Godrej Agrovet: Business Analysis
We have analyzed all their six businesses in-depth & the synergies that they bring, please RT if beneficial.
A Thread π§΅π
We have analyzed all their six businesses in-depth & the synergies that they bring, please RT if beneficial.
A Thread π§΅π
1/ Ram Manohar Lohia had replied to a speech of Jawahar Lal Nehru in 1956 saying βAap Har Ghar mein Pani Pahuncha dijiye, baaki hum dekh lengeβ showcasing the plight of the farmers at the time.
Nothing much has changed since. The opportunity for efficient players is out there.
Nothing much has changed since. The opportunity for efficient players is out there.
2/ Why Agri sector should not be ignored?
Agriculture as a % of GDP in India is 18-20%, to give you context the automotive industry is ~7-8% of our GDP.
Agriculture provides livelihood to nearly half of our huge population.
Agrovet is one such integrated player in this space.
Agriculture as a % of GDP in India is 18-20%, to give you context the automotive industry is ~7-8% of our GDP.
Agriculture provides livelihood to nearly half of our huge population.
Agrovet is one such integrated player in this space.
3/ Godrej Agrovet is one of India's largest Agri-conglomerate with operations across 6 business verticals, including animal feed, crop protection, Astec Life, Oil Palm, dairy and poultry, & processed foods.
Do not worry, we will go through each of them.
Do not worry, we will go through each of them.
4/ Still, the question that runs everyone's mind is why is the stock not performing?
To give you an Idea; Godrej came up with their IPO at 460 per share in 2017. Was subscribed 97x.
Still, 5 years after, it's at the same price. We'll try to understand what happened by the end.
To give you an Idea; Godrej came up with their IPO at 460 per share in 2017. Was subscribed 97x.
Still, 5 years after, it's at the same price. We'll try to understand what happened by the end.
5/ Business: Animal Feed - 50% of rev & 35% of EBIT
Only Pan India player in the Animal feed business: Godrej Agrovet is the No. 1 player in the compound animal feed industry in India with a presence across poultry, cattle, & aqua feed segments with 4K+ distributors.
Only Pan India player in the Animal feed business: Godrej Agrovet is the No. 1 player in the compound animal feed industry in India with a presence across poultry, cattle, & aqua feed segments with 4K+ distributors.
6/ Godrej Agrovet is less than 10% of the market Plus the majority of the business continues to be unorganized; so the opportunity for there.
7/ However, gaining market share has not been manageable due to the business being stagnant for one reason or another (COVID, HORECA hit, etc), still continues to grow at above market rates through higher value add across its portfolio.
Charts on realization & volumes π
Charts on realization & volumes π
8/ How have they increased realization?
Through R&D: One of the cases is using biotechnology and enzymes to enhance the performance of our products while also developing low-cost unconventional raw materials for manufacturing animal feed.
Through R&D: One of the cases is using biotechnology and enzymes to enhance the performance of our products while also developing low-cost unconventional raw materials for manufacturing animal feed.
9/ Why is Animal Husbandry (something that drives the sales of animal feeds) a megatrend trend? π
The only way to achieve the dream of increasing farmers' income sustainably+ ever increasing demand for consumption of non-veg food.
Note: Non-seasonal business.
The only way to achieve the dream of increasing farmers' income sustainably+ ever increasing demand for consumption of non-veg food.
Note: Non-seasonal business.
10/ A shift from unorganized livestock farming to organized farming with a growing population of livestock+ Outbursts of diseases in animals are leading to the increasing adoption of animal feeds (better for health)
Here's how agrovet plays its role.
youtube.com
Here's how agrovet plays its role.
youtube.com
11/ Financial sense
Quarterly Rev runrate from 900 to 1100crs in the last 3yrs.
Cattle and Animal Feed has margins of 6-7 % and Shrimp Feeds has margins of 8-9%.
ROCEs at over 20-25%.
Quarterly Rev runrate from 900 to 1100crs in the last 3yrs.
