Godrej Agrovet Limited

Transcription

1 IPO Review Rating matrix Rating : Subscribe Issue Details Issue Opens 4-Oct-17 Issue Closes 6-Oct-17 Issue Size ( Crore) crore Price Band ( ) No of Shares on Offer (lakh) 252 QIB (%) 5 Non-Institutional (%) 15 Retail (%) shares and in Minimum lot size multiples of thereof Objects of the Issue ( Crore) The offer comprises a fresh issue of 63.4 lakh equity shares (~ crore) and an offer for sale of lakh equity shares (~ crore). The IPO proceeds (~ crore) will be used for repayment of working capital facilities availed (~ 1 crore) and commercial papers issued (~ 15 crore) while the balance will be used for general corporate purposes Shareholding Pattern Pre-Issue Post-Issue Promoter & promoter group 74.8% 68.7% Public & Others 25.2% 31.3% Valuation Summary (at 46 ;upper price band) FY14 FY15 FY16 FY17 P/E EV/EBITDA P/B ROCE ROE Research Analyst Chirag J Shah shah.chirag@icicisecurities.com Shashank Kanodia, CFA shashank.kanodia@icicisecurities.com September 29, 217 Branded player in high growth segments Godrej Agrovet (GAVL) is part of the prestigious Godrej group and is a well-diversified agri-business player that serves to enhance both crop and livestock yields. GAVL has a strong brand recall with a nation wide presence. It operates across five business verticals namely animal feed, crop protection, oil palm, dairy and poultry & processed foods. Consistent margin profile through innovative product launches amid improved operational efficiencies and optimal asset turnovers have led GAVL to become an extremely capital efficient player in animal feed (RoCE 73%), oil palm (RoCE 59%) and crop protection (RoCE of 34%) verticals. The company has at appropriate times acquired strategic assets (Cream line Dairy & Astec Life Sciences) to augment its product profile. On a consolidated basis in FY17, GAVL recorded sales of 4911 crore, EBITDA of 439 crore (EBITDA margins of 9%) & adj PAT of 249 crore. Investment Rationale Strong distribution network and established brands! GAVL is one of the largest compound animal feed company in India with 35 manufacturing facilities and 4 distributors. GAVL gains edge over peers through well-established brands (Milk more, Calf Starter, Excel, etc.) across animal lifecycles. In the crop protection vertical, company has leveraged its in house R&D prowess to create strong brands along with a robust distribution network of 6 distributors. Similarly, GAVL operates under the Jersey, Real Good Chicken and Yummiez brands in its dairy and processed poultry & foods divisions respectively. Therefore, strong brand recall and pan India presence bodes well for GAVL which is expected to drive growth in sales & profitability going forward. Diversified Businesses with proven promoter pedigree ( Godrej group ) GAVL has a diversified business model with animal feed constituting ~5% of sales, oil palm~1%, Crop protection ~15% & Dairy ~2%. This coupled with proven promoter pedigree helps GAVL realise consumer confidence and help attain competitive edge over its peers, primarily due to ethical business practices & good quality product profile Concerns Business verticals exposed to vagaries of nature Concentration risk in Andhra Pradesh (Oil palm business) Interruptions in third party services (contract manufacturing) Available at 1.8x MCap/sales & 35x P/E (FY17); recommend SUBSCRIBE At the upper price band of 46, GAVL is available at MCap/sales of 1.8x and P/E of 35x on FY17 numbers. GAVL possess healthy balance sheet with Net Debt: Equity at.6x, average NWC days ~3 days and robust return ratios profile (FY17 RoE at 28%). We advise SUBSCRIBE on GAVL. Exhibit 1: Key Financials crore FY13 FY14 FY15 FY16 FY17 Net Sales EBITDA EBITDA Margins (%) Depreciation Interest PAT PAT Margins (%) EPS ( ) Godrej Agrovet Limited Price band 45-46

