Godrej Agrovet Limited - Should you subscribe?

Godrej Group's Godrej Agrovet Limited is all set to hit the primary market in the first week of October 2017. The issue is opening on October 4,2017 and closing on October 6,2017. The tentative date of listing is October 16,2017. Allotment details will be available on this link http://karisma.karvy.com tentatively on October 12,2017. The company has set price range between Rs 450 - Rs. 460 per share. Application lot is for 32 shares.

This IPO is mix of fresh issue and offer for sale. The company is garnering Rs 291.51 Crore through Fresh Issue. The Company's selling shareholders namely its holding company Godrej Industries Limited shall sell shares worth Rs. 300 Crore and investor company V-Science Investments Pte Ltd shall sell 1,23,00,000 shares. The company will not receive any proceeds received by selling shareholders.

The company proposes to utilise the net proceeds from the fresh issue towards;

1. Repayment/prepayment of working capital facilities availed by our company;

2. Repayment of commercial papers issued by our company; and

3. General Corporate purposes

The bifurcation of deployment of fund is summarised below;

General corporate purposes include strategic initiatives and acquisitions, funding initial stages of equity contribution towards its objects, working capital requirements, investments into subsidiaries and joint ventures, part or full debt repayment/prepayment, strengthening of market capabilities etc. The amount remains uncertain until issue process gets completed.

Overview of the company

GAL was incorporated in 1991 with an objective to focus on agricultural businesses. Its animal feed and crop protection businesses were commenced by erstwhile Godrej Soaps Limited and then acquired by GAL. In the first decade of its journey, it was committed to building three key business verticals - animal feed to improve the yield of Indian livestock, crop protection to address the low productivity of Indian agriculture and oil palm business to benefit from the public-private partnership model introduced by the GOI in order to reduce India’s dependence on vegetable oil imports.

In 2001, to further strengthen its presence in the animal feed business, it acquired Goldmohur Foods and Feeds Limited (a subsidiary of Hindustan Lever Limited), and in 2004 expanded its animal feed business to Bangladesh by forming a joint venture with Advanced Chemical Industries Limited (Bangladesh), which is one of the large conglomerates in Bangladesh. In 1994, GAL ventured into the poultry business by launching the 'Real Good Chicken' brand. In 2008, with an objective to grow its poultry and processed foods business, it entered into a joint venture with Tyson India Holding Limited, a subsidiary of Tyson Foods Inc., USA which is a fortune 500 company.

GAL entered the dairy business with acquisition of 26% equity interest in Creamline Dairy in 2005. The poultry venture and the dairy investment was done with an objective to be present across the value chain from feed to food. In 2015, it consolidated its shareholding in Creamline Dairy to 51.9% with the intent to further strengthen its journey from feed to food. In 2015, it also acquired a majority equity interest in Astec Lifesciences to boost its manufacturing capabilities in agro-chemicals and backward integrate its crop protection business. 

Should you subscribe? YES. I've highlighted five main reasons why should you subscribe this IPO? 

1. Association with established group - The Godrej Group.

  

Godrej is a household name in India. Godrej is among India's oldest and most prominent corporate groups. The Godrej brand is recognisable in India due to its long established presence in the Indian market, the diversified businesses in which the Godrej group operates and the trust it has developed over the course of its operating history. 

GAL's association with the Godrej brand provides it a competitive advantage in attracting talent, benefitting from its global network, exploring potential business opportunities, corporate governance practices and acquiring direct access to senior decision makers. Association with Godrej helps a lot especially GAL's businesses that involve direct sale to retail customers. 

2. Impressive financials

Revenue from operations and PAT

Only association with the existing brand is not enough to attract the investors to subscribe the IPO, financial must  also be good. In GAL's case, even if it was not part of Godrej group, then also IPO is worth subscribing seeing impressive financials of the company and the speed with which it is growing.   GAL's revenue from operations and Profit after tax figure are enough to indicate that shares are worth having in your portfolio. In five years, revenue from operations jumped from 2771.83 Crore to 4983.45 Crore (79.79%). As a result PAT jumped from 96.75 Crore to 274. 39 Crore (184%).