Cattle and Animal Feed has margins of 6-7 % and Shrimp Feeds has margins of 8-9%.
ROCEs at over 20-25%.
12/ Business: Vegetable Oil - 10-30% of rev & 20-50% of EBIT
Why such volatility? It's highly dependent on Global Palm Oil prices
Higher the prices, the better for agrovet as they are the producers & the processors.
Why such volatility? It's highly dependent on Global Palm Oil prices
Higher the prices, the better for agrovet as they are the producers & the processors.
13/ Works through a public-private partnership (PPP) (by Govt. of India)
They work closely with farmers (to whom they pay a fixed % of rev) in their allotted area to plant oil palms on their farmland and provide technical guidance and assistance.
An Asset-light business model.
They work closely with farmers (to whom they pay a fixed % of rev) in their allotted area to plant oil palms on their farmland and provide technical guidance and assistance.
An Asset-light business model.
14/ 35% market share in the palm oil segment (the largest among vegetable oils)
Has about 75,000 hectares of land under palm tree cultivation (Plan to take this to over 1 lakh hectares in 5-6 years with the recent govt. reforms in this space, land has been allotted for the same)
Has about 75,000 hectares of land under palm tree cultivation (Plan to take this to over 1 lakh hectares in 5-6 years with the recent govt. reforms in this space, land has been allotted for the same)
15/ As a commodity, production of Palm oil cannot be increased substantially to match demand as a palm tree requires 5 years to grow & 10+ yrs to mature (increases yield).
A similar supply crunch has happened now.
A similar supply crunch has happened now.
16/ By which I mean, Crude Palm Oil prices are at an all-time high (up 3x from COVID lows) as I write this due to the Russian-Ukraine war: this will have +ve consequences on their business for the time being.
17/ As almost 97% of Indiaβs palm oil consumption is met through imports, demand for the domestic palm oil industry is expected to remain robust as even the government is keen to reduce the dependency over the longer term.
Latest reforms in this space. thehindubusinessline.com
Latest reforms in this space. thehindubusinessline.com
18/ A consequence of increasing prices that investors should be cognizant of:
Palm Oil is a key component for FMCG companies either directly or as a raw material for consumer goods like Soaps.
Most FMCG cos. will face severe margin pressure in the upcoming quarters.
Palm Oil is a key component for FMCG companies either directly or as a raw material for consumer goods like Soaps.
Most FMCG cos. will face severe margin pressure in the upcoming quarters.
19/ Financial sense
Revenue & margins are cyclical, however, even in the worst times the business is profitable & ROCEs are high at 20-25% (due to this unique asset-light PPP model)
Having the best of times currently, Need for caution.
The government is a key risk here.
Revenue & margins are cyclical, however, even in the worst times the business is profitable & ROCEs are high at 20-25% (due to this unique asset-light PPP model)
Having the best of times currently, Need for caution.
The government is a key risk here.
20/ Business: Crop Protection (standalone) - 10-15% of rev & 40-50% of EBIT
The most profitable & the fastest-growing segment
Pan India player: mainly deals in herbicides.
The most profitable & the fastest-growing segment
Pan India player: mainly deals in herbicides.
21/ Distribution network is the competitive advantage in this business:
The final product, or the packaged pesticide formulation, is sold through over 100,000 distributors across the country.
GAVL has 6000 distributors, commendable.
The final product, or the packaged pesticide formulation, is sold through over 100,000 distributors across the country.
GAVL has 6000 distributors, commendable.
22/ Further, with 15 to 20 major manufacturers and ~ 500 to 800 standalone formulators operating across four broad categories of pesticides (insecticides, herbicides, fungicides & others),
The brand & the brandβs perception inside a farmerβs head is a key differentiator.
The brand & the brandβs perception inside a farmerβs head is a key differentiator.
23/ Godrej seems to be winning that too, Whereas a typical formulator makes a 7-9% margin & even the integrated ones make 13-15%; agrovet makes 20-22% margins showcasing its superiority.
