Godrej AgroVet Investment Opportunity

The IPO of Godrej Agrovet Is a good opportunity for investors to buy into a high quality secure business franchisee, with competitive advantages in an industry with attractive dynamics with long run-way of growth. Furthermore, we are betting on an extremely strong and capable management given the strong pedigree and governance of the Godrej’s.

Just like its each business segment agrovet operates in is either under-penetrated (animal feed) or in high growth areas (dairy, poultry, agri-inputs), this is Industry attractiveness.

25%+ PAT CAGR over past 5 years, minimal working capital requirement, high RoCe (25%+ even in a downturn), high asset turn (5x), it shows Strong financial situations.

Over the next 3-4 years, FY17-21, Godrej Agrovet will grow Revenues at 15-16% CAGR, PAT at 20%+ CAGR with ROE of 25%.

Double in 3 years: FY21E PAT Rs 550 cr (2x FY17 PAT) and assuming 30x 1 year fwd multiple, the stock can potentially double over the next 3 years.

While most consumer stocks in India (staples and discretionary) trade at valuations of 35-45x PE on FY19E, Godrej Agrovet’s valuations at IPO of 27x FY19 PE look sensible given the strong track record and clean corporate history. It wouldn’t be surprising if the stock traded upwards of 30x PE FY19E on listing given the peer valuations in this space.

We studied further regarding same and we found that, Godrej Agrovet operates in extremely large spaces (Animal feed, dairy, agri inputs, processed foods) where participation from unorganized/regional players is still high. Given the strong godrej brand, distribution strength and quality of products, One can see clear category conversion with national player like Agrovet scaling up implying long run way of continues growth

Agrovet is the Leader in animal feed – Animal feed market is 90% unorganized and Godrej has 10% market share of the 10% organized market and at this market share they are the largest and the only national player in India. Huge room to keep growing share as unorganized market shifts to organized players. Extremely profitable business with return on capital of 50%+ as business has high asset turns and negligible working capital.

Godrej Agrovet aims to be the top 10 agri inputs co in India. After the Astec acquistion, Godrej’s agri inputs business is similar to PI Inds, wherein the custom synthesis/exports is done by Astec and the domestic agri inputs business driven by R&D molecules is led by Agrovet. With the Godrej parentage, they are getting good traction from R&D innovators whom they can tie up with for in-licensing of Molecules for sale in domestic market. Over the next 5 years, this division alone can gross revenues of Rs 2000 cr vs current revenue of Rs 700 cr. Going by peer valuation of PI Inds which is more than Rs 10000’cr Market Cap on Rs 2000 cr revenue, it won’t be surprising 5 years from now if we are talking of the agri input business of godrej Agrovet being valued at Rs 10000 cr

Godrej Agrovet also has a diary business after acquistion of Creamline diary. So far it’s only in one state doing Rs 1000 cr revenue with 4% margins. There is huge scope for margin and topline expansion in this business. Firstly most of the sales are liquid milk which fetches low margin and with the entry of Godrej’s at the driving seat they are scaling up the proportion of value added products like paneer, ghee, curd, ice cream etc which would drive margin expansion. They haven’t yet been aggressive in promoting dairy products under Godrej banner and have not yet entered other states. Eventually they would take this format to other states which would again imply strong growth trajectory

25% of India’s palm oil plantations are under godrej Agrovet which is a steady cash generating business – maturity of plantations (currently only 33% mature) leave good room for them to grow revenues at 15%+ for the next 5/10 years.

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