Godrej Agrovet: Agri Behemoth in The Making
Godrej Agrovet: Agri Behemoth in The Making
Godrej Agrovet: Agri Behemoth in The Making
Sector: Agriculture
Godrej Agrovet
Processed
Food & Dairy
Palm
Oil
Animal
Feed
Crop
Protection
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Godrej Agrovet
Summary ............................................................................................................. 3
Company overview............................................................................................... 5
Key risks............................................................................................................. 33
Management overview....................................................................................... 34
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Godrej
Initiating Coverage | Sector: Agrovet
Agriculture
Godrej Agrovet
BSE Sensex S&P CNX
38,673 11,624 CMP: INR509 TP: INR610 (+20%) Buy
Godrej Agrovet (GOAGRO) is a diversified agri company with pan-India presence and
operations spread across five business verticals. It comprises (i) the crop protection
Stock Info
business, where it is a dominant player in plant growth regulators and triazole chemistry
Bloomberg GOAGRO IN
(via its subsidiary Astec Life Science), (ii) palm oil, where it enjoys leadership in India, (iii)
Equity Shares (m) 192
M.Cap.(INRb)/(USDb) 97.8 / 1.4
animal feed- amongst the top player in cattle feed , (iv) dairy and (v) processed foods.
52-Week Range (INR) 737 / 462
1, 6, 12 Rel. Per (%) -1/-7/-37 Agri behemoth in the making
12M Avg Val (INR M) 88 Riding on the back of crop protection and the palm oil business
Free float (%) 31.2
The diverse nature of GOAGRO’s various businesses de-risks its operations, enabling
Financial Snapshot (INR b) it to focus on growth, optimize capital efficiency and to maintain its competitive
Y/E Mar FY19E FY20E FY21E
advantage. It undertakes dedicated R&D in existing products, focusing on improving
Sales 58.6 64.9 73.0
yields and process efficiencies. Strength of the 'Godrej' brand and its association with
EBITDA 4.7 5.9 7.0
trust, quality and reliability help the company across segments, particularly in those
NP 2.4 3.0 3.7
involving direct sales to retail consumers.
EPS (INR) 12.6 15.7 19.0
EBITDA Gr. (%) 5.2 26.0 18.6 In crop protection, GOAGRO is focusing on multiple product launches with category
EPS Gr. (%) 11.8 24.0 21.5 expansion; it has guided for ~10 launches over the next 3-5 years with a potential of
RoE (%) 16.4 18.3 19.6 INR10b. Growth in Astec will be driven by capacity expansion; GOAGRO plans to
RoCE (%) 14.8 16.8 18.3 invest INR350-400m every year over the next 3-4 years in triazole chemistry. At a
EV/ EBITDA (x) 22.3 17.7 14.9 fixed asset turnover of 2-2.5x, it should aid in revenue CAGR of 15% over FY18-21.
P/E (x) 40.3 32.5 26.7 Demand for palm oil in India is not a constraint as >90% of the domestic demand is
imported. To augment the supply of fruits for palm oil manufacturing, the
Shareholding pattern (%) government has introduced a program to promote its cultivation. GOAGRO — India’s
As On Dec-18 Sep-18 Dec-17 largest palm oil processor is well placed to capitalize on this opportunity; we expect
Promoter 68.8 68.8 68.8 revenue/ EBITDA CAGR of 11%/ 12% over FY18-21.
DII 2.9 3.4 17.2 Low compound feed penetration, decline in fodder availability and increasing
FII 3.0 2.6 3.4 crossbred cattle should drive industry-wide growth for cattle feed. GOAGRO, a
Others 25.3 25.3 10.7 leading player in cattle feed is at the forefront to tap this opportunity with the Indian
FII Includes depository receipts poultry feed industry expected to grow at 14.9% CAGR over FY17-20. But, pure feed
players like GOAGRO face stiff competition from integrators. We expect the animal
feed segment to deliver revenue/EBITDA CAGR of 14%/12% over FY18-21.
Godrej Agrovet We expect consolidated revenue/ EBITDA CAGR (FY18-21) of 12%/ 16% to INR73b/
Agri behemoth in the making INR7.0b. We initiate coverage on GOAGRO with Buy rating and SOTP-based target
price of INR610.
1 April 2019 3
Godrej Agrovet
3-4 years for capacity expansion in triazole chemistry. This would ensure its
consolidated crop protection revenue will grow at CAGR of 15% over FY18-21E.
Palm oil – a steady cash generating business
India has a huge opportunity in the palm oil business as it imports more than 90% of
its demand due to supply constraint of fresh fruit bunches (FFBs). Oil palm
plantation in India is regulated and GOAGRO has participated in the government’s
Oil Palm Development Program (OPDP) for accessing FFB produce from farmers in
designated areas, thus being an asset-light model. As at FY17, only 0.3m hectares
are under palm oil cultivation with scope for an additional 2m hectares. GOAGRO
being the largest palm oil manufacturer in India (35% market share) is well placed to
capitalize on this opportunity as the government increases the area under
cultivation. We expect the segment to deliver revenue CAGR of 11% over FY18-21 to
INR8,046m by FY21 on account of increasing availability of FFBs (on higher mix of
mature plants), increase in oil plantation area (currently has access to ~66k hectares
of land and plans to add 2-2.5k hectares per year), and improvement in the Oil
Extraction Ratio (OER). EBITDA margin is likely to expand by 60bp to 22.3% on
operating leverage and improvement in OER.