R&D is the key active ingredient.
R&D is the key active ingredient.
24/ Additionally, Pest incidence and weather conditions are variable and different products would be required in varying degrees in these locations: A diversified product base matters.
Given the stability in their rev & margins, Agrovet seems to be besting even here.
Given the stability in their rev & margins, Agrovet seems to be besting even here.
25/ The business is even not performing to its potential:
They have launched 10 products since FY20 across categories catering to the entire crop lifecycle. However, the business is yet to reap the benefits from these multiple launches.
They have launched 10 products since FY20 across categories catering to the entire crop lifecycle. However, the business is yet to reap the benefits from these multiple launches.
26/ Inherent risks in this business: Resistance development which happens with most molecules over time (need to continue to develop molecules) & Regulatory risk wrt. ban of products.
However, no major contribution from the products in the red category for Agrovet.
However, no major contribution from the products in the red category for Agrovet.
27/ Financial sense (includes Astec which has similar nos.)
Continuously growing revs & industry-beating margins.
This biz segment has the highest WC requirement (2-4 months); still makes superb ROCEs of more than 25%.
A segment that could change the fortunes of the co.
Continuously growing revs & industry-beating margins.
This biz segment has the highest WC requirement (2-4 months); still makes superb ROCEs of more than 25%.
A segment that could change the fortunes of the co.
28/ Astec Life (Another listed company where Agrovet holds 63%)
Currently a small part of rev (5-7%), but does hold a ton of potential in the future.
Currently a small part of rev (5-7%), but does hold a ton of potential in the future.
29/ Agrovet has built the majority of its stake in the business at 400-500crs market cap in 2015.
As of today, the market cap is at 3400crs: made a good 6-7x in 7 years and is a fine indicator of the acquisition strategy of Godrej Agrovet.
As of today, the market cap is at 3400crs: made a good 6-7x in 7 years and is a fine indicator of the acquisition strategy of Godrej Agrovet.
30/ The motive for the acquisition was to leverage Astec LifeSciences portfolio of agrochemical technicals (active ingredients) & formulations, such as triazoles, & sell them under the βGodrejβ brand through our strong distribution network.
+ Gain their Tech & R&D capabilities.
+ Gain their Tech & R&D capabilities.
31/ The optionalities that open up in this business:
Astecβs latest capex on Herbicides
R&D center with 100 scientists
CDMO business (Agrochem Innovators)
The value add is already getting visible as gross margins continue to expand (from 35% to 50%)
Astecβs latest capex on Herbicides
R&D center with 100 scientists
CDMO business (Agrochem Innovators)
The value add is already getting visible as gross margins continue to expand (from 35% to 50%)
32/ Financial sense
Adequately profitable & scalable business model (think PI industries after the CDMO business started to showcase its numbers)
As mentioned in the previous tweet, a lot of investments have not started reflecting on the nos. till date.
Adequately profitable & scalable business model (think PI industries after the CDMO business started to showcase its numbers)
As mentioned in the previous tweet, a lot of investments have not started reflecting on the nos. till date.
33/ So, should one jump to buy a stake in Astec? A big risk that should not be ignored.
Agrovet could do a merger with Astec Lifesciences, and Astec's minority shareholders would be at the risk of being forced to own a business they do not want to: Godrej agrovet.
Agrovet could do a merger with Astec Lifesciences, and Astec's minority shareholders would be at the risk of being forced to own a business they do not want to: Godrej agrovet.
34/ Additionally, the previous owner (Hiremath family) continues to sell their stake in the business: never a good sign.
Once they complete selling their stake, they have little incentive to continue to run Astec.
Management overhaul can take time.
Once they complete selling their stake, they have little incentive to continue to run Astec.
Management overhaul can take time.
35/ Business: Creamline Dairy - 10-15% of rev with negligible EBIT
the company sells milk and milk-based products (Curd, milkshakes, etc.) under the βJerseyβ
the company sells milk and milk-based products (Curd, milkshakes, etc.) under the βJerseyβ
36/ Why is it not making any profits?
