Company Background And Business Model
Godrej Agrovet (GAVL) was incorporated in 1991 in the state of Gujarat. Godrej Agrovet Limited (GAVL), is a diversified, R&D focused agri-business company with operations across five business verticals viz. animal feed, crop protection, oil palm, dairy, and poultry & processed foods. GAVL is the largest crude palm oil producer in India, in terms of market share,& the leader in compound cattle feed in India as of March 2017. Godrej Agrovet Ltd has joint ventures Godrej Tyson Foods Ltd, a food processing firm, and ACI Godrej Agrovet Pvt. Ltd, which runs a poultry products business in Bangladesh. The Company made significant investments to enhance R&D capabilities over the years.
Product Portfolio
1. In animal feed business, the products comprises cattle feed, poultry feed (broiler and layer), aqua feed (fish and shrimp) and specialty feed. The products are produced at 35 facilities and sold through 4000 distributors across India.
2. In crop protection business, company produces plant growth regulators, organic manures, generic agrochemicals and specialized herbicides. The products are sold in India and 24 countries. Company has over 6000 distributors in this business segment.
3. In oil palm business, the products include crude palm oil, crude palm kernel oil and palm kernel cake. Company owns five palm oil mills.
4. The dairy business is operate through a subsidiary Creamline Dairy. Company sell milk and milk based products under the 'Jersey' in 5 south India states. Company own nine milk processing units. Company has 2,500 milk product distributors and 50 retail parlors.
5. Company also produce processed poultry and vegetarian products under the brands 'Real Good Chicken' and 'Yummiez'.
Company Strengths:
1. Pan-India presence with extensive supply and distribution network.
2. Diversified businesses with five business verticals.
3. Emphasis on R&D
4. Part of the Godrej group. Part of strong 'Godrej' brand.
5. Leading position in the segments it operate.
Debut in Indian markets via IPO in 2017 :
GAVL came up with IPO issue in October 2017 with following objectives :
The Issue comprises a Fresh Issue and an Offer for Sale.
1. Offer for Sale: Each of the Selling Shareholders will be entitled to the respective portion of the proceeds of the Offer for Sale.2. Fresh Issue: Company proposes to utilize the proceeds from the Fresh Issue towards:
a. Repayment or prepayment of working capital facilities availed;
b. Repayment of commercial papers issued by the Company; and
c. General corporate purposes.
On 16-Oct-2017 , Godrej Agrovet (GAVL )had Bumper Listing and ended 29% higher on Day 1 from issue price.
After soaring about 34 percent higher in the opening tick, market debutant Godrej Agrovet ended lower than its listing price, but around 29 percent higher than the issue price at Rs 592.
The diversified agro-business company started off first trade at Rs 615.60 on the National Stock Exchange, a whopping premium of 33.82 percent over its issue price of Rs 460 per share.
The Rs 1,157-crore initial public offer was oversubscribed 95.41 times on October 6, the last day of bidding. The issue was opened for subscription on October 4, with a price band of Rs 450-460 per share.
The IPO comprised of fresh issue of shares worth Rs 291.51 crore and offer for sale of up to Rs 300 crore by Godrej Industries and up to 1.23 crore shares by V-Sciences Investments Pte Ltd, a subsidiary of Singapore-based investment company Temasek.
Post issue, Godrej Industries holds 60.81 percent stake in Godrej Agrovet, which is an agri-business company with operations across five verticals - animal feed, crop protection, oil palm, dairy, poultry and processed foods.
Agrovet will use fresh issue proceeds towards repayment of loans and other general purposes.
Key Highlights :
Diversified business model to drive future growth – Operations across five business verticals has enabled GAVL to grow revenues over the last five years. Diversified product portfolios, across various categories provides the companies with a larger target market in terms of crops and/or geographies, as pest incidence and weather conditions are variable and different products would be required in varying degrees in these locations. Further, diversified players with a larger basket of products become less vulnerable to crop/location specific risks. The diversified business model along with geographic diversification provides a hedge against the risks associated with any segment. This helped to drive growth, optimize capital efficiency and maintain competitive advantage. Existing inter-linkages between businesses also helped to maximize the potential synergies amongst them. For example, the animal feed team frequently collaborates with dairy, and poultry and processed foods businesses for sale of compound feed to the farmers. Additionally, some of the biomass produced from the oil palm business is used as an animal feed ingredient, which provides additional source of revenue to oil palm business as well as strengthens the cost competitiveness of the animal feed business. Given the uncertainty in the domestic market owing to the dependence on monsoons, players present in export markets achieve some level of risk mitigation through diversification.