2 In 21, the company acquired Goldmohur Foods and Feeds Limited (a subsidiary of Hindustan Lever Limited) to further strengthen its presence in the animal feed business. Major cattle feed products are Bovino, Godrej Bypro etc. Major poultry feed products are Superstar, Excel Prestarter etc. Major aqua feed are Som feed, White Diamond, etc Its key plant growth regulators are Vipul, Double etc. Its key soil conditioner product is Vikas. Its key cotton herbicide is Hitweed while its other crop protection products include Oryzostar - herbicide used for paddy crop. The acquisition of Astec Life Sciences helps the company with an extended product range (aggregate of 212 registrations under the Insecticides Act, 1968) and strong R&D focus Company Background Godrej Agrovet was incorporated in 1991 with the objective to focus on business segments across the Indian agriculture value chain. During the first decade of their journey the company strived to strengthen its presence in three key business verticals namely animal feed (to improve Indian livestock yield), crop protection (to address the low yields that plagued Indian agriculture) and oil palm (to benefit from the public-private partnership model introduced by the GoI in order to reduce India s dependence on vegetable oil imports). GAVL acquired the animal feed and crop protection business from its erstwhile promoters Godrej Soaps Limited and built them up on this strong foundation. Over the years, the company has consistently achieved growth both through the organic and inorganic route to become a prominent player across all its business verticals. In 24, GAVL expanded its animal feed business geographical footprint into Bangladesh by forming a joint venture with Advanced Chemical Industries Limited (Bangladesh). In 1994, GAVL forayed into the poultry business by launching the Real Good Chicken brand. In 28, with an objective to grow its poultry and processed foods business, they entered into a joint venture with Tyson India Holding Limited, a subsidiary of Tyson Foods Inc., U.S.A. (a Fortune 5 company). The company further gained entry into the dairy business by acquiring 26.% equity interest in Cream Line Dairy in 25. In 215, GAVL increased its stake in Cream Line Dairy to 51.9% with the intent to further strengthen its journey from feed to food. In 215, it also acquired a majority equity interest in Astec Life Sciences to boost manufacturing capabilities in agro-chemicals and backward integrate its crop protection business. GAVL s business verticals Animal Feed Business GAVL is one the largest compound animal feed manufacturer in India and fourth largest in Bangladesh in terms of sales volume. The animal feed portfolio of products comprises cattle feed, poultry feed (broiler and layer), aqua feed (fish and shrimp) and specialty feed. The animal feed manufacturing units are spread across 35 facilities (1 owned and 7 operated by GAVL) and are strategically located near major consumption centres, with an aggregate production capacity of 2.4 million tonne per annum. Sales revenue from this division in FY217, FY216 and FY215 stood at 2621 crore, 2544 crore and 2543 crore respectively. GAVL has a pan-india distribution network of ~4, distributors for animal feed products, as of Q1FY218. The company also owns an advance Research & Development (R&D) institute in this domain i.e. The Nadir Godrej Centre for Animal Research and Development in Nashik, Maharashtra. GAVL intends to leverage its capabilities at this centre to develop cost effective solutions to improve animal productivity. As of Q1FY218, it had 45 scientists working at this center focused on R&D for poultry feed and cattle feed. Crop Protection Business The company s product portfolio includes a wide range of agro-chemical products that cater to the entire lifecycle of crops. GAVL s product portfolio includes organic manures, seed treatment fungicides, plant growth regulators, herbicides, insecticides and fungicides. Its products can be used for the growth of all major cereals, vegetables and horticulture crops across both agri-seasons (Kharif and Rabi) in India. In October 215, GAVL acquired a majority equity interest in Astec Life Sciences, which produces agrochemical active ingredients (technical), bulk and formulations as well as intermediate products. Page 2

