Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Godrej Agrovet Limited (GAL).

 

The rating continues to factor in the diversified and healthy business risk profile of GAL which has presence in the animal feed, palm oil, crop protection, dairy, poultry and processed foods segments. The company is one of the leading players in the domestic organised animal feed industry and enjoys a substantial market share in the palm oil segment. The rating also factors in the company’s strong financial risk profile supported by healthy debt protection metrics, low gearing and healthy return indicators. The rating further factors in the financial flexibility enjoyed by GAL being part of the Godrej group.

 

These strengths are partially offset by susceptibility to volatility in raw material prices, intense competition in some of the business segments and vulnerability to weather conditions and government regulations. Nonetheless, the company's presence across diverse agriculture-related businesses mitigates these risks to some extent.

Analytical Approach

CRISIL Ratings has considered the consolidated business and financial risk profiles of GAL. This is because these entities, collectively referred to as Godrej Agrovet, have common promoters and are in similar lines of business.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Diversified business presence

The company’s focus on diversification into newer segments such as palm oil, crop protection, dairy and poultry over the past 7-8 fiscals in order to lower its concentration in the animal feed business (revenue contribution down to around 48% for the first nine months of  fiscal 2023 from 80% in fiscal 2012) supports its overall business risk profile and provides cushion against slowdown in any business segment.

 

In the first nine months of fiscal 2023, overall revenue grew 17% year-on-year, largely on account of solid volume growth in the animal feed and palm oil businesses and strong sales growth in dairy and poultry segments. Operating margin was, however, impacted by high raw material prices, lag in price hikes across most segments and unfavourable product mix in the crop protection segment. It improved slightly in the palm oil segment backed by higher realisations and in poultry segment supported by strong performance by branded categories. On the other hand, the operating margin declined in the animal feed (on a per tonne basis) and dairy segments, because of limited or delayed transmission of high input prices. The crop protection segment was majorly impacted due to deferred application opportunities during the Kharif season and competitive pressures for key enterprise products of Astec Lifesciences.

 

Dominant position in the domestic animal feed and palm oil segment

GAL enjoys a dominant position in the domestic organised animal feed industry with presence across various sub-categories such as cattle, broiler, layer, aqua and other feeds. The company's efforts are driven by research and development to achieve cost leadership and competitiveness which have supported its volume growth. The segment continued to see traction across sub-segments in the first nine months of fiscal 2023 as well, with overall volume growth of around 8%.

 

As almost 97% of palm oil consumption in India is met through imports, demand for domestic palm oil is expected to remain robust. The segment registered compounded annual growth rate of 18% over the seven fiscals through 2022, with healthy operating margin of above 18%.

 

Strong financial risk profile

Financial risk profile remains strong as reflected in gearing of 0.44 times as on December 31, 2022 and interest coverage of 5.62 times in the first nine months of fiscal 2023, versus 0.67 times and 12.6 times, respectively in the previous fiscal. Debt remained at similar levels at Rs 1,542 crore as on September 30, 2022 from Rs 1,566 crore as on March 31, 2022. While debt levels are expected to remain high in order to fund the capital expenditure (capex) plan and working capital requirements, the overall financial risk profile would remain comfortable.

 

Strong financial flexibility from being part of the Godrej group

GAL enjoys strong financial flexibility being part of the Godrej group and has the ability to raise debt at competitive rates and on short notice. It is able to directly derive implicit benefits being part of the Godrej group and without a formal arrangement of support with the parent, group companies or promoters.

 

Weaknesses:

Exposure to volatility in raw material and commodity prices and intense competition

Revenue and profitability remain susceptible to volatility in raw material and commodity prices in the animal feed, palm oil, dairy and poultry businesses. Given the intense competition in the animal feed business, the company's ability to pass on the increase in prices is with a lag or at times, limited. In fiscal 2023, operating margin was impacted by high raw material cost in the feed and dairy segment. Also, revenue sharing with farmers in the palm oil business is formula driven and linked to international crude palm oil prices and hence revenue and operating margin remains susceptible to fluctuations in commodity prices.