Animal Feed — strong growth prospect
The overall animal feed industry is expected to grow at ~14% CAGR over FY17-20 to
INR1,065b by FY20 (as per CRISIL). Cattle feed — low compound feed penetration,
declining availability of fodder and increased crossbreeding of cows and buffaloes
offers huge opportunity for GOAGRO (being one of the leading players). Also, scaling
up its dairy segment should provide an additional revenue stream for selling its feed
to farmers (over the long term). Poultry feed — expect overall poultry feed to grow
at 14.9% CAGR over FY17-20 (65% is organized due to high penetration of
compound feed), but pure feed players like GOAGRO are facing stiff competition
from integrators who supply feed directly to farmers. Thus, scaling up its poultry
processing segment is critical to compete with integrators. Addressing this, the
company has already entered into the live bird market, which constitutes 98% of the
poultry market. In 9MFY19, segment revenue grew 17% YoY to INR22,147m backed
by volume growth of 15.7%, but segment EBIT declined 23.1% YoY to INR824m due
to an increase in raw material prices. However, from FY20, we expect margins to
start inching up on the price hike taken by the company in 4QFY19 and several R&D
initiatives, which should help in cost reduction over the next 2-3 years. Hence, we
expect this segment to clock in revenue CAGR of 14% over FY18-21 to INR37.8b
(EBITDA margin to remain flat over FY18-21).
Initiating coverage with a Buy rating
We expect consolidated revenue/ EBITDA CAGR (FY18-21) of 12%/16% to INR73b/
INR7b. We expect GOAGRO to generate strong CFO of INR12b over FY19-21 and
RoCE should increase to 18.3% by FY21 from 14.7% in FY18. We ascribe (i) 18x
EV/EBITDA multiple to crop protection (avg. RoCE of 35.6% over FY13-18) and 16x to
the oil palm business segment, given GOAGRO’s strong positioning and growth
prospects (avg. RoCE of 30.1% over FY13-18), (ii) 14x EV/EBITDA to animal feed
segment considering its strong RoCE profile (avg. RoCE of 51.3% over FY15-18), and
(iii) 15x EV/EBITDA to dairy and the processed food business, considering its strong
growth prospects. Our SOTP-based target price stands at INR610 implying 20%
upside. We initiate coverage on GOAGRO with a Buy rating.
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Company overview
GOAGRO is a diversified agri-business company with operations across five verticals:
(a) animal feed, (b) crop protection, (c) oil palm, (d) dairy, and (e) poultry and
processed foods. The company is focused on improving productivity of farmers by
innovative products and services that increase crop and livestock yields.
7% 10% 6%
10% 12% 12% 24% 22% 19% 19%
11% 21% 22% 22%
21%
10% 11%
34% 39%
16% 17% 19% 20% 22% 26%
8% 10% 10% 13%
FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18
Source: Company, MOSL Source: Company, MOSL
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The company has guided for ~10 product launches over the next 3-5 years in its
standalone crop protection business with a potential of INR10b. 2-3 out of the 10 new
products should hit the market by Mar’20.
GOAGRO’s subsidiary, Astec LifeSciences, plans to invest INR350-400m every year to
expand capacity in triazole chemistry over the next 3-4 years. This should aid revenue
CAGR of 15% over FY18-21 for Astec.
Backward integration of intermediates is expected to result in ~200bp margin
expansion over FY18-21 in Astec.
GOAGRO has a strong presence in the crop protection market with plant growth
regulators, organic manures, generic agrochemicals and specialized herbicides. It
also has a subsidiary — Astec LifeSciences, which manufactures and sells AI (Active
Ingredient), bulk and formulations, and intermediate products with a focus on the
triazole group of fungicides across India and 24 other countries. As of FY18,
GOAGRO’s standalone business contributed 58% to the overall crop protection
revenue while Astec contributed the remaining 42%.
Astec Export -
Triazole
GOAGRO Astec 13%
Standalone 42% Astec
Domestic Astec
58%
20% Export -
CRAMS
9%
1 April 2019 7
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Exhibit 7: Consolidated crop protection revenue to post 15% Exhibit 8: Consolidated crop protection margins to expand
CAGR over FY18-21E 30bp over FY18-21E
Total crop protection revenue (INRm) Growth % Total crop protection EBITDA (INRm) Margin %
54 25.4
48 25.6 25.1 25.2
22.7 23.9 24.5
21.7 20.4
37
10 15 16 14 15
2,213 3,040 3,352 4,959 7,647 8,818 10,199 11,675 13,476 503 659 859 1,012 1,825 2,215 2,503 2,937 3,419
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
GOAGRO is one of the leading players in cotton herbicide with its product Hitweed, a
9(3) product patented until 2022 and catering to plants with broad leaves. Plans are
afoot to launch a superior version of Hitweed to continue enjoying the strong
market share even after its patent expiry. Besides, the company plans to launch
products catering to tea, chilli and cotton, and also to expand into an all-together
new category. Overall, its launch pipeline over the next 3-5 years has ~10 products;
of this 2-3 are expected to hit the market by Mar’20.