Strong R&D capabilities aid to growth – GAVL is focused on improving the productivity of farmers by innovating products and services that sustainably increase crop and livestock yields. The Company made significant investments to enhance their R&D capabilities over the years and believe that emphasis on R&D has been critical to their success. Hence GAVL has been able to identify market trends and introduce a range of innovative and value-added products in the market to cater to the evolving needs of customers.
Animal feed Business – Accounts for 53% of the top line & 36% to the EBIT, with segment margins in range of ~6-7%. Its product portfolio comprises of cattle feed, poultry feed (broiler and layer), aqua feed (fish and shrimp) and specialty feed. It has a strong distribution network for the animal feed business with ~4,000 distributors across India. The company is also present in this space with its 50:50 JV, ACI Godrej, which produces cattle, poultry and fish feed in Bangladesh. The focus for this segment is on achieving cost leadership by improving the operational efficiency of animal feed business through R&D as well as cost rationalization initiatives thereby improving profit margins and market share
Crop Protection Business – Accounts for 16% of the top line & 37% to the EBIT, with segment margins in the range of ~20-22%. The company’s product portfolio is spread across the entire crop lifecycle including plant growth regulators, organic manures, generic agrochemicals and specialized herbicides. Continuing the business growth story, GAVL acquired promoter holding in Astec Life Sciences Limited in 2015. The distribution network of Company’s crop protection business in India includes approximately 6,000 distributors, as of FY17. With good monsoons, the rabi season is expected to be strong and benefit crop protection business in H2FY2018. Further, the company launched three new products under the crop protection business this year and has guided for launch two to three new products every year. The focus for this segment is on introducing new products. R&D initiatives have increasingly focused on off patented chemistry synthesis, which will help in
expanding our product portfolio. GAVL also intend to achieve deeper market penetration and extend target crop segment with niche plant growth regulators.
Oil Palm Business – This business accounts for 10% of the top line & 22% to the EBIT, with segment margins in the range of ~19-20%. This is a regulated business under the PPP model with gross margins at ~20%. The internal consumption of biomass from this segment into the cattle feed segment help optimise costs. GAVL operates with an aggregate FFB processing capacity of 125 MT per hour and a palm kernel processing capacity of 7 MT per hour. In the oil palm business, the company has a strong market share of 35% in India and access to nearly 20% of India’s oil plantations. Higher oil prices and improvement in yield should benefit this segment in the near term. The focus for this segment is to grow its presence in certain regions, create additional revenue streams from oil palm biomass and continue to focus on R&D to improve FFB yield per hectare at laboratory in Chintampalli, Andhra Pradesh.
Dairy Business – This business accounts for 21% of the top line & 7.3% to the EBIT, with segment margins in the range of ~3-4%. In With ambition of expanding presence in the "Animal Protein" space further, GAVL acquired controlling stake in Cream Line Dairy Products Limited - a leading Dairy player in South India. The company has significant presence in Andhra Pradesh, Telangana, Tamil Nadu, Karnataka and Maharashtra, under the "Jersey" Brand name. Its value-added product portfolio includes Curd, Flavoured Yogurt, and Ice Cream. Dairy distribution network includes approximately 4,000 milk distributors, ~2,500 milk product distributors and 50 retail parlours, as well as direct sales to institutional customers. The focus for this segment is to introduce new products and increase product reach. It intends to continue to provide variants of existing, and new, value-added poultry products.
Valuations
At its CMP of `593/-, the stock trades at a PE of ~37x its FY18 estimated annualized EPS of `16/-. GAVL is focused on improving the productivity of farmers by innovating products and services that sustainably increase crop and livestock yields. The Company made significant investments to enhance their R&D capabilities over the years and believe that emphasis on R&D has been critical to their success. The company aims to improve market share across all business verticals.Since several sectors in which GAVL operate are largely unorganized, we believe that cost leadership will be a key enabler for GAVL to increase the market share. The company has evolved from cattle feed to an animal protein player. We are POSITIVE on the company’s long-term growth prospects.