3 Exhibit 2: Brief Financial Summary Segment wise Particulars Units Animal Feed Oil Palm Crop Protection Dairy Sales crore EBITDA crore EBITDA margins % EBIT crore EBIT margins % Capital Employed crore RoCE % GAVL produces a range of products including crude palm oil, crude palm kernel oil, palm kernel cake and other by-products. Crude palm oil it is extracted from FFBs of oil palm. It is refined for edible purposes and also has applications in confectionary, personal care and cosmetic industry. Crude palm kernel oil it is extracted from palm kernel and has applications across confectionary, personal care and Edible oil industry. Oil Palm Business GAVL is the largest crude Oil Palm producer in India, in terms of market share, as of FY217. The company works closely with Indian farmers to develop oil palm plantations with exclusive access to approximately 61,7 hectares under oil palm plantations across nine states, which is equivalent to approximately one-fifth of India s oil palm plantations, as of FY217. This division offers farmers a variety of services such as quality seedlings, fertilizers, technical guidance and assured buyback of fresh fruit bunches ( FFBs ). Sales revenue from this division in FY217, FY216 and FY215 stood at 57 crore, 44 crore and 394 crore respectively. Apart from its sizable top line contribution, this division enjoys strong EBITDA margins of 2%+ thereby generating a RoCE in excess of 5%. Dairy The company entered the dairy business in 25 and in October 215 acquired a majority equity interest in Cream Line Dairy, which currently sells milk and milk based products under the Jersey brand mainly in the southern region. Its product profile includes fresh toned milk, double toned milk, standardized milk and full cream milk, curd, lassi, butter milk, flavored milk, paneer, ghee, milk powder and ice cream. The company s constant endeavor is to move up the value chain by introducing value added products by leveraging its in house R&D initiatives. Sales revenue from this division in FY217 stood at 11 crore. JV s Sales trend (GAVL s share) crore FY15 FY16 FY17 Poultry & Processed foods (Sales in Godrej Tyson) ACI Godrej (Sales JV s GAVL holds a 5% equity interest in a joint venture, ACI Godrej (Bangladesh), which processes and sells poultry feed, cattle feed and fish feed in Bangladesh. This venture has witnessed robust growth as sales stood at 64 crore in FY217 from 398 crore in FY15, thereby registering a CAGR of 23.2%. Furthermore, the company also has a presence in poultry and processed food segment through its brands Real Good Chicken and Yummiez. GAVL operates in this segment through a joint venture (GAVL s ownership at 49%) with Tyson Foods Inc., U.S.A. Products sold under our Real Good Chicken brand cater primarily to quick service restaurants and retail customers seeking fresh value-added products. Products under our Yummiez brand cater primarily to retail customers with frozen valueadded chicken products and other snacks, such as nuggets, burger patty, tikkas, kebabs, French fries, frozen green peas etc. Page 3

4 Key financials: Story in charts Exhibit 3: Revenues grew at 15.5% CAGR in FY13-17 Exhibit 4: Topline bifurcation (FY17) Dairy, 11, 21% crore Crop Protection, 765, 16% Animal Feed, 2621, 53% 1 FY13 FY14 FY15 FY16 FY17 Oil Palm, 57, 1% Exhibit 5: Top line main constituents sales trend (FY15-17) 6 Top line growth at GAVL has been both organic as well as inorganic in nature. Major acquisitions were done in the year 215 wherein GAVL increased its stake in Cream line Dairy to 52% (a subsidiary) and acquired majority stake (>5%) in Astec Life Sciences crore FY15 FY16 FY17 Animal Feed Crop Protection Oil Palm Dairy Exhibit 6: EBITDA & EBITDA margins trend Exhibit 7: PAT & PAT margins trend crore % crore % FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 EBITDA EBITDA Margins (%) PAT PAT Margins (%) GAVL realises steady ~8-9% as EBITDA margins & ~5% as PAT margins which coupled with high asset turnovers results in robust return ratios. Page 4

5 Exhibit 8: Net working capital days trend days FY14 FY15 FY16 FY17 5 Investment Rationale Strong distribution network and established brands! GAVL is one of the largest compound animal feed company in India with 35 manufacturing facilities and 4 distributors. GAVL gains edge over peers through well-established brands (Milk more, Calf Starter, Excel, etc.) across animal lifecycles. In the crop protection vertical, company has leveraged its in house R&D prowess to create strong brands along with a robust distribution network of 6 distributors. Few of their marquee brands include Vipul, Double, Hitweed (selective cotton herbicide targeting broad-leaf weeds) and Combine. The acquisition of Astec LifeSciences has provided the company with strong R&D capabilities in the agrochemical active ingredients category that were used to introduce new fungicide products such as Kemplar and Casper as part of the Company s offerings Similarly, GAVL operates under the Jersey, Real Good Chicken and Yummiez brands in its dairy and processed poultry & foods divisions respectively. Therefore, strong brand recall and pan India presence bodes well for GAVL which is expected to drive growth in sales & profitability going forward. Diversified Businesses with synergistic benefits GAVL has a diversified business model with animal feed constituting ~5% of sales, oil palm ~1%, Crop protection ~15% & Dairy ~2%. Operating across five diversified yet related business verticals provide GAVL with certain natural synergistic benefits such as improved operational efficiencies, added ability to drive growth and attain high levels of capital efficiency. For example, some of the biomass produced from the oil palm business is used as an animal feed ingredient, which provides additional source of revenue to the oil palm business as well as strengthens the cost competitiveness of the animal feed business. Strong parentage Godrej Group GAVL has a proven promoter pedigree, belonging to the esteemed Godrej Group that helps GAVL realise consumer confidence and help attain competitive edge over its peers. It is largely due to ethical business practices & commitment towards good quality product profile. The Godrej brand will also benefit the company in gaining access into the group s global network and potential investment opportunities to pursue inorganic growth and further strengthen their market share. Healthy balance sheet & robust return ratios GAVL possess healthy balance sheet with Net Debt: Equity at.6x as of FY17 there providing comfort and strength to grow going forward. The company also has a controlled working capital cycle with average NWC days ~3 days (FY13-17). Consequently, it realises robust return ratios profile with FY17 RoE at 28%. Exhibit 9: RoCE & RoE trend 16 % FY14 FY15 FY16 FY17 RoE RoCE 19.1 Page 5