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Exhibit 10: Standalone crop protection business to post Exhibit 11: Margins in standalone crop protection business
revenue CAGR of 15% over FY18-21E to contract by 100bp over FY18-21E
Standalone Crop Protection Revenue (INRm) Standalone Crop Protection EBITDA (INRm)
Growth % Margin %
25 29.1 28.8 28.6 28.1
25.6 22.9
21.7 22.6
18
16
11 12
10 10
3,040 3,352 3,725 4,661 5,142 5,751 6,671 7,872 659 859 854 1,054 1,495 1,658 1,911 2,214
FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Exhibit 12: Astec’s domestic revenue to grow at 18% CAGR Exhibit 13: Astec’s export revenues to grow at 15% CAGR
over FY18-21E over FY18-21E
Astec Domestic Revenue (INRm) Growth % Astec Exports Revenue (INRm) Growth %
29 53 51
46
22
15 13 21
12
13 12
1,305 1
-23
-13
1,305 1,498 1,587 1,600 2,070 2,329 2,608 758 1,163 892 1,302 1,965 2,378 2,675 2,996
FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
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Astec’s strengths
Backward integration makes production cost efficient: By far, Astec is a superior
player in terms of operational efficiency at low cost of production due to its fully
backward integrated capabilities. Therefore, it’s a preferred supplier for many global
giants like Sumitomo, Adama and Nufarm; and for players in domestic market like
Adama, Syngenta, Dhanuka, Bharat Rasayan and Insecticides India.
1 April 2019 10
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29 28
18 23
17 19 21
7
-13
-48
FY14 FY15 FY16 FY17 FY18
1 April 2019 11
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Global palm oil consumption for 2017 stood at 65MMT with India accounting for
~14% share. India has huge opportunity in the palm oil business as it imports more
than 90% of its demand due to supply constraint of FFBs.
For FY18-21, we expect the palm oil segment’s revenue CAGR at 11% to INR8,046m,
which is due to increased availability of FFBs (as higher maturity plants start yielding
fruits), increase in coverage area and improvement in OER.
We expect palm oil’s EBITDA margins to expand by 60bp over FY18-21 to 22.3% on
account of operating leverage, improvement in the OER directly flowing to EBITDA,
and any improvement in palm oil prices.
Exhibit 18: Palm plantation occupies 6% of harvested area… Exhibit 19: …but forms 30% of total vegetable oil production
Gloabl Harvested Area - 276mn ha Global Oil Production - 214mn ha
Palm Palm Oil
6%
29% Soya 25% Soya Oil
30%
Rapeseed Rapeseed Oil
43% 8%
Sunflower Sun Oil
9%
12%
13% Others 25% Others
Source: Advance Enzyme Presentation , MOSL Source: Advance Enzyme Presentation, MOSL
Palm gives the highest oil yield of 4-6 tons per hectare/year with a global average of
3.74 tons per hectare/year, which no other oilseed crop produces. In India, farmers
have obtained 6-8 tons per hectare/year, highest being 10 tons per hectare/year.
1 April 2019 12
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0.67
0.38 0.48
In the last 15 years, global demand for oils and fats (vegetable oil) has doubled from
92MMT in FY2000 to 180MMT in FY15. The four major vegetable oils — palm (30%),
soya bean (25%), rape seed and mustard (12%), and sunflower (8%) contributed 75%
to the total world oil production. Of the total palm oil production of 62.4MMT
(FY17), ~85% of the palm oil is produced by Indonesia and Malaysia. In 2017, global
palm oil consumption stood at 65MMT. India’s share in total palm oil consumption
stood at 14% at ~9.3MMT, with over 90% being met by imports.
Exhibit 22: Palm oil has a 64% share in edible oil imports in
India Exhibit 23: India is the largest palm oil importer
Import share of edible oils in India - FY17 (15.1MMT) Top 6 Palm Oil Importing Countries - FY17
India
2%
Palm oil 5% 5%
18% European Union
11% 34%
Soybean oil China
Source: CARE, MOSL Source: USDA Estimates (Aug 2017), MCX, MOSL
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Exhibit 24: Top-2 countries contribute 85% to the global Exhibit 25: India has a 14% market share in global palm oil
palm oil production (62.2MMT – FY17) consumption (65MMT – 2017)
Nigeria; 2% Others; 9% Indonesia;
Colombia; 15% Indonesia
2%
Others; India
Thailand; 45% India; 14%
3% EU
China
Indonesia;
Malaysia
55% EU; 10%
Malaysia; Pakistan
30% Pakistan; Malaysia; China; 8%
Others
5% 4%
Source: USDA Estimates (Aug 2017), MCX, MOSL Source: USDA Estimates (Aug 2017), MCX, MOSL
Exhibit 26: Additional area of 2.0m Hectare can be brought Exhibit 27: AP has the highest potential area to be brought
under palm oil cultivation under cultivation
Current Area Potential area for cultivation Potential Area Identified
Total States % share
(m Hectare) (m Hectare) (m hectares)
0.3 * 2.0 2.3 Andhra Pradesh (AP) 0.47 24
* as on FY17 Source: Company, MOSL Gujarat 0.26 13
Karnataka 0.26 13
Tamil Nadu 0.21 11
Bihar 0.20 10
Maharashtra 0.18 9
Meghalaya 0.05 3
Mizoram 0.06 3
Others 0.25 13
Total 1.93 100
* as on FY17 Source: Company, MOSL
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Exhibit 30: Import duty providing support amidst declining global palm oil prices
1 April 2019 15
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Exhibit 31: Well distributed maturity profile of plantation to Exhibit 32: Area under cultivation grew at 8% CAGR over
ensure higher availability of FFBs FY13-18
GOAGRO - Age profile of area under cultivation
GOAGRO's oil palm plantation area (hectares)
(hectares) - FY18
1/3rd 1/3rd 1/3rd
64,125 66,400
21,354 21,354 21,354
50,324 55,287 58,430 61,700
43,507
Upto 3 years 3-8 years >8 years FY13 FY14 FY15 FY16 FY17 FY18 1HFY19
Source: Company, MOSL Source: Company, MOSL
GOAGRO targets to add 2,000-2,500 hectares land every year GOAGRO has
66,400 hectares (as on Sept’18) under coverage for oil palm plantation (area
under coverage has increased at 8% CAGR over FY13-18). Management targets
to add 2,000-2,500 hectares to its land under cultivation every year to ensure
FFBs availability.