Earning per share

The company's EPS (on consolidated basis) has rose from Rs. 1.21 per share in 2013 to Rs. 11.45 per share. In five years, the company has managed to rose its EPS by 846%. This is the sign of strong fundamentals of the company. This is possible because of timely strategic decisions of acquiring more equity interest in subsidiary companies and entering into strategic joint ventures.

3. Fairly priced shares

The company has set price range between Rs.450 - 460 per share. If we take lower band and upper band, PE Multiple comes to 39.30 to 40.17. Having seen the financials and scope for future growth, the issue price is reasonable. Keeping in mind the group it belongs to and the level of existing operations, the price asked is fairy justifiable.

4. Pan India presence with Extensive supply and distribution network

GAL has a Pan India presence and operations spanning across five business verticals ; animal feed, crop protection, oil palm, dairy and poultry and processed foods. As a result of its widespread network and significant operational experience, it has been able to identify market trends and introduced and range of innovative and value added products in the market to cater to the evolving need of customers. In addition, since several of its facilities are located near major consumption centres, it has ensured product freshness by reducing delivery time to customers as well as reduce its transportation cost. Its nation wise footprint also allows it to leverage the competitive advantages of each location to enhance its competitiveness and reduce its geographic and political risks in its businesses.

For its animal feed business, its distribution network comprises approx. 4000 distributors. Its distribution network for crop protection products comprises approx. 6000 distributors. In its oil palm business, it has access to 61,700 hectares of oil palm plantations across nine states. For its dairy business, its supply chain network includes procurement from six states through a network of 120 chilling centres. Its dairy distribution network includes approx. 4000 milk distributors, approx. 3000 milk product distributors and 50 retail parlors, as well as direct sales to institutional customers.

5. Experience promoters and Management team

GAL has a strong management team with significant industry experience. Its promoters include Mr. Adi Godrej and Mr. Nadir Godrej, each of whom have approximately 40 years of experience in successfully creating shareholders value across businesses in a diverse range of industries. Further, Mr. Balram S. Yadav, its Managing Director, has been with the Godrej group since 1991 and has approximately 27 years of experience in the agro-related businesses. He played an instrumental role in setting up its poultry and processed foods business. In addition, the combination of its experienced Board of Directors and its dynamic management team positions it well to capitalize on future growth opportunities. It has created a distinct entrepreneurial structure within the organization, with each of its business divisions being managed as an independent profit centre with separate management.

Its experienced management has demonstrated the ability to successfully build and integrate its various operating activities through their years of experience. In particular, they have led the process through which it has developed a complementary mix of products, created value through inorganic growth, built brand recognition and loyalty, managed price volatilities and identified new business opportunities. They have also helped GAL in developing an optimized procurement model, an extensive marketing and sales network and long-term relationships with its key vendors.

Apart from above listed points, Diversified Businesses with Synergies in Operations and strong R & D Capabilities are positive points of GAL to apply the IPO

Conclusion :

This IPO is worth subscribing. However, there is only one worrisome thing about this company and that is decreasing % of RoNW (RoNW) and Profit margin. The company is working under paper thin margin in competitive market. GAL's profit margin has raised from 3.49% in 2013 to 5.51% in 2017, however, it has gone down from 6.84% in 2016. Return on net worth too has slightly gone down from 23.39% in 2013 to 22.71% in 2017, it was 23.94% in 2016.

RoNW 22.71% is still good. Considering the other positive factors, slight drop in margin and RoNW can be ignored.   

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Thank you for reading...Jai Hind

CA Prashant Seta

(Disclaimer : I've opined based on my knowledge and understanding. Investors should do their own research before applying)