Godrej Agrovet IPO Analysis

Godrej Agrovet’s IPO hits the market this week as the agro-industry focused company seeks to raise Rs 1,157 Crores from the stock market in the price band of Rs 450-460 per share. The major verticals that the company operates in include: Animal feed, crop protection, oil palm and dairy. The revenue breakup is given below.



The animal feed vertical contributes almost 53% of the revenues as of FY17 and it has witnessed stagnant growth over the past few years. The company acquired Creamline Dairy in December 2015 and that acquisition has helped the company post a decent top-line growth.

Must read: A guide to investing in IPOs

Financials:

If we look at the financials of the company, we can see a 15.5% CAGR in revenues over the last four years which coupled with the improving margins has resulted in better profitability.



The crop protection business has delivered excellent growth and high profitability margins while the animal feed business is facing headwinds in business. The company has the distinct characters of a holding company and in the future they may hive off the different businesses for “value-unlocking”.

The company enjoys high returns on both capital employed and networth and has also sustained these high returns (Refer to below table)



The company has a consolidated debt of Rs 663 Crores as per FY17 numbers and post IPO, Rs 250 Crores worth of debt will be paid off. At Rs 460 per share, the market cap of the company works out to Rs 8,816 Crores and because of varied lines of business it is tough to do a peer-to-peer analysis. Let’s break down the company into different parts and estimate a fair value:



At the upper range of price band, the IPO is fully priced in and offers little for investors to gain. Even the future prospects are bright only for a few segments of the business. The crop protection and oil palm businesses are performing better than the animal feed business in terms of growth and profitability.

On a broader level, the price-to-earning valuations work out to 36x which is expensive. Despite the Godrej brand and Indian Agri focused business, the company doesn’t make a good long term investment.

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