Godrej Agrovet Ltd - IPO Note

Issue Opens: October 04, 2017

Issue Closes: October 06, 2017

Face Value: Rs 10

Price Band: Rs 450-460

Issue Size: ~Rs 1,157cr (at upper price band)

Public Issue: ~25.2 mn shares (at upper price band)

Bid Lot: 32 Equity shares

Issue Type: 100% Book Building

Source: RHP

Company Background

Godrej Agrovet is an India based agri-business company with operations in five business verticals - animal feed, crop protection, oil palm, dairyand poultry and processed foods. Godrej Agrovet was the largest crude palm oil producer in India in terms of market share (source: Oil Palm Report).Animal Feeds is the flagship business of the company (53% of sales), in which the products comprise of cattle feed, poultry feed, aqua feed and specialty feed. The company also has 50:50 joint venture with Bangladesh-based Advanced Chemical Industries (ACI).

In crop protection (15.5% of sales), products include organic manures, generic agrochemicals and specialized herbicides. It owns 56.8% stake in AstecLifeSciences which is into agrochemical active ingredients (technical), bulk and formulations. In oil palm business (~10% of sales), the company produces crude palm oil, crude palm kernel oil and palm kernel cake. In dairy business (~21% of sales), the company operates through its subsidiary - Creamline Dairy and sells milk and milk-based products under the ‘Jersey’ brand across Telangana, Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra.
Godrej Agrovet also manufactures and markets processed poultry and vegetarian products through its brands ‘Real Good Chicken’ and ‘Yummiez.

Objective of the Offer

The offer consists of Fresh Issue of ~6.34 mn equity shares (aggregating up to ~Rs292cr). It also includes offer for sale of up to ~ 18.8 mn shares (promoters selling stake of about ~Rs300cr and V-Sciences Investments selling 12.3 mn equity shares). The proceeds of the issue will be used for repayment/prepayment of working capital (Rs100cr), repayment of commercial papers (Rs150cr) and for other general corporate purposes.

Key Investment Rationale

• Godrej group is one of India’s oldest and most prominent corporate groups. The ‘Godrej’ brand is recognizable in India due to its long established existence and its diversified businesses.

• Godrej Agrovet has a strong pan-India presence with a strong procurement base, diversified product portfolio and large-distribution network. This enables it to achieve economies of scale in sourcing of raw materials and distribution of products. It has total ~14,000 distributors in animal feed (4,000), crop protection (6,000) and dairy (4,000) businesses.

• The company targets to achieve cost leadership in animal feed business by improving operational efficiency of its animal feed business through R&D as well as cost rationalization initiatives. Through its R&D efforts, the company wants to develop innovative livestock nutrition products that provide product differentiation, which will help in improving its profit margins and market share.

• Godrej Agrovetaims to diversify its oil palm business by creating additional revenue streams and lower operational costs. This may reduce price risk of crude palm oil and crude palm kernel oil. In dairy business, the company plans to increase market share by growing its brand in southern states of India and broadening the value-added product portfolio. This is likely to help the company increase its margins.

Key Risks

• Fluctuations in the price of crude palm oil and other oil palm products could adversely affect Godrej Agrovet’s businesses

• Outbreaks of livestock diseases in general and poultry and shrimp disease in particular can also hamper company’s operations.

Conclusion

At upper price band, P/E on post-issue shares works out to 38.6x (FY17 EPS).  We recommend investors to SUBSCRIBE to the IPO from long term perspective.

Research Disclaimer