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Godrej Agrovet’s acquisition of additional stake of 25 per cent in Creamline Dairy Products, a company where it already holds 26 per cent, is a move in the right direction. Godrej Agrovet is the agri business subsidiary of Godrej Industries.
The deal, which will make Godrej Agrovet the majority shareholder with 51 per cent stake, is worth about Rs 150 crore and values Creamline Dairy at Rs 550 crore. Valuations look reasonable given Creamline’s financial year 2016 projected turnover of Rs 1,000 crore and its historical profit after tax margins of 2.25-2.40 per cent, which have helped deliver high return on equity of over 24 per cent during FY13 and FY14. The acquisition should add about five per cent to Godrej Industries’ consolidated earnings.
What’s more, the prospects of Creamline appear healthy. The company has a strong presence in southern states such as Telangana, Andhra Pradesh, Karnataka, Tamil Nadu and in the Nagpur region of Maharashtra. Its key brand “Jersey” is focused on the retail segment through milk and milk products as well as its milk parlours in south India. While the FY16 projected revenues of Rs 1,000 crore look achievable, given the 11 per cent average growth reported in the past three-four years, Creamline’s aim of doubling sales over the next three-four years may not come easily. For this, it will have to grow at close to 20 per cent annually.
Analysts believe the acquisition will not have material impact on the dairy businesses of listed peers like Britannia, Nestle India given the under-penetrated domestic dairy market where organised players accounted for 19 per cent of the market in FY15 (according to estimates of CRISIL Ratings). Multiple players can co-exist and their expansion will only aid growth of the organised segment, they say. Second, unlike Nestle and Britannia which are in the premium end, Creamline is present in the mass segment. The Godrej management, however, has already hinted at the potential in the value-added dairy space. Abneesh Roy of Edelweiss Securities, though, believes Creamline may take some time to become a national player.
The acquisition looks strategic for Godrej Agrovet, which is the largest manufacturer of animal feed in India. Analysts at CRISIL estimate that share of organised dairy segment could grow to 25 per cent by FY18. This should benefit Creamline, which can use its healthy operating cash flows and debt-free balance sheet to grow fast.
