IPO Snapshot:

Godrej Agrovet is entering the primary market on Wednesday 4^th October 2017 to raise Rs. 292 crore via fresh issue of equity shares and an offer for sale (OFS) of upto Rs. 300 crore by promoter Godrej Industries and upto 1.23 crore equity shares of Rs. 10 each by Temasek, both in the price band of Rs.450 to Rs. 460 per share. Representing 13.13% of the post issue paid-up share capital at the upper end, total issue size is Rs. 1,157 crore, of which Rs. 866 crore is the OFS portion. Issue will close on Friday 6^th October and listing is expected on 16^th October.

Company Overview:

Godrej Agrovet, 63.61% subsidiary of Godrej Industries, is an agri-focused company with FY17 topline of Rs. 4,926 crore, engaged in 5 diversified businesses:

1. Animal feed (53% of FY17 revenue, 6% EBIT margin): Cattle, poultry and aqua feed with 2.36 million MTPA production capacity across 35 facilities and 4,000 distributors pan-India. Presence in Bangladesh through equal JV ACI Godrej for animal feed manufacturing capacity of 0.57 million MTPA, working of which is not captured in the topline/ operating profit.
2. Crop Protection (15% of FY17 revenue, 22% EBIT margin): manufactures agro chemicals across entire crop lifecycle (plant growth regulators, organic manures, generic agrochemicals, specialized herbicides) under brand names Vipul, Double, Combine, Hitweed etc. at 2 manufacturing facilities, 6,000 distributors. Also 56.82% stake in listed firm Astec Lifesciences (since Nov 2015), both institutional and retail sales
3. Palm Oil (10% of FY17 revenue, 20% EBIT margin): largest crude palm oil producer in India with 35% market share (FY17). 5 palm oil mills with aggregate processing capacity of 125 MT per hour and 1 palm kernel processing capacity of 7 MT per hour. 
4. Dairy (20% of FY17 revenue, 4% EBIT margin): operation through 51.91% subsidiary, Creamline Dairy, ‘Jersey’ brand, Owns 9 milk processing units, 120 chilling centers, distribution network of 4,000 milk distributors, ~ 3,000 milk product distributors and 50 retail parlours in Telangana, Andhra Pradesh, Tamil Nadu, Karnataka, Maharashtra
5. Poultry and processed food (revenue not consolidated as holding <50%): operates through 49:51 JV with Tyson Foods, US, 2 integrated processing plants, brands ‘Real Good Chicken’ and ‘Yummiez’ for retail and institutional clients

While animal feed, dairy and poultry verticals are expected to grow in mid-teens going forward, higher-margin crop protection and palm oil verticals are expected to have comparatively lower growth rates, in single digits (6-9% pa), as per company estimates.

Financials:

During FY14-17, consolidated revenues grew at 17% CAGR, while EBIT grew at 16% CAGR, thanks to 36% CAGR in the crop protection business (both organic and inorganic). FY17 consolidated revenue grew 31% YoY to Rs. 4,926 crore, mainly led by inorganic growth in crop protection and dairy segments in the form of Astec Life (wef 6Nov15) and Creamline Dairy (wef 21Dec15) respectively. Earnings before interest and tax (EBIT) was up 42% YoY to Rs. 465 crore, crop protection (Rs. 170 crore) and oil palm (Rs. 103 crore) being the key contributories with 79% and 66% YoY growth respectively, even as animal feed (Rs. 166 crore) saw degrowth of 10% YoY. Net profit for FY17 stood at Rs. 249 crore (including pretax exceptional gain of Rs. 20 crore), leading to EPS (excluding exceptional gains) of Rs. 10.95, on equity of Rs. 185 crore (FV Rs. 10 each).  

For Q1FY18, consolidated revenue growth was slow, at 2% YoY, to Rs. 1,363 crore, led by crop protection and dairy segments, even as animal feed, particularly poultry, faced severe headwinds. EBIT for the first quarter stood at Rs. 133 crore, translating into EBIT margin of 9.7%, up from FY17’s 9.4%. Net profit for Q1FY18 stood at Rs. 72 crore, translating into EPS of Rs. 3.88. Despite steady topline growth, company’s operating (~10%) as well as net profit (~5%) margins have remained more-or-less stagnant over the past few years. 

