Godrej Agrovet is a diversified, Research & Development agri-business company in India. It operates in Animal Feed, Crop Protection, Oil Palm, Dairy and Poultry and Processed Foods segments. They have set up the Nadir Godrej Centre in Nashik which a one-of-its-kind animal husbandry research center in the private sector in India. Their Animal Feed business is also one of the largest in the Compound Feed market.
The company’s shares have 52 weeks price band of INR 598-265 and a total market capitalization of INR 73.65 billion which makes it a Mid-Cap company. The shares have a P/E ratio of 21 and a dividend yield of 1.17%
Now,Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 parameters and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The parameters are as follows.
1. Economic Moat
2. Business Model and Management
3. Growth Ratios
4. Profitability Ratios
5. Cash Flow Ratios
6. Liquidity and Solvency Ratios
8. Valuation Ratios
9. ROE (Du Pont Analysis)
10. Future Prospects
(All units are INR Millions except ratios and per share data)
You can get the complete excel model used for this analysis from below:
1.Economic Moat (★ ★ ★ ☆ ☆)
The company operates in a highly unorganized market of agriculture and animal husbandry. Market dominance in such an industry is achieved through scale, pricing power, distribution and innovation capacities. The company has 21+ factories across India and 2 R&D centres in Maharashtra. It also has a Pan-India presence with extensive supply and distribution network and operates across 5 business verticals. On the innovation front, dedicated R&D is undertaken in existing products primarily with a focus to improve yields and process efficiencies. This has improved gross profitability for the company over the years. Overall the company has a good economic moat but operates in a highly unorganised industry. Therefore, this category gets 3 stars in Godrej Agrovet fundamental analysis.
2. Business Model and Management (★ ★ ★ ★ ★)
The company operates across 5 major segments. The revenue breakup in FY 2016 was such that 67% of the revenue was from animal feed, 10.8% from Oil Palm,13.2% from crop protection and 7.3% from Dairy. The company then focused on its dairy and crop protection business in order to diversify from the low margin animal feed products. As of FY 2020, the revenue contribution from animal feed has reduced to 51.7% whereas the dairy and crop protection contribution has increased to 20% and 17% respectively. Overall the company has a well-diversified business model with a good growth prospect in the future.
Godrej Agrovet has increased its stake in Godrej Tyson Foods Limited (GTFL) to 51% in 2019 and thereby the latter has become a subsidiary from a Joint Venture earlier. This business is focussed on increasing the product portfolio in the ‘Yummiez’ product range and on growing the live bird business. In India’s poultry market, live poultry constitutes 98% of total sales since most consumers prefer freshly culled chicken meat. Processed chicken meat comprises 2% of total production, out of which only an estimated 1% undergoes processing into value-added products that are ready-to-eat or ready-to-cook. But with an increasing presence in supermarkets and shopping malls, there is sustainable growth in the retailing of chilled and frozen poultry products for the company.
Mr Balram Yadav is the Managing Director of the company. Under his leadership, Real Good Chicken and Yummiez were established as the leading processed poultry brands in India. Each segment along with R&D has its own head and accountability for P&L of their division. Overall the management has shown stability and has no previous cases of principal-agent conflict. Therefore this category gets 5 stars in Godrej Agrovet fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ☆)
The revenue has seen a CAGR growth of 13.4% over the last 7 years. The operating income and net income has also increased by 13.6% and 22.62% respectively. The working capital has been negative due to the nature of the business and the Cap-Ex has been flat over the years. Overall this indicates a linear growth model for the company. Therefore this category gets 4 stars in Godrej Agrovet fundamental analysis.