Biomass - providing an additional revenue stream
In the palm oil production chain, large quantities of biomass by-products (up to
almost ~4-5x of the oil production) are produced. For instance, 100MT of FFBs
processed produces 20% of palm oil (including palm kernel) while the rest is
biomass (80%). Of the biomass generated, small portion is sold in the form of
briquettes and protein with the rest sold as fiber.
Thus, some of the biomass produced is used as an animal feed ingredient, which
provides additional source of revenue to the palm oil business, as well as
strengthens the cost competitiveness of the animal feed business.
The revenue generated from biomass is sufficient to assist in covering the fixed
cost (3-4% of the sales) of the business.
Improvement in OER and global palm oil prices to aid in expanding margin
We expect EBITDA margins to expand by 60bp over FY18-21 to 22.3% on account of
improvement in OER, operating leverage (improvement in the utilization of the new
plant) and any improvement in global palm oil prices.
Improvement in OER to directly flow to EBITDA
Currently, OER for FFBs stands at 16-18%. The new plant in Andhra Pradesh is
expected to improve OER. Any improvement in OER would directly flow to EBITDA
and thus aid in expanding margins.
Exhibit 33: Revenue to grow at 11% CAGR over FY18-21E Exhibit 34: Margin to expand by 60bp over FY18-21E
Palm Oil Revenue (INRm) Growth (%) Palm Oil EBITDA (INRm) Margin (%)
25.3 22.8 21.7 21.8 22.3
20.1
18.2
15.5 14.7
4,042 11.4
7.5
2.6
5,066 5,854 6,713 7,219 8,046 734 1,157 1,270 1,350 1,573 1,796
FY16 FY17 FY18 FY19E FY20E FY21E FY16 FY17 FY18 FY19E FY20E FY21E
Source: Company, MOSL Source: Company, MOSL
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Any improvement in global palm oil prices should aid in margin expansion
GOAGRO directly purchases FFBs from farmers based on the prices determined by
the government (linked to global palm oil prices). Indian palm oil prices are
protected by the government, thanks to the import duty, but international prices
still have a bearing on the prices in India. Thus, any improvement in global palm oil
prices will directly flow to the EBITDA of the company.
750 12,528
500 8,924 (19.5)
250
(20.1) (7.5)
0
FY15
FY16
FY17
FY18
Jun-10
Jun-13
Jun-16
Mar-08
Dec-08
Sep-09
Mar-11
Dec-11
Sep-12
Mar-14
Dec-14
Sep-15
Mar-17
Dec-17
Sep-18
1 April 2019 17
Godrej Agrovet
The Indian animal feed industry is expected to grow at 13.9% CAGR over FY17-20 to
INR1,065b (as per CRISIL). The growth can be mainly attributed to the poultry segment
(14.9% CAGR over FY17-20 to reach INR735b by FY20).
Decline in fodder availability (due to declining pasture land), increased cross-breeding
in cows and buffaloes, and the shift from unorganized to organized players should aid
in driving cattle feed sales of GOAGRO.
Though, the poultry feed industry in India is expected to grow at 14.9% CAGR over
FY17-20, pure feed players like GOAGRO are facing stiff competition from integrators.
Therefore, scaling up Godrej Tyson is critical for the company to compete with forward
integrated players.
Hence, we expect the animal feed business revenue/ EBITDA to grow at 14%/ 12%
CAGR over FY18-21 to INR37,875m/ INR2,638m.
GOAGRO is one of the largest organized players in the compound animal feed
market in India. Its product portfolio comprises cattle feed, poultry feed (broiler and
layer) and aqua feed (fish and shrimp), manufactured at its 31 plants spread across
India. Also, GOAGRO has an established strong network of over 4,000 distributors.
Exhibit 37: Animal feed industry to grow at 13.9% CAGR over FY17-20
Feed Segment Volume MMT Volume Growth % Value INR b Value Growth %
FY17 FY20 FY17-20 FY17 FY20 FY17-20
Poultry Feed 16-17 20-21 7.5% 480-490 730-740 14.9%
Cattle Feed 7.5-8.5 9-10 5.9% 148-150 197-199 9.9%
Aqua Feed 1.6-1.8 2.1-2.3 9.0% 85-86 131-132 15.4%
Total 25.1-27.3 31.1-33.3 7.1% 715-725 1,060-1,070 13.9%
Source: Company, MOSL
Indian Animal Feed Industry Size (FY17- INR715-725b) GOAGRO Animal Feed Revenue - INR25.8b (FY18)
12% 13%
Poultry Feed Poultry Feed
Cattle Feed Cattle Feed
21% 45%
Aqua Feed
Aqua Feed
67% 42%
In the overall animal feed industry, poultry feed occupies the largest share of
volume/value mix at 63%/67% on increased penetration of compound feed,
especially in the broiler segment. In contrast, the share of cattle feed is lower at
21% (volume: 31%) as farmers rely on pasture land as a means of feed.