Dairy Business is a tough business to sustain thanks to cooperative societies with no profit motives.
Even when RM prices increase, the competitors (much larger cooperatives like Nandini, Amul) do not increase their prices for long.
Dairy Business is a tough business to sustain thanks to cooperative societies with no profit motives.
Even when RM prices increase, the competitors (much larger cooperatives like Nandini, Amul) do not increase their prices for long.
37/ Additionally, Godrej Jersey is present across the states of Telangana, Andhra Pradesh, Tamil Nadu, Karnataka, and Maharashtra:
Too many for their size which showcases non-dominance in any state, leading to no pricing power.
Too many for their size which showcases non-dominance in any state, leading to no pricing power.
38/ The company boasts of a strong distribution but nos. are not reflecting off the same as they make below industry margins & continues to talk about increasing & investing in procurement (the most important part of this business).
They continue to lose market share.
They continue to lose market share.
39/ The opportunity size available for Agrovet if in the future they crack this business: It's a perpetual 8-10% growth business with a ton of opportunity for value-add products (India is at the tip of the iceberg)
40/ Financial sense
Stagnated revenues, negligible profits & ridiculously low ROCEs (In comparison: Hatsun Agro & Dodla Dairy - other listed private dairy players - make 15-20% ROCEs)
Agrovet must find a way out here or look to divest this cash guzzler.
Stagnated revenues, negligible profits & ridiculously low ROCEs (In comparison: Hatsun Agro & Dodla Dairy - other listed private dairy players - make 15-20% ROCEs)
Agrovet must find a way out here or look to divest this cash guzzler.
41/ Godrej Tyson: A JV between Agrovet (owns 51%) & Tyson Foods.
Tyson Foods is the world's second-largest processor and marketer of chicken, beef, pork, & processed foods with a Mcap of $31B. It has investments in R&D space in the live birds & frozen foods business.
Tyson Foods is the world's second-largest processor and marketer of chicken, beef, pork, & processed foods with a Mcap of $31B. It has investments in R&D space in the live birds & frozen foods business.
42/ Business: Godrej Tyson - 10% of rev & negligible EBIT
The business is yet to reach critical mass & is a sweet spot to benefit from a thriving industry.
They produce processed poultry & vegetarian products under the brands βReal Good Chickenβ and βYummiesβ
The business is yet to reach critical mass & is a sweet spot to benefit from a thriving industry.
They produce processed poultry & vegetarian products under the brands βReal Good Chickenβ and βYummiesβ
43/ Agrovet has a 30% market share in the non-vegetarian frozen foods business and an 8% share in the vegetarian frozen foods business.
A proxy for growth in QSRs & Modern Trade.
A proxy for growth in QSRs & Modern Trade.
44/ The operations are integrated to produce their poultry products giving them sustainability of quality over competitors.
We will discuss more synergies due to their distributed presence in the agriculture supply chain later.
We will discuss more synergies due to their distributed presence in the agriculture supply chain later.
45/ On the opportunity: India is one of the fastest-growing poultry markets globally.
Additionally, our market is seeing huge consolidation where from 15% of the market with top 10, it has gone toward 38% as of FY20 (exp to soon reach 50%)
+ Convenience food megatrend.
Additionally, our market is seeing huge consolidation where from 15% of the market with top 10, it has gone toward 38% as of FY20 (exp to soon reach 50%)
+ Convenience food megatrend.
46/ Some intricate challenges for the industry remain.
No control over RM (Soya, etc.) pricing & the end-product pricing.
Mis-information is prevalent for ex: eating chicken causes Corona leading to a huge dip in sales
Loss of 15K crs every year due to not using vaccines.
No control over RM (Soya, etc.) pricing & the end-product pricing.
Mis-information is prevalent for ex: eating chicken causes Corona leading to a huge dip in sales
Loss of 15K crs every year due to not using vaccines.
