulting in an OP of Rs 124.39 crore. Other income stood at Rs 6.15 crore. Interest cost and depreciation stood at Rs 11.80 crore and Rs 21.64 crore. After providing for total tax of Rs 33.56 crore and share of profits from associates of Rs 10.74 crore, consolidated profit after tax for the June 2017 quarter stood at Rs 74.29 crore. Due to seasonality in business quarterly profit cannot be annualised.

At higher price band of Rs 460, the diluted equity share capital of the company works out to Rs 191.66 crore of face value of Rs 10. EPS for FY 2017 works out at Rs 13.6. The P/E on FY 2017 diluted EPS works out to 33.8.

There are no listed peers with such a diversified business model. The company is playing major role in all its verticals and is poised for better prospects. The company has grown inorganically in the past and will continue to evaluate inorganic growth opportunities, in keeping with their strategy to grow and develop the market share or to add new product categories, in future as well.