Buy Godrej Agrovet : Prasanth Prabhakaran
Prasanth Prabhakaran, Senior President & CEO at YES Securities told CNBC-TV18, "We started off January by saying that you should have an agri based portfolio and some stocks where you are going to see capex expenditure from the government over the next three or four years. So, one remains Godrej Agrovet, it is a strong buy from our side."
"We see a strong upside in the stock thanks to two things. One is that their main business which is their animal feeds business, they have built in capacity. There are at around 50 percent capacity utilisation and we see that going through at least 20-25 percent growth track on that side. Their other lines of businesses which includes crop protection chemicals, pesticides that they end up having, their dairy business and their poultry business all are strong segments for growth. So you have a mixture of consumption story plus an agri theme that agrovet continues to hold for the long term."
Buy Godrej Agrovet : Prasanth Prabhakaran
Credit Suisse initiates coverage on Godrej Agrovet; Target at Rs 630 in the medium term.
Credit Suisse has initiated coverage on Godrej Agrovet with a neutral rating and a target of Rs 630.
The brokerage observed that the company is a diversified agri-business with a strong pedigree. Further, Indian agricultural value chain offers business opportunities.
Going forward, it expects earnings to grow at CAGR of 18 percent over FY17-20. Further, the stock has good long-term potential, but valuations leave little upside.
For the firm, the key earnings driver will be crop protection which will see new launches and exports growth.Meanwhile, dairy margins will bounce back in H2FY18, likely to see gradual margin expansion from thereon.
Axis Securities Reseach Report of GAVL: Investment Rationale:
GAVL to continue its multi-year secular growth; tremendous growth potential in each segment as each business segment GAVL operates in is either under-penetrated (animal feed) or in high growth areas(dairy, poultry, agri-inputs)
A leader in animal feed with customer stickiness. 5-7x growth opportunity as industry shifts from noncompound to compound feed. Benefits from strong brand, R&D, sales on cash & carry and pan-India distribution
Agri Inputs: A renewed focus led by 3 pronged strategies to drive 2.5x revenue growth over FY17-21.
Strategy revolves around (1) launch of rice herbicide; (2) in-license agreements; and (3) acquisition-ledgrowth (Astec).
GAVL aims to be among the top 10 agri-chem companies in India over the next 3 years
Dairy: 20% revenue CAGR as GAVL focuses on (1) higher proportion of revenue from value added
products, and (2) deepening its geographic reach
Strong financials: 40%+ PAT CAGR over past 7 years, minimal working capital requirement, RoCE of~20%, high asset turn (~5x). We expect 20% PAT CAGR over FY17-21.
We maintain a BUY with a target of Rs 682 for long term 1 year and above.
GAVL to continue its multi-year secular growth; tremendous growth potential in each segment as each business segment GAVL operates in is either under-penetrated (animal feed) or in high growth areas(dairy, poultry, agri-inputs)
A leader in animal feed with customer stickiness. 5-7x growth opportunity as industry shifts from noncompound to compound feed. Benefits from strong brand, R&D, sales on cash & carry and pan-India distribution
Agri Inputs: A renewed focus led by 3 pronged strategies to drive 2.5x revenue growth over FY17-21.
Strategy revolves around (1) launch of rice herbicide; (2) in-license agreements; and (3) acquisition-ledgrowth (Astec).
GAVL aims to be among the top 10 agri-chem companies in India over the next 3 years
Dairy: 20% revenue CAGR as GAVL focuses on (1) higher proportion of revenue from value added
products, and (2) deepening its geographic reach
Strong financials: 40%+ PAT CAGR over past 7 years, minimal working capital requirement, RoCE of~20%, high asset turn (~5x). We expect 20% PAT CAGR over FY17-21.
We maintain a BUY with a target of Rs 682 for long term 1 year and above.
Budget 2018 Connection :
See budgetary allocations for irrigation, eNAM, rural insurance: Godrej Agrovet
here will be budgetary allocations into three critical areas of agriculture -- rural insurance, irrigation projects, and eNAM, said Balram Yadav, MD, Godrej Agrovet.
See budgetary allocations for irrigation, eNAM, rural insurance: Godrej Agrovet
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