47/ Financial sense
Rev growth is substantial (200crs/quarter now), but just like another listed player Venky's in this space; margins are highly volatiles (due to the reasons mentioned above); same with ROCEs
Still, a long way to go before this becomes profitable sustainably.
Rev growth is substantial (200crs/quarter now), but just like another listed player Venky's in this space; margins are highly volatiles (due to the reasons mentioned above); same with ROCEs
Still, a long way to go before this becomes profitable sustainably.
48/ The largest competitors in each of their businesses
The point to note is the competition in each of the verticals is never-ending, so any gain in market share over long periods could be attributable to some competitive advantage.
Let's talk about synergies in b/w segments.
The point to note is the competition in each of the verticals is never-ending, so any gain in market share over long periods could be attributable to some competitive advantage.
Let's talk about synergies in b/w segments.
49/ Synergies: Farm to Fork
The animal feed team collaborates with dairy, poultry, & processed foods businesses for the sale of compound feed to the farmers.
Use of oil palm biomass & chemical residues in Animal Feed business for producing electricity & as a key ingredient.
The animal feed team collaborates with dairy, poultry, & processed foods businesses for the sale of compound feed to the farmers.
Use of oil palm biomass & chemical residues in Animal Feed business for producing electricity & as a key ingredient.
50/ Optionalities:
Maxximilk (a JV with an Israeli company, 75% owned by Agrovet): Doing R&D to increase the milk yield of cows in India. The financial results are expected in 3-5 years.
Why is it needed in India & could create a big business?
Maxximilk (a JV with an Israeli company, 75% owned by Agrovet): Doing R&D to increase the milk yield of cows in India. The financial results are expected in 3-5 years.
Why is it needed in India & could create a big business?
51/ Another Optionality is their financial muscle to do large M&A (growing inorganically)
There are multiple reasons for which they can do M&A, mentioned π
There are multiple reasons for which they can do M&A, mentioned π
52/ Future Plans:
a. Capital expenditure (capex) plans of Rs 200-300 crore each in FY22 & FY23, are expected to be funded through internal accrual and long-term debt. Expansion across crop protection & Astec continues (incremental capital towards high ROCE businesses)
a. Capital expenditure (capex) plans of Rs 200-300 crore each in FY22 & FY23, are expected to be funded through internal accrual and long-term debt. Expansion across crop protection & Astec continues (incremental capital towards high ROCE businesses)
53/ b. World over: Animal Feed businesses evolve to become animal protein businesses, Poultry Feed businesses evolve to become chicken businesses, Cattle feed businesses evolve to become milk businesses
One of the megatrends that is exp to happen in India over the nxt 10-15 yrs.
One of the megatrends that is exp to happen in India over the nxt 10-15 yrs.
54/ The same is the bet by Godrej Agrovet where they want to become a mega animal protein player over the next few decades, completing the farm to fork cycle.
54/ c. Become a reliable supplier to the fast-growing D2C players (Licious, Fresh to home, etc.) to increase their value add.
Seems, they have understood their lack of capabilities & the culture to do this on their own.
Also, why D2C players are winning the market?
Seems, they have understood their lack of capabilities & the culture to do this on their own.
Also, why D2C players are winning the market?
55/ Let's talk about strengths.
a. Godrej brand: The heritage runs back 124 years & thus the brand is recognizable across India with an inherent trust built in.
a. Godrej brand: The heritage runs back 124 years & thus the brand is recognizable across India with an inherent trust built in.
56/ b. The company's presence across diverse agri-businesses so outperformance in a few segments compensates for underperformance in others; however, the upside gets capped at most times & the valuations too get affected as investors can just buy other pure-play players.
57/ c. Pan-India presence with an extensive supply and distribution network; plus the integrated nature of their business model.
58/ Management
Mr. Balram Yadav, the Managing Director, has been with the Godrej group since 1991 and has approximately 32 years of experience in the agri industry.
Played a pivotal role in Agrovetβs turnaround in 2007, introducing new business segments & cutting off losses.