The total animal feed segment contributed ~50% to the revenue of the company
with an EBITDA contribution of 33%. Segment EBITDA margin has declined to
1 April 2019 18
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7.2% in FY18 from 9.1% in FY15 (with flat revenues over the same period),
mainly due to increasing competition from unorganized players on low entry
barriers, increasing raw material price pressure and rising competition from
integrators in poultry feed.
We expect the animal feed segment to post revenue CAGR of 14% over FY18-21
to INR37.8b. Segment EBITDA margins should decline by 20bp over FY18-21.
Cattle-feed: The animal feed segment revenue grew at a meager 0.4% CAGR
over FY15-18 to INR25.8b; while revenue from cattle feed grew at 16.4% CAGR
over the same period to INR10.8b. This led to the cattle feed segment
increasingly contributing to animal feed revenues in FY18 at 42%, which stood at
27% in FY15.
Poultry-feed: This segment’s performance has remained subdued (de-grew at
7.7% CAGR) over FY15-18 due to food processing players integrating backwards
into the broiler feed segment. Processing companies/ integrators directly supply
feed to farmers, thus, pressurizing pure feed players like GOAGRO.
In 9MFY19, the animal feed segment registered revenue growth of 17% YoY to
INR22,147m, backed by volume growth of 15.7%. The growth is attributable to
the broiler segment wherein (a) the company launched products catering to
small integrators, and (b) the layer segment witnessed strong growth. However,
segment EBIT declined by 23.1% YoY to INR824m, mainly due to an increase in
raw material prices. However, from FY20, we expect margins to start increasing
as the company took a price hike in 4QFY19 and also due to some R&D
initiatives, which would aid in reducing costs over the next 2-3 years.
GOAGRO has a strong presence in the cattle feed segment and it intends to
scale up volumes in the broiler/ layer segment (tailor-made product for small
integrators).
Exhibit 40: Revenue to grow at 14% CAGR over FY18-21 Exhibit 41: EBITDA margin to decline by 20bp over FY18-21
Animal Feed EBITDA (INRm) Margin (%)
Animal Feed Revenue (INRm) Growth (%)
16.2 8.2
7.4 7.2 7.0
13.1
11.9 6.4
25,442 26,208
5.0
25,760
3.0
0.0
(1.7)
29,929 33,482 37,875 2,077 1,926 1,856 1,493 2,133 2,638
FY16 FY17 FY18 FY19E FY20E FY21E FY16 FY17 FY18 FY19E FY20E FY21E
Source: Company, MOSL Source: Company, MOSL
Recently Amul (India’s largest milk processor) has started supplying cattle feed
directly to farmers. Therefore, over the long term, scaling up of GOAGRO’s
processed food manufacturing (Godrej Tyson) and dairy (Creamline) businesses
is critical for its feed business. The company may also resort to inorganic
acquisitions to scale-up at a faster pace.
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Exhibit 42: Milk production grew at 6.0% CAGR over FY13-17 Exhibit 43: Milk prices increased by 2.4% CAGR over FY15-18
All India Milk Production (In 000 Tonnes) Growth (%) Avg Wholesale Milk Price (INR/litre) Growth (%)
13.8
6.3 6.3 6.4 12.7
FY13 FY14 FY15 FY16 FY17 FY11 FY13 FY15 FY17 9MFY19
Shortage of Fodder supply Compound cattle feed - the only resort to shortage of fodder supply
Preference given to food Genetics, feed and fodder, cattle management and environment have a significant
crops and cash crops over
bearing on the milk producing capability of cattle (quantity and nutritive value).
fodder cultivation
Livestock reared by villagers depend on crop byproducts, grass from roadside and
Diversified use of
agricultural residues has led other marginal lands for feed. Wheat, maize and rice bran are commonly used as
to grazing lands gradually feed, but the use of concentrates is rather limited. Thus, a major share of this
diminishing industry is still unorganized as small-scale farmers do not use compound cattle
Increased mechanization in feed, while large-scale dairy farms using compound feed are few.
farming activity has led to a But, with increasing scarcity of fodder, farmers will have to use compound feed to
decline in agricultural
ensure balanced nutrition for cattle.
waste, a source of fodder
Exhibit 44: Green fodder supply deficit trend Exhibit 45: Dry fodder supply deficit trend
Green Fodder Demand (MMT) Supply (MMT) Dry Fodder Demand (MMT) Supply (MMT)
1,170
1,097
1,134
1,025
1,061
473
488
443
451
466
421
428
630
650
589
609
526
549
569
401
406
411
390
395
380
385
947
988
1995 2000 2005 2010 2015 2020 2025 1995 2000 2005 2010 2015 2020 2025
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Godrej Agrovet
Broiler segment — forward integration the only resort for pure feed players
While Meat production in India grew at 8.9% CAGR over FY01-17 to 7.4MMT;
poultry at ~47% is the highest contributor, followed by buffaloes at ~20%.
In the broiler segment, 90-95% of the feed production is in the form of compound
feed. Majority of the organized feed is manufactured by integrators who produce
70-75% of the total manufactured feed, which is typically used for captive purposes.
The balance feed is sold to individual farmers. In contrast, specialist feed
manufacturers primarily sell the feed.
1 April 2019 21
Godrej Agrovet
Exhibit 49: …contribution of poultry is 47% Exhibit 50: Proforma P&L of farmer
Species-wise meat contribution (FY17) Particulars INR (based to 100)
Evolution of chicken vertical integration in the US; India on the same path
In the early days of the broiler business, the different stages of producing broiler
meat were all separate businesses. There were independent feed mills, hatcheries,
farms and processors. However, in the 1940s, ‘integrators’ combined the different
stages of production by coordinating the production capacity of each stage; thereby
reducing costs. Thus, integrators started supplying feed to farmers giving stiff
competition to pure feed players.
