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Godrej Agrovet - Diversified Agri related play


Company Name – Godrej Agrovet Limited (Godrej Agrovet)


Current Share Price – INR 470 (January 09, 2023)


Market Cap – INR 9,021 cr


 

1. What is interesting about the stock?

Conglomerate owned by a conglomerate!


The conglomerate boom was a period of rapid growth in the number of conglomerates, or big corporations made up of many companies spanning multiple and often unrelated fields or industries. It refers to the period in the US in the 1960s. Berkshire Hathaway is the only major remaining conglomerate with other ones (like GE) being broken up. Reason – conglomerate discount or holding company discount due to:

  • If one business unit of a conglomerate is struggling, this tends to hurt the entire company, inflating the risk for investors.

  • The more diversified a conglomerate is, the more complex it becomes for non-professional investors to analyze and evaluate its finances, which adds a behavioral extent, as humans are fundamentally reluctant to engage with an unknown.

  • A very diverse set of subsidiaries/businesses require the management to spread their attention thin, hindering the necessary expertise to develop.

However, we still have a few listed conglomerates left. Conglomerate demergers like Reliance created huge value for its shareholders. Will Godrej Agrovet (conglomerate) owned by Godrej (conglomerate) create similar value?


Godrej Agrovet is an play on agriculture sector with strong presence in Animal Feeds (48% of revenue), Vegetable oils (12%), Crop Protection (18%), Dairy (16%), and Others (6%) businesses. It has multiple subsidiaries: Godrej Tyson Foods, Creamline Dairy, Astec Lifesciences, and ACI JV (Bangladesh).


Godrej Agrovet has a pan-India presence and its operations span across five business verticals. It has set up processing facilities and supporting infrastructure as well as R&D to develop a modern operating platform across key agriculture verticals. The nationwide footprint also allows it to leverage its competitive advantages of each location to enhance competitiveness and reduce geographic and political risks in businesses.


Animal Feeds business


The Company enjoys a dominant position in the domestic organized animal feed industry with a presence across various sub-categories such as cattle, broiler, layer, aqua, and other feeds. It has over 32 state-of-the-art manufacturing plants, equipped with quality assurance labs, which help farmers improve their farm productivity and profitability. The company has an R&D center in Bangalore and, in 2015, set up the Nadir Godrej Centre for Animal Research and Development in Nashik, Maharashtra - and of its kind animal husbandry research center in India.


ACI JV - In 2004, Godrej Agrovet entered into a joint venture (50:50) with ACI, Bangladesh, to manufacture and market animal feed in that country. It owns two manufacturing facilities (Sirajganj and Rajshahi) and also has one third-party facility close to Dhaka. The manufacturing facilities are equipped with integrated breeding and hatchery operations, backed by a quality assurance laboratory.


Crop Protection business


Crop Protection business comprises agrochemicals, including herbicides, insecticides, fungicides, plant growth regulators, and organic manure. In this business, the company has a pan-India distribution channel of 7,000+ distributors.


Astec LifeSciences - Astec is an Indian manufacturer of agrochemical active ingredients, formulations, and intermediate products. It contributes nearly half the revenues of the division. Godrej acquired a majority stake in 2015 from its promoters. It enjoys cost leadership in the manufacturing of key products compared with Indian and Chinese peers, due to proprietary processes developed in-house and backward integration.


Dairy business


Godrej Agrovet ventured into the dairy business through the acquisition of a minority stake in Creamline Dairy Products (CDPL) more than a decade ago. Currently, Godrej Agrovet owns 51.9% of Cremaline. It has a presence across Telangana, Andhra Pradesh, Tamil Nadu, Karnataka, and Nagpur (Maharashtra), where it sells milk and derivatives under the brand name Jersey. It also operates dedicated Jersey milk parlors across South India. It has launched dairy sweets ‘Mysore Pak’ and re-launched the entire product portfolio under the new ‘Godrej Jersey’ logo.


Vegetable oil


The Company has got an entitlement of 2,00,000 hectares from the Indian Government to procure fresh fruit bunches of oil palm from farmers cultivating the crop in this area. Of this, it has developed over ~73,000 hectares across Andhra Pradesh, Goa, Gujarat, Odisha, Tamil Nadu, Karnataka, Maharashtra, and Chhattisgarh. In 2015, the Company commissioned an oil palm mill in Mizoram, while its new oil palm factory at Seethanagaram, Andhra Pradesh, has the latest technology, which will enable it to increase the oil extraction ratio.


Godrej-Tyson Foods (Ready to Eat)


Godrej Agrovet’s processed poultry and vegetarian products business, Godrej Tyson Foods (GTFL), is best known for two brands − Real Good Chicken and Yummiez. The latter offers a range of vegetarian and non-vegetarian ready-to-cook products. Started in 2008, Godrej Tyson is a 51% subsidiary of the company, with the balance stake held by Tyson Foods, one of the world’s largest poultry processing companies. GTFL is the second largest player in the processed poultry segment in India.


2. Key Historical Financials



  • Company revenue and profit have been growing 11% and 14% on a CAGR basis respectively in the last 5 years

  • EBITDA margin is stable around 7-9% but has fallen to 6% in H1FY23 due to higher raw material prices which Company has not been able to pass on

  • Both EBITDA and net profit have fallen on a YoY basis in Q2FY23

  • Working capital days increased from 23 in FY20 to 57 in FY21 and 73 in FY22 leading to negative cash flow from operations!

3. What is my view on company valuation?


The Company has traditionally traded at a median P/E level of 33.8x, but on a TTM basis is currently trading at 26x. However, Company is going through tough business conditions – higher working capital level and lower margins driving the lower multiple. In the last 5 years, the Company has traded in the P/E range of 22-57x.


Godrej Agrovet’s diversified portfolio with leading market positions across agricultural inputs and outputs, careful selection of less-regulated segments, and high-quality management and parentage are some of the key positives. This makes it a good investment in the long run but driven by value unlocking using demergers or the sale of underperforming businesses.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Volatility in raw material and commodity prices in the animal feed and palm oil businesses primarily. Company does not have pricing ability in these businesses and hence any change in import duties or global prices directly impacts its revenues

  • The Company is dependent on weather conditions like all agri-businesses and therefore any variability can lead to an impact on revenues and profitability

  • As the Company retails vegetarian and non-vegetarian products, any change in dietary preferences directly impacts its business

  • High geographic dependence on Andhra Pradesh for the palm oil and dairy businesses

 

About the Author


I have over 17 years of experience in private equity and public markets. I am an engineer by background an MBA from a premier institute in India.


Disclosure


I have had no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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