Godrej Agrovet: The challenge of varied businesses under one roof

At the core, Godrej Agrovet has its animal feed business which generated 53% of revenue last fiscal. Its crop protection and oil palm business generated 15% and 10% revenue, respectively. Graphic by Subrata Jana/Mint

At the core, Godrej Agrovet has its animal feed business which generated 53% of revenue last fiscal. Its crop protection and oil palm business generated 15% and 10% revenue, respectively. Graphic by Subrata Jana/Mint

Godrej Industries Ltd, the promoter of Godrej Agrovet Ltd, is listing its unit at an opportune time.

As Sharekhan Ltd points the listing will help unlock value for the parent firm. Further, at present, high valuations may not be a major deterrent.

At the upper of the price band, the post-issue price-to-earnings multiple comes to 32 times the last fiscal year’s earnings.

In comparison, the Nifty is trading at around 25 times historical earnings.

A sound financial performance, high return ratios—a return on equity of 27.8% in FY17—and a healthy balance sheet may well justify premium valuations.

However, the point investors need to ponder over is how value accretive the investment can be.

Broadly, Godrej Agrovet has five business divisions—animal feed, crop protection, oil palm, dairy, poultry and processed foods—giving it a conglomerate structure. It holds a 52% stake in Creamline Dairy Products Ltd, which, as its name implies, is in the dairy business.

Godrej Agrovet owns an around 56% stake in Astec Lifescience Ltd, a listed agrochemical firm.

And it has joint ventures Godrej Tyson Foods Ltd, a food processing firm, and ACI Godrej Agrovet Pvt. Ltd, which runs a poultry products business in Bangladesh. All of these contribute meaningfully to Godrej Agrovet’s revenue.

The businesses strictly do not complement each other, especially if one looks at it through a backward and forward integration prism. Each industry has its own dynamics and profitability profile. This gives Godrej Agrovet a holding firm colour.

At the core, it has its animal feed business which generated 53% of revenue last fiscal. Crop protection and oil palm business generated 15% and 10% revenue, respectively. But one cannot call Godrej Agrovet a pure animal feed firm as crop protection business generated more operating profit (earnings before interest and tax) than animal feed last fiscal. Similarly, palm oil’s contribution to operating profit is disproportionate to its revenue share.

Of course, as the historic financial performance shows, the company has done well in the past despite the varied business verticals. Also, the evolution of business verticals (especially in poultry and processed foods) offers value unlocking opportunities in future.

But the challenge once it becomes a listed company is value discovery. Stock markets in general have given preference to individual companies rather than a firm holding multiple businesses.

In fact, such firms are ascribed holding company discounts. So much so that several firms (CESC Ltd and Tube Investments of India Ltd, for example) are restructuring to become simpler entities and attain better valuations.

True, the current structure should not be a problem as long as the company delivers on the earnings front. However, for the performance to fully count in the stock performance, a simpler structure may just work better.