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 49% in fiscal 2022 from 80% in fiscal 2012) supports its overall business risk profile and provides cushion against slowdown in any particular business segment.

In fiscal 2022, overall revenue grew by 33% largely on account of solid growth in the animal feed and palm oil business driven by volume growth and passthrough of high input prices. Operating margin was, however, impacted by high raw material prices, lag in price hikes across most segments and high sales returns in the crop protection segment. Margin improved in the palm oil and Astec segments backed by higher realisations, and remained stable in animal feed segment (on a per ton basis); however, it declined in other segments such as crop protection, dairy and poultry, because of limited or delayed transmission of high input prices. The crop protection segment was particularly impacted by lower sowing because of an erratic monsoon season, leading to high sales returns and provision for doubtful debts.

* 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 and have supported its volume growth.

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 margin of above 18%.

* Strong financial risk profile

Financial risk profile remains strong as reflected in gearing at about 0.67 times as on March 31, 2022 and interest coverage of about 13 times in fiscal 2022, versus 0.46 times and 14 times, respectively in the previous fiscal. Debt increased to Rs 1,566 crore in fiscal 2022 from Rs 990 crore in the previous fiscal, as the company continued its reliance on borrowings to fund the working capital requirement and to benefit from the arbitrage of 150-200 basis points versus supplier funding. While debt levels are expected to remain high in order to fund the capital expenditure plan and working capital requirements, the overall financial risk profile will 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 2022, 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 margins remain 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 2022, erratic monsoons in key states led to lower sowing of major crops and resulted in high sales returns 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, thus 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 is relatively well managed.

Key Financial Indicators

Annexure - Details of Instrument(s)

Annexure – List of entities consolidated

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