Backward integration by integrators – a threat to pure feed player
Integrated poultry players use the contract farming model, rather than indulging in
captive farming. Under contract farming, integrators provide day-old chicks with
feed, medications, vaccinations and advisory services to farmers. The health, feed
intake, growth, and mortality level of these day-old chicks is the responsibility of the
farmers and is monitored by the integrator. In the case of broiler farming, at the end
of six weeks, the full grown bird is returned to the integrator, who then sells this
bird as live or processes it. In the Indian market, pure feed manufacturers like
GOAGRO are facing stiff competition from integrators/ processing companies like
Venky/ Suguna.
Tyson Foods, USA, to compete with other industry players
In 2008, GOAGRO entered into a JV with Tyson Foods, USA, to manufacture and
market processed poultry and vegetarian products through its two brands ‘Real
Good Chicken’ and ‘Yummiez’. Through this JV, GOAGRO is combining its supply
chain expertise and Tysons’ capabilities in vertically-integrated poultry processing
and product development (currently company has acquired 51% stake in Godrej
Tyson).
1 April 2019 22
Godrej Agrovet
The total poultry feed requirement in India has been estimated at 21-22MMT, based
on the overall poultry population and typical feed conversion ratios. Of this, ~16-
17MMT was contributed by compound feed in FY17.
In FY17, the poultry feed industry (comprising broiler and layer feeds) was worth
INR480-490b. The same is growing at CAGR of 14-15% and is expected to be worth
INR730-740b by FY20.
Broiler feed comprised 85% of the industry (13.5-14.5MMT) in FY17, while layer
feed stood at 2-3MMT. In the layer segment, 25-35% of the feed production is in the
form of compound feed as against 90-95% in the broiler segment. Usage of layer
feed is expected to increase with a rise in usage of compound feed and growth in
the overall egg production. Production cost of eggs is directly proportional to the
feed cost. Egg-laying chicken are fed maize, corn, broken rice, groundnut cakes,
jowar, bajra, and soya (mixed with amino acids) to augment yields. As a result, when
grain prices increase, egg production costs rise in tandem. That apart, distance
between the egg and the feed production centers also determines the price of eggs.
Exhibit 51: Egg production grew at 6% CAGR over FY13-17 Exhibit 52: Proforma P&L of farmer
India Egg Production (In lakh nos.) Growth (%) Particulars INR (based to 100)
7.2 Sales 100.0
6.3 Less: Direct Cost 86.9
5.7
5.0 Cost of chicks 3.4
Cost of feed 75.8
Cost of medicine and labour cost 7.7
Gross Profit 13.1
697,307 747,519 784,839 829,294 881,386 Margin % 13.1%
Source: DAHD, MOSL
FY13 FY14 FY15 FY16 FY17
Source: DAHD, MOSL
Fisheries industry in India: The industry is concentrated in the southern and the
eastern parts of India. The export market is relatively smaller than the domestic
1 April 2019 23
Godrej Agrovet
market, but is largely organized. In sales volume, the organized fish feed market is
expected to grow at 3-4% CAGR over FY17-20 to 0.8-0.9MMT in FY20 from 0.7-
0.8MMT in FY17.
Shrimp industry in India: As ~80% of the shrimp cultivated in India is exported, the
industry uses compound shrimp feed and complies with the international quality
standards. In volume terms, the shrimp feed industry in India grew at 13-14% CAGR
over FY13-14 to 0.9-1.0 MMT in FY17. However, in FY19, decline in global shrimp
prices and increase in raw material costs, adversely impacted shrimp feed
manufacturing companies in India.
27-28
Exhibit 55: Maize price trend Exhibit 56: Soybean price trend
Maize (INR/Quintal) Soybean (INR/Quintal)
2,200 4,400
1,900 4,000
1,600 3,600
1,300 3,200
1,000 2,800
Jul-14
Jul-15
Jul-16
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Nov-17
Nov-18
Apr-14
Apr-15
Apr-16
May-17
May-18
Aug-17
Aug-18
Feb-18
Feb-19
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Jan-15
Jan-16
Jan-17
Jan-15
Jan-16
Jan-17
Jan-18
Feb-19
Oct-14
Oct-15
Oct-16
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
1 April 2019 24
Godrej Agrovet
The organized players in the Indian dairy industry are expected to grow at 20% CAGR
over FY16-22 to INR5,321b (grew at 17.5% CAGR over FY10-16).
Increasing share of value added products (VAP) (currently less than 25%) and
procuring milk directly from farmers should aid margin improvement. Thus, we expect
the dairy segment revenue/ EBITDA to grow at 6%/ 26% CAGR over FY18-21 to
INR13,722m/ 686m by FY21.
In the processed food segment, the company intends to scale up its presence in the
live bird market (as it accounts for 98% of the poultry market in India). We expect
Godrej Tyson’s revenue/ EBITDA to grow at 12%/ 33% CAGR over FY18-21 to
INR6,142m/ 491m.
We believe over the long term, GOAGRO is well placed to scale up its dairy and poultry
processing businesses by leveraging the Godrej brand, which should also aid
GOAGRO’s animal feed sales.