Mr. Balram Yadav, the Managing Director, has been with the Godrej group since 1991 and has approximately 32 years of experience in the agri industry.
Played a pivotal role in Agrovetβs turnaround in 2007, introducing new business segments & cutting off losses.
59/ The management team is adequately incentivized with ESOPs with Mr. Balram owning ~1.7% of the business.
The median tenure of an employee in Agrovet is 5.8 years.
The median tenure of an employee in Agrovet is 5.8 years.
60/ Consolidated Financials:
Strong rev growth, stable margins, volatile working capital requirements lead to huge volatility in operating cashflows.
Debt looks high but is short term just to finance inventory (will lead to huge gains in this period)
Overall, a high ROCE biz.
Strong rev growth, stable margins, volatile working capital requirements lead to huge volatility in operating cashflows.
Debt looks high but is short term just to finance inventory (will lead to huge gains in this period)
Overall, a high ROCE biz.
61/ Shareholding
Promoter continues to buy shares since their IPO: 71.64% holding
PE fund (Temasek) holds a 12% stake (bought 20% stake at 2860crs in 2012; 3x in 10 years for the current stake)
Balram Yadav 0.5% stake recently.
Promoter continues to buy shares since their IPO: 71.64% holding
PE fund (Temasek) holds a 12% stake (bought 20% stake at 2860crs in 2012; 3x in 10 years for the current stake)
Balram Yadav 0.5% stake recently.
62/ Risks & threats
a. Commodity pricing: There is little correlation between how their costs move & how their end product prices move leading to random sprouts of profitability & losses.
a. Commodity pricing: There is little correlation between how their costs move & how their end product prices move leading to random sprouts of profitability & losses.
63/ b. Key raw materials are grains (primarily maize), extractions (de-oiled rice bran extraction, soybean extraction, and mustard extraction), animal proteins, molasses, amino acids, vitamins, minerals, and other additives: Too many, Imagine the logistical & inventory challenges
64/ c. Erratic weather conditions & heavy dependence on monsoons.
d. The limited reach of technology in the demography that they cater to. However, this is changing as we speak thanks to Reliance JIO.
d. The limited reach of technology in the demography that they cater to. However, this is changing as we speak thanks to Reliance JIO.
65/ e. Talent retention has been a challenge due to massive startup funding (competitors) & ever-decreasing popularity of the agricultural industry among the youth.
Mechanization is the only way out, as skilled people continue to be scarce+ helps avoid human errors.
Mechanization is the only way out, as skilled people continue to be scarce+ helps avoid human errors.
66/ f. Finally, the biggest risk for Godrej Agrovet is them being is so many businesses at a single time.
It will take a genius level of management bandwidth to run this business sustainably. What if the next leader is a fool?
It will take a genius level of management bandwidth to run this business sustainably. What if the next leader is a fool?
67/ Finally, the valuations have been beaten up for Agrovet since their listing 5 years ago.
At some price, a lot of optionalities & moats are not priced in. We would like to know your thoughts on valuations in the comments section.
End of Thread.
At some price, a lot of optionalities & moats are not priced in. We would like to know your thoughts on valuations in the comments section.
End of Thread.
68/ What will make Godrej Agrovet succeed over the long run, to fulfill the vision that they aspire to reach?
The MD Mr. Balram Yadav has the answer: It will require 3Gs - God, Government & Godrej Team in equal proportions.
This should be enough to apprehend the business.
The MD Mr. Balram Yadav has the answer: It will require 3Gs - God, Government & Godrej Team in equal proportions.
This should be enough to apprehend the business.
69/ We had missed answering what is ailing the stock since the last 5 years:
So, the answer is there in the thread.
For one reason in one sector or another in the other sector, the aggregate profitability got hit & didnβt meet the expectations that were built in during the IPO.
So, the answer is there in the thread.
For one reason in one sector or another in the other sector, the aggregate profitability got hit & didnβt meet the expectations that were built in during the IPO.
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