Godrej Agrovet - IPO Analysis

IPO rating – 48 (Invest with limited exposure)

Godrej Agrovet’s IPO consists of fresh issue of Rs 291.51 crore and Offer for Sale of Rs 300 crore by Godrej Industries and 12,300,000 equity shares by V-Sciences Investments Pte Ltd. aggregating the issue size of Rs 1157.31 crore. The face value of each equity share is Rs 10. The minimum lot size for subscription is of 32 shares with issue price ranging between Rs 450-460. The issue will remain open from October 4-6, 2017. Company will get listed on both BSE and NSE.

Purpose of the Issue
Each of the Selling Shareholders will be entitled to the respective portion of the proceeds of the Offer for Sale net of their proportion of Issue related expenses. The company will not receive any proceeds from the Offer for Sale.
The net proceeds from the Fresh Issue would be utilised towards –

Godrej Agrovet is a diversified, research and development focused agri-business company with operations across five verticals namely; animal feed, crop protection, oil palm, dairy, poultry and processed foods.

• Animal Feed: The portfolio of products comprises of cattle feed, poultry feed (broiler and layer), aqua feed (fish and shrimp) and specialty feed. It has aggregate production capacity of 23 lakh MTPA, as of June 30, 2017. Also, its joint venture company in Bangladesh named ACI Godrej has two manufacturing facilities with an aggregate production capacity of 5,70,000 MTPA, as of June 30, 2017.

• Crop protection: Under this segment, company manufactures a wide range of products that cater to the entire crop lifecycle including plant growth regulators, organic manures, generic agrochemicals and specialized herbicides. It has a major stake in Astec LifeSciences that manufactures agrochemical active ingredients (technical), bulk and formulations and sells its products in India as well as exports them to the United States and countries across Europe, West Asia, South East Asia and Latin America.

• Oil palm: Company produces range of products including crude palm oil, crude palm kernel oil and palm kernel cake. It has entered into MOU with nine state governments, which provides an access to ~61,700 hectares under oil palm plantation, which is equivalent to approximately one-fifth of India’s area suitable for oil palm cultivation.

• Dairy: It sells milk and milk products under the ‘Jersey’ brand across the states of Telangana, Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra. Its dairy distribution network includes ~4,000 milk distributors, ~3,000 milk product distributors and 50 retail parlours, as well as direct sales to institutional customers.

• Poultry & processed foods: Company manufactures and markets processed poultry and vegetarian products through the brands ‘Real Good Chicken’ and ‘Yummiez’. It has set up two processing plants with integrated breeding and hatchery operations and has 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.

In terms of sales volume, India is one of the largest global producer of animal feed with an annual production of between 25mn MT and 27mn MT. Going forward, the industry is expected to grow at a CAGR of 13% to 14%, reaching a market size of between Rs 1,060 and Rs 1,070 bn by FY20.
The domestic crop protection demand is currently sized at between Rs 145bn and Rs 155bn. The industry grew at a healthy CAGR of 8.5% in sales value between FY13-17, driven by higher pesticide use per hectare to boost agricultural production, and an increased penetration of pesticides. It is expected to grow at more or less similar rate in the upcoming five years. The highest theoretical oil yield of this crop is projected to 18 tons per hectare per year. In India itself the best farmers have obtained 6 to 8 tons and highest being 10 tons of oil per hectare per year.
India is the world’s biggest producer and consumer of milk. India’s dairy industry is projected to be worth approximately Rs 16,368 bn, maintaining a CAGR of 15.6% during FY17-22.

Financial Performance

 
Company’s consolidated revenue has grown at a CAGR of 16% over FY13-17. As we see, company has been generating consistent profits since last 5 years. PAT margin for FY15, FY16 and FY17 was 6.3%, 6.9% and 5.5% respectively. It has been paying dividend to shareholders since FY14. For FY17, it paid dividend of Rs 4.5 per share.

Valuation
At upper price band of Rs 460 with EPS of Rs 12.58 (of FY17), its P/E works out at 36.5x. It has very diverse portfolio and we believe that there no listed peers in industry with such varied portfolio mix. Hence, it cannot be determined that the issue price is over-priced or under-priced.

Our View
Company has well-diversified business and belongs to the Godrej group which has strong brand recognition. Operating with such mix portfolio shows the confidence with which company is carrying out its business. It has been generating consistent profits and revenue is growing in double digits from last five years. It will be difficult for any new or existing company to initiate and operate with such diversified portfolio and hence competition would be less tough. All the sectors under which company’s verticals operate have a promising outlook going forward. Considering these positive factors, investors can subscribe to this IPO.