1 April 2019 25
Godrej Agrovet
Thus, scaling up of the dairy business is also critical to the cattle feed business as
going forward, cooperative societies/ private companies may start with
backward integration (similar to broiler processing companies).
GOAGRO’s growth strategy for the dairy business is to: (i) leverage its brand to
increase its market share in India’s southern states, (ii) increase margins by
increasing share of value-added products in the portfolio and (iv) increase the
milk procurement base directly through farmers, which would also aid in
increasing sales of its cattle feed division.
The company has changed its strategy of milk procurement; it procures more
milk from cows now rather than buffaloes due to a decline in SMP and butter
prices. Currently, 70% of its milk requirement is met by cows, which was 52% a
year ago.
Hence, we expect the segment to deliver revenue CAGR of 6% over FY18-21 to
INR13,722m in FY21. We expect, EBITDA margin to expand by 200bp to 5.0% by
FY21.
Indian Dairy Unorganized (INRb) Organized (INRb) Dairy Revenue (INRm) EBITDA Margin (%)
Industry
5.2% 5.0%
4.5%
5,321
3.0% 3.6%
677 5,127
2,643 2,729 10,099 11,577 11,766 12,589 13,722
1 April 2019 26
Godrej Agrovet
SWOT Analysis
Strong brand Seasonal nature of Lower penetration of Increased raw material
pedigree aids in business leads to compound feed in prices in animal feed
attracting and volatility in earnings cattle and layer and crop protection can
retaining customers Feed cost accounts segment provides huge affect profitability
Operates across for 60-70% of the runway for growth Intense competition
diversified business total cost for the Scaling up of dairy and from fully-integrated
segments farmer, therefore, it processed food players in broiler feed
Market leader in PGR may be difficult for segments to provide Decline in rainfall can
GOAGRO to pass on complementary sales of impact crop protection
the price increase in feed to farmers and palm oil business
raw materials Scaling up the
consumer businesses by
leveraging the Godrej
brand
1 April 2019 27
Godrej Agrovet
Bull case
In the crop protection business, we have factored in higher sales/ EBITDA CAGR
of 17%/21% over FY18-21 v/s base case assumption of 15%/ 16% CAGR due to
line-up of product launches in the domestic business and capacity expansion in
Astec. We have also factored in higher EV/ EBITDA multiple of 19x v/s base case
multiple of 18x.
In palm oil, we have factored in higher processing volume growth of 14% CAGR
over FY18-21 v/s our base case assumption of 10%.
In animal feed, new launches should aid revenue growth. Easing of raw material
prices should help in improving margins. Thus, we have factored in higher
revenue/ EBITDA CAGR of 15%/ 19% over FY18-21 v/s base case assumption of
14%/ 12%.
Carrying the above assumptions, we get a bull case target price of INR729
(upside of 43%) based on FY21E EBITDA (v/s base case target price of INR610).
Bear Case
In the crop protection business, we have factored in lower sales/ EBITDA CAGR
of 10%/ 10% over FY18-21 v/s base case assumption of 15%/ 16% CAGR as the
line-up of product launches may fail to pick up as expected (have also factored
in the decline in margins).
In palm oil, we have factored in lower processing volume growth of 8% CAGR
over FY18-21 v/s our base case of 10%. We have factored in lower EV/ EBITDA
multiple of 13x v/s base case multiple of 18x in palm oil & crop protection.
In animal feed, competition from integrators, especially in the broiler segment
should intensify further and therefore, we have factored in a decline in margins.
We have factored in revenue/ EBITDA CAGR of 11%/ 9% over FY18-21 v/s base
case assumption of 14%/ 12%. We have also factored in lower EV/ EBITDA
multiple of 11x v/s base case multiple of 14x.
Carrying the above assumptions, we get a bear case target price of INR395
(downside of 22%) based on FY21E EBITDA (v/s base case target price of
INR610).
Exhibit 59: Scenario analysis – bull case Exhibit 60: Scenario analysis – bear case
Bull Case FY19E FY20E FY21E Bear Case FY19E FY20E FY21E
Sales (INR m) 58,276 66,136 75,772 Sales (INR m) 57,118 62,492 67,980
Sales growth (%) 11.9 13.5 14.6 Sales growth (%) 9.7 9.4 8.8
EBITDA (INR m) 4,694 6,207 7,718 EBITDA (INR m) 4,596 5,363 6,017
EBITDA Margin (%) 8.1 9.4 10.2 EBITDA Margin (%) 8.0 8.6 8.9
EBITDA growth (%) 6.0 32.2 24.4 EBITDA growth (%) 3.7 16.7 12.2
PAT (INR m) 2,494 3,288 4,230 PAT (INR m) 2,422 2,708 3,058
PAT growth (%) 14.8 31.8 28.6 PAT growth (%) 11.5 11.8 12.9
Target price (INR) 729 Target price (INR) 395
Upside/downside (%) 43 Upside/downside (%) (22)
Source: Company, MOSL Source: Company, MOSL
1 April 2019 28
Godrej Agrovet
Exhibit 61: Revenue to grow at 12% CAGR over FY18-21 Exhibit 62: Crop protection and AF dominates revenue mix
Revenue (INRm) Growth (%) Crop Protection Animal Feed Palm Oil Dairy
