Godrej Agrovet: Healthy feed

The public issue of the agri-business arm of Godrej Group, Godrej Agrovet, will open on October 4. Of the ₹1,157 crore that the company plans to raise, only ₹292 crore will be fresh issue that will accrue to the company; the balance is an offer-for-sale by the promoter company Godrej Industries and Temasek Holdings’ subsidiary, V Sciences.

Godrej Agrovet, which is among the country’s leading players in the animal feed segment, has over the last several years diversified into other segments such as crop protection chemicals, dairy, poultry and palm oil through concerted efforts.

This has been through both organic expansion and inorganic initiatives such as acquisition, joint ventures and tie-ups. Over the last few years, Godrej Agrovet has been strengthening its position in profitable businesses within the segments that they operate in, such as crop protection chemicals and palm oil and this is expected to continue in the future also. This should have a positive rub-off on the company’s overall profitability.

At the upper end of the price band of ₹460, the company is valued at about 34 times its 2016-17 earnings and about 29 times its estimated 2017-18 earnings. Given the diversified nature of the business, there isn’t a direct comparable peer in the listed space.

While the company’s initiatives to capitalise on better margin businesses such as agrochemicals and palm oil, coupled with growth opportunities in this space, should help Godrej Agrovet sustain good performance in the near future, the upside in the stock price may be limited in the short term. The issue will only suit investors with a longer investment horizon of at least two years.

Godrej Agrovet is a large player in the animal feed space (53.2 per cent of revenue in 2016-17) with presence in poultry, cattle and aqua segment. The company’s distribution network for feed segment stood at about 4,000 distributors, as of June 30, 2017. While this segment has been a significant contributor to revenue, the EBIT (earnings before interest and tax) margin has been modest at 6 per cent.

Hence, over the years, the company has diversified into other segments such as poultry feed in 1994, palm oil, diary with investment in Creamline Diary in 2012 and crop protection chemicals through the acquisition of Astec Life Sciences.

As a result, the share of animal feed to the overall revenue has reduced over the last five years from about 75 per cent in 2014-15 to 53.2 per cent and 46.5 per cent in 2016-17 and April-June 2017 period. Given the relatively low margin in the animal feed space, these initiatives should help Godrej Agrovet improve its profitability in the medium term.

Also, a favourable change in the revenue mix with higher contribution from better-margin businesses crop protection chemicals (EBIT margin of 22.1 per cent in 2016-17) and oil palm (20.3 per cent) should enable the company improve its overall profit margin. To strengthen its crop protection business, Godrej Agrovet acquired majority stake in Astec Life Sciences (current holding at 56.82 per cent), which has presence in nearly 24 countries selling active ingredients, bulk intermediates and formulation products, in addition to contract manufacturing services.

The company sources technicals (active ingredients) from its subsidiary company, Astec Life Sciences, formulates and sells them through its network of 6,000 distributors. Besides this, the company has tied up with global innovators, the latest being with a Japanese chemical major for two products which will be launched soon and also synthesises its own products.

It currently has about 45 products in its portfolio and hopes to add at least two-three products every year, with a focus on fungicides, herbicides and plant regulators, which are poised for stronger growth. This should help the company sustain healthy growth in this segment.

Godrej Agrovet has access to about 61,700 ha of oil palm plantations, which constitute about a fifth of the country’s plantations. About two-thirds of the cropped area is under eight years, of which 35 per cent is in the three-eight year maturity bracket. The production peaks in the eighth to ninth year and remains steady for 25 years.

The favourable maturity profile for the plantation should support the company’s raw material requirement to achieve strong growth over the next few years.

Also, the company’s strategy to maximise efficiency by using the oil seed surge to produce biomass energy and cattle feed has aided the segment’s margin improvement to 20.3 per cent in 2016-17, from 15.2 per cent in the previous year.

In the dairy business, wherein the product is largely liquid milk carrying brand name ‘Jersey’, the company is consciously shifting focus to value-added products.

It is evaluating new products in the ultra-high temperature (UHT) processed milk and flavoured yogurt segments.

The share of value-added products should increase from the current 28 per cent and thereby aid profitability.

Revenue and net profit grew at a CAGR of 15.6 per cent and 30.7 per cent in the FY13-17 period. During 2016-17, the company’s revenue and operating profit grew 31 per cent and 48 per cent, respectively.

Operating profit margin expanded by 100 basis points to 8.9 per cent.

In the June 2017 quarter, operating profit margin further improved to 9.1 per cent.

However, the company’s working capital cycle has gone up significantly to 143 days in the June 2017 quarter from 31 days as of March 2017.

This is largely on account of higher contribution from the crop protection business where despite EBIT margins being in excess of 20 per cent, receivable days are as high as 180 days.

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