As of 30-6-17, company’s networth stood at Rs. 1,073 crore, implying BVPS of Rs. 58. Total debt stands at Rs. 715 crore and cash equivalents at Rs. 50 crore, leading to net debt to equity ratio of 0.62:1, which will contact to 0.3:1, as Rs. 250 crore debt will be repaid from fresh issue proceeds.

Shareholding:

Godrej Industries holds 62.61% stake as promoter, while other Godrej family members hold 11.19% stake in Godrej Agrovet currently. Post IPO, holding for these will decline to 58.10% and 10.82% respectively. Temasek entity V Sciences owns 19.97% whose stake will contract to 12.89% post OFS. Balance ~5% is held by employees, including 2.4% by company’s MD Mr. Balram Yadav.

On 14-9-17, company has undertaken pre-IPO placement worth Rs. 8.5 crore, to 48 employees, at Rs. 440 per share, which is a 4% discount to upper end of the IPO price and understandably so, since allotment was made to company’s employees.

Valuation:

At Rs. 460 per share, company’s market cap will be Rs. 8,816 crore and EV Rs. 9,232 crore. This implies PE multiple of 42x and 27x, based on FY17 and FY18E respectively. The EV/EBITDA multiples are   18x and 14x on historic and current year running respectively. Although there are no exact listed peers given Godrej Agrovet’s diverse business segments, ballpark comparison can be made with a couple of listed companies, such as:  

1. Rs. 3,400 crore revenue earning Gujarat Ambuja Exports is an agro processing company with product basket comprising of vegetable oils, animal feed ingredients, maize processing, cotton yarn  among others. On FY17 EBIT margin of 6.6%, company is ruling at historic PE multiple of 12x and EV/EBITDA multiple of 9x, which is much lower than Godrej.
2. Venky’s India, with Rs. 2,500 crore topline from poultry, oilseeds and animal health segments (similar to Godrej Agrovet), strong brands, with poultry segment clocking EBIT margins of 15% in FY17 versus 6% for Godrej Tyson, and company level EBIT margin of 11.4%, and is currently trading at PE and EV/EBITDA multiples of 23x and 12x respectively, based on FY17 performance, which is again much lower than Agrovet. Godrej Agrovet’s animal feed business has poor on both growth and profitability, the dairy segment is highly competitive besides earning much lower margins. Thus, other business segments are more or less comparable to peers.

Even if the above peer comparisons are not convincing, let’s adopt a sum-of-the-parts (SoTP) valuation:

Based on the above SoTP valuation, despite not applying holding company discount for ACI Godrej, Creamline Dairy, Astec Life and Godrej Tyson, company’s equity value is Rs. 7,750 crore, which is 14% lower than the market cap of Rs. 8,816 crore at the asking price of Rs. 460 per share. Thus, IPO seems to be fully priced, and seems to have left no money on the table.

However, based on the value unlocking theme, there seems to be opportunity in Godrej Industries. Below is the SoTP valuation of Godrej Industries:

Godrej Industries’ 58.10% stake in Godrej Agrovet, post IPO, is valued at Rs. 4,100 crore, after applying 20% holding company discount. Exposure to FMCG and real estate provide good diversification and hedge, coupled with the century old Godrej trust and strong brand name, make it a safe front-liner to invest into in the current correction. However, Godrej Agrovet IPO seems to be fully priced, and if one has to choose either, go with the ultimate parent!   

Conclusion:

Company is a take on Bharat and particularly, Indian agricultural sector. While the topline growth is healthy, given the size, margins have not expanded as some business or the other keeps facing headwinds (drawback of diverse operations). While crop protection is the cash cow and palm oil clocking high operating margins, domestic animal feed, dairy and poultry lag peers on many counts.

Thus, fundamentally, IPO valuations appear fully priced in and Godrej Industries may prove to be better rewarding in the long term.

Disclosure: No interest.