31.2
7%
11% 21% 22% 20% 19% 19%
10% 11% 11% 11% 11%
37,550 49,264 52,059 58,588 64,895 73,004 16% 17% 17% 18% 18%
13%
FY16 FY17 FY18 FY19E FY20E FY21E FY16 FY17 FY18 FY19E FY20E FY21E
Source: Company, MOSL Source: Company, MOSL
1 April 2019 29
Godrej Agrovet
Exhibit 63: EBITDA margin to expand by 100bp over FY18-21 Exhibit 64: EBITDA mix
EBITDA (INRm) Margin (%) Crop Protection Animal Feed Palm Oil Dairy
9.0 9.5 1% 6%
8.9 8.5 10% 7% 8% 8%
7.9 8.0 19%
21% 22% 23% 22% 21%
FY16 FY17 FY18 FY19E FY20E FY21E FY16 FY17 FY18 FY19E FY20E FY21E
Source: Company, MOSL Source: Company, MOSL
Exhibit 65: Adj. PAT to grow at 19% CAGR over FY18-21 Exhibit 66: To generate CFO of INR12b over FY19-21
Adj PAT (INRm) Growth (%)
Reclassification of acceptance CFO (INRm)
35.1 under IndAS in FY17
24.0 9,534
21.5
2,172 11.8
1,693
4,570
3,293 3,721 3,688 3,773
(2.5) (5.1)
1,587
2,287 2,428 3,010 3,657
FY16 FY17 FY18 FY19E FY20E FY21E FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Exhibit 67: ROE and RoCE to improve going ahead Exhibit 68: Net DE ratio to improve further
RoE (%) RoCE (%) Net Debt (INRm) Net DE Ratio (x)
30.0
1.6
25.5
23.8
18.3 19.6
17.9 1.0
16.4 2,965
3,799 3,345 2,225
17.5 18.3 0.6
15.7 16.8
14.7 14.8 0.3
13.2 0.2 0.2
0.1
6,307 12,744 6,102
FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY15 FY16 FY17 FY18 FY19E FY20E FY21E
1 April 2019 30
Godrej Agrovet
Exhibit 69: 1year forward EV/EBITDA Exhibit 70: 1year forward P/E
EV/EBITDA (x) Avg (x) P/E (x) Avg (x) Max (x)
Max (x) Min (x) Min (x) +1SD -1SD
+1SD -1SD 57
30 50.3
26.8 49
26 43.9
23.4
22 41 37.6
18 17.9 33
33.7 33.7
17.9
14 25
Jul-18
Jul-18
Jun-18
Nov-17
Nov-18
Jun-18
Nov-17
Nov-18
Apr-18
May-18
Dec-17
Aug-18
Dec-18
Apr-18
May-18
Jan-18
Feb-18
Mar-18
Sep-18
Jan-19
Feb-19
Mar-19
Dec-17
Aug-18
Dec-18
Jan-18
Feb-18
Mar-18
Sep-18
Jan-19
Feb-19
Mar-19
Oct-18
Oct-18
1 April 2019 31
Godrej Agrovet
1 April 2019 32
Godrej Agrovet
Key risks
1 April 2019 33
Godrej Agrovet
Management overview
1 April 2019 34
Godrej Agrovet
Gross Block 5,234 6,417 12,139 14,109 15,185 17,833 20,163 22,554
Less: Accum. Deprn. 578 975 564 1,329 2,214 3,204 4,325 5,585
Net Fixed Assets 4,655 5,443 11,575 12,779 12,971 14,629 15,838 16,969
Goodwill on Consolidation 0 0 1,949 1,949 1,949 1,949 1,949 1,949
Capital WIP 1,492 1,380 638 504 1,904 1,506 1,426 1,535
Total Investments 1,288 1,858 2,140 1,755 1,952 1,952 1,952 1,952
Curr. Assets, Loans&Adv. 8,326 8,847 14,930 15,157 16,749 18,783 20,928 23,894
Inventory 3,193 3,888 6,665 7,381 7,629 8,717 9,703 10,856
Account Receivables 2,259 2,693 4,545 5,219 6,315 6,742 7,467 8,400
Cash and Bank Balance 1,145 175 420 538 299 503 633 1,123
Loans and Advances 1,729 2,092 3,299 2,019 2,507 2,821 3,125 3,515
Curr. Liability & Prov. 3,934 3,711 5,862 11,212 12,890 14,840 16,130 17,892
Account Payables 2,296 2,141 3,349 8,408 9,550 11,081 11,967 13,208
Other Current Liabilities 1,519 1,434 2,312 2,496 2,955 3,326 3,684 4,144
Provisions 120 136 202 308 385 433 479 539
Net Current Assets 4,391 5,136 9,067 3,946 3,859 3,943 4,798 6,003
Appl. of Funds 11,827 13,818 25,369 20,933 22,635 23,979 25,963 28,408
1 April 2019 35
Godrej Agrovet
1 April 2019 36
REPORT GALLERY
RECENT INITIATING COVERAGE REPORTS
`
Explanation of Investment Rating
Investment Rating Expected return (over 12-month)
BUY >=15%
SELL < - 10% Godrej Agrovet
NEUTRAL > - 10 % to 15%
UNDER REVIEW Rating may undergo a change
NOT RATED We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.
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Disclosure of Interest Statement Godrej Agrovet
Analyst ownership of the stock No
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the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or
published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such
distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all
jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall
be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The person accessing this information specifically agrees
to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSL
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm
Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id: na@motilaloswal.com, Contact No.:022-38281085.
Registration details of group entities: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser:
INA000007100.Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409)
offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate
products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
*MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f. August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company Law Tribunal, Mumbai Bench. The existing registration no(s) of
MOSL would be used until receipt of new MOFSL registration numbers.
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