4. Profitability Ratios (★ ★ ★ ★ ★)
The gross margin has been improving over the years due to the products and process improvements done in the R&D centres. The other margins along with return on assets have also been stable over the years and are also expected to improve in the coming years due to expansion into high margin poultry and dairy products. Therefore this category gets 5 stars in Godrej Agrovet fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ★ ★)
The net income margin has shown some signs of improvement and the Cap-Ex has remained stable. The free cash flow as a percentage of net income has been positive and the operating cash flow growth rate has also improved in recent years. Overall the company has indicated an improved cash flow position. Therefore this category gets 5 stars in Godrej Agrovet fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ★ ☆)
The financial leverage has almost been flattened along with the debt to equity ratio for the company. The profitability has also been stable which indicates good solvency. The current ratio is almost at the minimum threshold of 1, along with the quick ratio. This indicates good liquidity in the assets of the company. Therefore this category gets 4 stars in Godrej Agrovet fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ★ ☆)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Business efficiency has improved over the years. The inventory days have increased from 48 to 78 days along with the payable days from 33 to 97 days. The receivables period has also increased from 27 to 48 days. Overall the cash conversion cycle has been declining but is still positive. Therefore this category gets 4 stars in Godrej Agrovet fundamental analysis.
8. Valuation Ratios (★ ★ ★ ★ ★)
The shares have started trading at higher valuation multiples as the company expanded into higher-margin products and diversified away from animal feeds. The valuations are also justified by fundamental factors like increasing consumption, higher disposable income, rural development etc. Hence the multiples can improve further in the coming years. Therefore this category gets 5 stars in Godrej Agrovet fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ☆)
The leverage ratio has been stable along with the asset turnover for the company. The tax efficiency has remained in the same range and the interest burden ratio has seen improvement. The operating margin has also been stable. Overall the company has given a constant Return on Equity over the years. Therefore this category gets 4 stars in Godrej Agrovet fundamental analysis.
10. Future Prospects (★ ★ ★ ★ ☆)
Some insights for the coming years from management discussion & analysis (MD&A) and con calls are as follows.
- The effect of Covid-19 was adverse on the Poultry business due to false rumours of infection from eating meat during the initial outbreak. However, the demand for ready-to-eat or ready-to-cook meat has increased due to the lockdown in the country. Therefore this segment can witness double-digit growth in FY 2021.
- Palm oil prices stand at INR 72/kg which is an increase from INR 55/kg in 2019. Indonesia and Malaysia use palm oil for making bio-diesel, which has led to an increase in demand. Average price next year is expected at INR 66-68/kg, as peak production months for Indonesia, Malaysia and India will collide in the next season, which will reduce prices from current levels. This will affect the revenue for the company negatively.
- Launch of new products in the last 9 months is expected to contribute to near-term growth in various categories, such as herbicides (Hitweed Maxx, Bloxit, Veteran), Insecticides (Prudens, Kliftan, Hanabi) and fungicide – Rohelus.
- The company has increased milk prices by INR 8-10/liter but the cost has also increased by INR 10-12/liter, which has impacted its performance in FY 2020 and no significant recovery is expected in ma
Overall the company has shown good fundamentals along with improving profitability. However, the situation related to pricing power has not improved much as the company mostly operates in an unorganized industry. Hence the quantum of profit can only increase with revenue. Therefore, this category gets 4 stars in Godrej Agrovet fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
GODREJ AGROVET SHARES (4.3/5)
Therefore it is a 4-star stock
★ ★ ★ ★ ☆
|Godrej Agrovet Shares|
|Economic Moat||★ ★ ★ ☆ ☆|
|Business & Management||★ ★ ★ ★ ★|
|Growth Ratios||★ ★ ★ ★ ☆|
|Profitability Ratios||★ ★ ★ ★ ★|
|Cash Flow Ratios||★ ★ ★ ★ ★|
|Liquidity & Solvency||★ ★ ★ ★ ☆|
|Efficiency Ratios||★ ★ ★ ★ ☆|
|Valuation Ratios||★ ★ ★ ★ ★|
|ROE (Du Pont Analysis)||★ ★ ★ ★ ☆|
|Future Prospects||★ ★ ★ ★ ☆|
|Overall Fundamental Rating||★ ★ ★ ★ ☆|
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