Godrej Agro IPO: Strong prospects

For a company which operates in five different business segments with their attendant complexities, Godrej Agrovet’s ability to report robust top line growth, steady margins and strong return ratios is noteworthy.

The agri-business major, which operates in the animal feed, crop protection, palm oil, dairy and poultry segments, has grown its revenue by an average of 15.5 per cent over the past five financial years. For FY17, reported annual revenue was just under Rs 5,000 crore. Its operating profit margins were in the range of eight-nine per cent in the past three financial years and return on equity (RoE) averaged over 30 per cent in past four financial years. 

Analysts at ICICI Securities say the high return ratios in animal feed, palm oil and crop protection (34-73 per cent) is a function of consistent margins-led innovative product launches, amid improved operational efficiencies and optimal asset turnovers. A good track record, strong promoters and stable outlook for each of the businesses are expected to help the company replicate its past performance. This, coupled with valuations of 34 times its FY17 earnings estimates, is the reason most brokerages have given a subscribe rating to the initial public offering (IPO). 

While there is no comparable peer, given the company’s diversified portfolio, analysts at Angel Broking say competitors in respective businesses trade in a price-to-earnings (P/E) multiple range of 22-57 times, while their RoE profile would be in the range of 15-30 per cent. The company, according to them, does not appear expensive, as its P/E multiple is in the middle of this range and RoE is at the higher end.

Notably, growth prospects of all its business segments remain healthy. For instance, the animal feed segment is by far the largest, accounting for over half of the consolidated revenue and a little more than a third of the profit.  CRISIL Research estimates the sector, currently at Rs 72,000 crore, to grow at 13-14 per cent annually over the coming years, and cross the Rs 1 lakh crore-mark by FY20.

The company is looking at improving its market share in crop protection by expanding into new crops and increasing distribution. Aided by the acquisition of Astec Lifesciences in 2015, it has been able to grow this business by 36 per cent annually. Need for higher yields, quality products and a diverse product basket should help the company tap into the Rs 30,000-crore target market (growing at 10 per cent annually).

The company is India’s largest maker of crude palm oil and the business has grown at 26 per cent during FY13-17, led by Godrej Agrovet’s strategy to increase its presence in certain regions, create additional revenues from palm oil biomass and focus on R&D to increase yields. 

The dairy business is a relatively new one and came into the company’s fold in 2005 after it acquired a 26 per cent stake in Creamline Dairy and subsequently raised it to 51.9 per cent in 2015. It sells milk and milk-based products under the Jersey brand in southern states, and is looking to increase its milk procurement base, automate its operations and increase the share of value-added products.

The poultry and processed foods business is a joint venture with a subsidiary of Tyson Foods of the US and sells products under the popular Real Good Chicken and Yummiez brands. Revenue in the business has grown at seven per cent annually during FY15-17, with contribution from both retail and institutional clients. Given the rising demand for hygienically processed food, sales are expected to rise.