6 Key risks and concerns Business verticals exposed to vagaries of nature As an agri-based company, GAVL is susceptible to extreme weather conditions like droughts and excessive rainfall that may affect operations at its different business verticals and impact the company financially. The animal feed business is dependant on certain key raw materials like maize, soybean extractions and mustard extractions whose prices and availability are subject to wild swings during periods of extreme weather patterns that could negatively influence the divisions gross margins. Adverse weather conditions may also cause extreme volatility in farm incomes and thereby influencing the farmer s decisions about the type and quantum of crop to plant. This in turn affects the yields at the company s oil palm division and sales of its crop protection products. Concentration risk in Andhra Pradesh The state of Andhra Pradesh is extremely critical for certain operations as well as revenues at GAVL. In the oil palm vertical, 32,25 hectares out of the total 61,7 hectares i.e. 52.3% of oil palm plantations that the company has access to are located in Andhra Pradesh along with two processing mills and an R&D facility. The animal feed vertical, specifically the aqua feed products are majorly manufactured and sold in Andhra Pradesh. In the dairy business, the company procures significant amount of raw milk and derives sizable sales revenues from this state. Therefore, any significant social, political or economic disruption in the state of Andhra Pradesh, or changes in the policies of the state or local governments of this state, could require the company to incur significant capital expenditure and change in business strategy Interruption in third party services GAVL utilise and depend on various third party service providers across their different business verticals. In the animal feed division, 18 out of their 35 manufacturing facilities are operated by third party contract manufacturers whose operations are not in the control of GAVL. Therefore, any inability on the contract manufacturer s part to deliver on the committed capacities could cause drop in sales volumes at GAVL. In the dairy vertical, the company utilizes the services of agents to procure milk from farmers, temperature controlled logistic providers and cold chain networks at their various distribution and storage facilities. The oil palm segment is also dependant on third parties for a variety of tasks. Outbreak of livestock diseases There exists a possibility of disease outbreak in the case of cattle, poultry and aquaculture, which will limit the sales of animal feed at GAVL leading to limited sales and profitability Inability to innovate and introduce new products in the market place In the current dynamic scenario, innovation holds the key. The company has a thrust on innovation and undertakes constant research & development (R&D) work in order to manufacture and market innovative product solutions. However, any lag or inability to introduce new products in the market place and consequent loss in market share will result in muted profitability at GAVL. Page 6