 

Susceptibility to weather conditions and government regulations

Revenue and profitability are susceptible to weather conditions as well as government regulations. Nonetheless, the company's presence across diverse agriculture-related businesses mitigates these risks to some extent. In fiscal 2023, erratic monsoons in key states impacted the application opportunities for agrochemicals in the crop protection segment. Also, the palm oil business has been impacted by extreme heat in the past, which resulted in lower oil extraction from fresh fruits, resulting in decline in yield.

 

High working capital intensive operations in the crop protection business

Among the six business segments, the crop protection (including Astec) segment has large working capital requirement with receivables and inventory of 8-9 months and supported by creditors of 5-6 months. However, owing to minimal/negative working capital requirement in other key segments, the overall working capital cycle is relatively well managed.

Liquidity: Strong

Cash accrual (post-dividend) expected at Rs 400-600 crore each in fiscals 2024 to 2026 should comfortably cover annual debt servicing. Bank lines of about Rs 500 crore had minimal utilisation of 32% on average in the 12 months through December 2022. The working capital requirement is partially met through issuance of commercial paper worth Rs. 900 crore availed at attractive rates of 7.5%. GAL enjoys strong financial flexibility being part of the Godrej group, which lends comfort to overall liquidity. The company has sizeable capex plans across segments over the next 2-3 years which are expected to be partly funded by additional debt.

 

Environment, social and governance (ESG) profile

GAL’s ESG profile supports its healthy credit risk profile.

The animal feed and agrochemicals sectors have significant impact on the environment owing to higher emissions, waste generation and water consumption. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners, and due to its nature of operations affecting local community and health hazards involved. GAL has been focusing on mitigating its environmental and social risks.

 

Key ESG highlights:

• As part of the vision, the company aspires to develop products which consume fewer resources (energy, water), emit fewer greenhouse gases and include recyclable, renewable or natural materials to the maximum possible extent, through extensive research.
• The company has reduced water intensity by 14% as of March 2022, against a target of 30% reduction by 2025. GAL is a water positive company and conserves 4 times the water that it consumes. The 2025 goal to reduce waste to landfill by 30% has already been achieved by the company by March 2022 with 31% reduction so far.
• GAL’s oil palm facilities use waste of fruit bunches as renewable boiler fuel, which has led to more than 99% energy being generated through renewable energy sources.
• In the coming year, the company will adopt internal carbon pricing and is committing towards science-based targets to further strengthen its climate action response.
• The governance structure is characterised by 54% of the board members being independent directors, dedicated investor grievance redressal system and extensive disclosures. The company’s chairman and executive positions are also split.

 

There is growing importance of ESG among investors and lenders. GAL’s commitment to ESG will play a key role in enhancing stakeholder confidence, given access to domestic capital markets.

Rating Sensitivity factors

Downward factors

• Significant decline in revenue and profitability impacting accrual and return indicators
• Large debt-funded acquisition or capex impacting the financial risk profile with gearing of more than 1 time on a sustained basis

About the Company

GAL, part of the Godrej group, has presence across the animal feed, palm oil, crop protection, dairy, poultry and processed foods segments with 60+ facilities and a wide distribution network across the country. The company is one of the largest organised animal feed manufacturers in India offering cattle, layer, broiler, shrimp, fish and other feeds. In addition, GAL has interests in animal feed through its joint venture, ACI Godrej Agrovet Pvt Ltd in Bangladesh.

 

In the crop protection business, the company has products across the insecticides, fungicides and plant growth regulator segments with a pan-India network of ~6,600 distributors. Through its subsidiary Astec, GAL is involved in the manufacturing and sale of intermediates, active ingredients and formulations.

 

In the palm oil segment, GAL has palm tree plantations across nine states for producing crude palm oil and palm kernel.

 

The company has presence in the dairy segment through its subsidiary Creamline Dairy Products Ltd ('CRISIL AA-/Stable/CRISIL A1+') and in the processed poultry and vegetarian food products segment through Godrej Tyson Foods Ltd.

Any other information: Not applicable