Godrej Agrovet to Merge with Astec Lifesciences: An Arbitrage Opportunity Coupled with Concerns.

Godrej Agrovet IPO - Has A Lot of Potential but Not a Lot of Upside at These Valuations

Value investor- India mid & small caps

Bhaskar Chakraborty

Equity Capital Markets

Godrej Agrovet Ltd / Equity Capital Markets

<ul><li><a href="https://www.smartkarma.com/entities/25916" target="_blank" data-smartkarma-citation="entities:25916:1">Godrej Agrovet Ltd (1322Z IN)</a> (GAVL) is the largest animal feed maker and oil palm acreage operator in the country. It also has interests in crop protection, dairy and poultry businesses.</li><li>Animal feed business contributing 51% of revenues is reporting declining volumes and margins</li><li>The oil palm business has a long runway for growth given India’s import dependence, but adverse nature of contract with government will result in unpredictable margins.</li><li>The parent crop protection business has industry-leading growth. However, Astec’s business is vulnerable to monsoons and it has taken exceptional losses amounting to 36% of its PBT over FY15-17.</li><li>The dairy business, subject to the vagaries of monsoons has an erratic margin profile. It’s focus on value added increases capital intensity and lowers its growth and return profile in our view.</li><li>Net net, GAVL has an excellent crop protection business but three of its businesses are monsoon dependent. We are looking at low-double digit revenue growth profile and unpredictable margins.</li><li>Assuming 20% Cagr in EPS over FY17-19, GAVL trades at 29x FY19 EPS. Specialist crop protection plays like <a href="https://www.smartkarma.com/entities/6040" target="_blank" data-smartkarma-citation="entities:6040:1">Pi Industries Ltd (PI IN)</a> (20x FY19 EPS), poultry plays like <a href="https://www.smartkarma.com/entities/10297" target="_blank" data-smartkarma-citation="entities:10297:1">Venky's (India) Ltd (WH IN)</a> (16x FY19 EPS) are trading at far less demanding valuations than GAVL that is a ripe candidate for a conglomerate discount in our view. We think the issue is aggressively priced as is evident from the fact that 75% of the issue is offer for sale by existing investors.</li></ul>

Godrej Agrovet Ltd (1322Z IN) (GAVL) is the largest animal feed maker and oil palm acreage operator in the country. It also has interests in crop protection, dairy and poultry businesses.Animal feed business contributing 51% of revenues is reporting declining volumes and marginsThe oil palm business has a long runway for growth given India’s import dependence, but adverse nature of contract with government will result in unpredictable margins.The parent crop protection business has industry-leading growth. However, Astec’s business is vulnerable to monsoons and it has taken exceptional losses amounting to 36% of its PBT over FY15-17.The dairy business, subject to the vagaries of monsoons has an erratic margin profile. It’s focus on value added increases capital intensity and lowers its growth and return profile in our view.Net net, GAVL has an excellent crop protection business but three of its businesses are monsoon dependent. We are looking at low-double digit revenue growth profile and unpredictable margins.Assuming 20% Cagr in EPS over FY17-19, GAVL trades at 29x FY19 EPS. Specialist crop protection plays like Pi Industries Ltd (PI IN) (20x FY19 EPS), poultry plays like Venky's (India) Ltd (WH IN) (16x FY19 EPS) are trading at far less demanding valuations than GAVL that is a ripe candidate for a conglomerate discount in our view. We think the issue is aggressively priced as is evident from the fact that 75% of the issue is offer for sale by existing investors.

Godrej Agrovet IPO: A Conglomerate at a Premium!