7 Exhibit 1: SOTP Fair Price Calculation ` Units Amount Animal Feed Business Sales crore 2621 RoCE % 73 Oil Palm Business Sales crore 57 RoCE % 59 Crop Protection Business (Standalone) Sales crore 451 RoCE % 3 Astec Life Sciences Sales crore 313 RoCE % 16 Dairy Sales crore 11 RoCE % 8 ACI Godrej (Animal Feed Business - Bangladesh) Sales crore 64 Godrej Tyson (Processed Food Division) Sales crore 446 Total SOTP Fair Value (Mcap in crore) for Godrej Agrovet ----->> Mcap (in crore) at the upper end of the price >> Valuations Godrej Agrovet is a pedigree of Godrej Group with strong brand presence across the business vertical namely, Animal Feeds, Oil palm, Agrochemicals, Dairy among others. These business segments are high growth drivers with considerable share of unorganized sector, offering Godrej Agrovet a healthy opportunity to grow. These businesses are also largely volume driven and possess high asset turnovers resulting in healthy 2%+ core return ratios. Godrej Agrovet also possesses healthy balance sheet with FY17 Net Debt: Equity at.6x and controlled working capital cycle with FY15-17 average NWC days at ~3 days. On the valuation front, at the consolidated basis (on FY17 numbers) Godrej Agrovet is available at MCap/Sales of 1.8x, P/E of 35.4x, EB/EBITDA of 21.5x & P/B of 8.8x. Given the conglomerate structure and complexity of operations, there is no apple-to-apple peer comparable for Godrej Agrovet. Henceforth, we arrive at a fair value of Godrej Agrovet breaking the business into individual segments and identifying suitable listed peers. On SOTP valuation methodology basis, we arrive at fair market cap of ~ 11 crore for Godrej Agrovet as compared to targeted IPO market capitalization of ~ 885 crore at upper price ( 46) of the price band ( 45-46). Hence assign SUBSCRIBE rating to the issue. Valuation Criteria Implied Value in crore Valuing it at 2.7x Mcap/Sales i.e. 1% discount to Avanti Feeds (market leader in shrimp feed in India) Valuing it at 2x Mcap/Sales given robust return ratios profile; No listed comparable peer 114 Valuing it at 3. Mcap/Sales i.e. at par with the listed peers in this domain like Rallis India 1353 Valuing it at 3. Mcap/Sales i.e. at par with the listed peers in this domain like Rallis India. Godrej Agrovet owns 56% in Astec Life Sciences 939 Valuing it at 1. Mcap/Sales i.e. at par with the listed peers in this domain. Godrej Agrovet owns 52% in Cream line Dairy 11 Valuing it at 1.35 Mcap/Sales i.e. 5% discount to the standalone animal feed business due to muted profitability. Godrej Agrovet owns 5% in this venture Valuing it at.5 Mcap/Sales i.e. 5% discount to the near competitor (Venky India) due to muted profitability. Godrej Agrovet owns 49% in Godrej Tyson 223 GAVL's Stake (%) Value Attributable to GAVL ( crore) Page 7

8 [ Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15 FY16 FY17 Revenue 3,12.5 3, ,75.2 4,911.1 Growth (%) Total Raw Material Costs 2,54.1 2, , ,796.1 Employee Cost Other Operaitng Expense Total Expenditure 2,861. 3,5.8 3, ,471.9 EBITDA Growth (%) Depreciation EBIT Interest Other Income Exceptional Items PBT Tax PAT Associate Share Non Controlling Interest Reported PAT Cash flow statement Crore (Year-end March) FY14 FY15 FY16 FY17 Profit Before Tax Add: Depreciation Cash Profit other changes Increase/(Decrease) in CL (Increase)/Decrease in CA CF from Operating Activities Purchase of Fixed Assets Others CF from Investing Activities Inc/(Dec) in Loan Funds Others CF from financing activities Net cash/cashflow Cl. Cash and cash Eq Balance sheet Crore (Year-end March) FY14 FY15 FY16 FY17 Source of Funds Equity Capital Reserves & Surplus Shareholder's Fund ,9.7 Minority Interest Long Term Borrowing Long Term Provisions Other non current liabilities Deferred Tax Liabilities Current Liabilities , ,77.5 Short Term Borrowing , Trade Payables Other current liabilities Short term provisions Source of Funds Application of Funds Net Block (Incl Intangibles) , ,282.6 Capital WIP Total Fixed Assets ,23.3 1,333. Goodwill Non-current investments Long Term loans & advances Other non-current assets Deferred Tax Assets Current Assets , ,422.4 Inventories Trade Recievables Cash & Bank Balances Current Investments Short Term Loans & Advances Other Current Assets Application of Funds 1, , , ,214.9 Key ratios (Year-end March) FY14 FY15 FY16 FY17 Per share data ( ) Book Value Cash per share EPS Cash EPS Profitability & Operating Ratios EBITDA Margin (%) PAT Margin (%) Inventory Turnover (Days) Debtor (Days) Creditor (Days) Return Ratios (%) RoE RoCE Valuation Ratios 46 (post dilution) PE Price to Book Value EV/EBITDA EV/Sales Leverage & Solvency Ratios Debt to equity (x) Interest Coverage (x) Debt to EBITDA (x) Current Ratio Page 8

9 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com Page 9

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