Rating Rationale
December 31, 2020 | Mumbai
Godrej Agrovet Limited
'CRISIL A1+' assigned to CP 
 
Rating Action
Rs.600 Crore Commercial Paper CRISIL A1+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A1+' rating to the commercial paper of Godrej Agrovet Limited (GAL).
 
The rating factors in GAL's diversified and healthy business profile with presence in animal feed, vegetable oil (palm oil), crop protection, dairy and poultry and processed foods. GAL is one of the leading players in the domestic organised animal feed industry and also enjoys ~35% market share in the palm oil segment. The rating also factors in GAL's strong financial risk profile supported by healthy debt protection metrics, low gearing levels and healthy return indicators. The rating further factors in the financial flexibility enjoyed by GAL from its strong parentage as part of the Godrej Group.

The strengths are offset by susceptibility of the profitability levels 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 agri-businesses mitigates the risks to some extent.

Analytical Approach

For arriving at the rating, CRISIL has considered consolidated business and financial risk profile of GAL. This is because these entities consolidated, collectively referred to as Godrej Agrovet, have common promoters and are in similar lines of businesses. CRISIL has also factored in support from the Godrej group, since Godrej Agrovet is an integral part of the group representing its presence in the agri-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:
Over the past 7-8 fiscals, GAL has focused on lowering its revenue contribution from the animal feed business (80% in fiscal 2012 to about 50% in fiscal 2020) through diversification in other segments like oil palm, crop protection and others. Over the last five years, while palm oil and crop protection businesses have grown at a compound annual growth rate (CAGR) of ~11% and ~9% in, respectively, the animal feed business witnessed CAGR of ~7% during the period. The diversification supports the overall business risk profile of the company and provides cushion from slowdown in any particular business segment.

In fiscal 2020, revenue grew by a healthy 17% led by strong growth in animal feed business and Astec Lifescience Limited (Astec; subsidiary of GAL). The animal feed business revenues grew by almost 20% during the fiscal driven by improved realisations despite muted volume growth of 3% impacted due to Covid-19 related disruptions.  Dairy business had been impacted due to muted demand in the fourth quarter of the fiscal. Crop protection witnessed tepid growth owing to weather conditions and focus on working capital cycle improvement. Poultry and processed food segment (through subsidiary Godrej Tyson Foods Limited; GTFL) witnessed sales and prices decline due to rumour of linkingCOVID-19 to poultry. Sales were impacted in oil palm business due to lower crude palm oil prices and reduced oil content in fruits.

With diversified presence in agri business, the impact of Covid-19 led disruptions has been limited. Revenues declined by ~8% in the first half of fiscal 2021 over the corresponding period of the previous fiscal. The impact was more pronounced in its animal feed and poultry businesses due to rumours linking Covid-19 to poultry consumption, resulting in a significant decline in demand and prices of live birds. Dairy segment witnessed dip in demand from HORECA segment. Healthy growth witnessed in Astec, GTFL and oil palm businesses supported the topline and margins in the first half of fiscal 2021. 
 
* Dominant position in the domestic animal feed industry; also enjoys ~35% market share in 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 research and development (R&D) driven efforts to achieve cost leadership and competitiveness have supported its volume growth.
 
With India being an importer of palm oil with almost 97% of consumption met through imports, demand for domestic palm oil industry is expected to remain robust. Company has about 70,000 hectares of land under cultivation. Segment has witnessed 11% CAGR over past 5 fiscals ending fiscal 2020 and healthy margins above 15%.
 
* Strong financial risk profile
Financial risk profile remains strong as reflected in gearing of about 0.2 time as on September 30, 2020 and interest coverage of about~17 times. The debt has increased in fiscal 2020 to fund higher working capital requirements. GAL's capital expenditure (capex) plans of around Rs 300 crore per annum over fiscals 2021 and 2022, are expected to be funded through internal accrual and long-term debt. While debt levels are expected to increase to fund capex and working capital requirement; financial risk profile should remain comfortable.
 
* Strong financial flexibility as part of the Godrej group
GAL enjoys strong financial flexibility being part of the Godrej group and a subsidiary of Godrej Industries Ltd (GIL, rated 'CRISIL AA/Stable/CRISIL A1+', which held a 59.28% stake as on September 30, 2020). Being part of the group, helps the company to maintain moderate access to capital markets and enjoy healthy relationships with banks. The company also benefits from the interactions with group companies as well as from strategic inputs provided by the Godrej group. CRISIL expects managerial and financial support to come in on a timely basis given the criticality of the company to the group.
 
Weaknesses
* Susceptible to volatility in raw material and commodity prices and intense competition
Revenues and profitability remain susceptible to volatility in raw material and commodity prices in the animal feed and palm oil businesses. Given the intense competition in the animal feed business, the company's ability to pass on the increase in prices is limited. In fiscal 2020, high raw material prices in the animal feed and dairy businesses had impacted the margins despite the company effecting price hikes. Also revenue sharing with farmers in the palm oil business is formula driven and linked to international crude palm oil prices and hence revenues and margins remain susceptible to commodity prices.
 
* Susceptibility to weather conditions and government regulations
Revenue and profitability are vulnerable to weather conditions as well as government regulations. Nonetheless, the company's presence across diverse agri-businesses mitigates the risks to some extent. In fiscal 2020, the company's crop protection business witnessed modest year-on-year revenue growth of ~5%, over ~7% in fiscal 2019 and ~12% in fiscal 2018, as growth was impacted by the initially delayed and subsequently extended monsoon. Also regulatory risk persists in crop protection business with respect to ban on products. However no major contribution from these products in the red category provides comfort. Also the performance of its palm oil business was impacted by extreme heat, which resulted in lower oil extraction from fresh fruit bunches, thus resulting in a decline in the yield.
 
* High working capital intensive operations in Crop protection business
Amongst the six business segments, the crop protection segment (including Astec) has high working capital requirement with debtor and inventory of about 8-9 months and supported by creditor of 5-6 months. With focused efforts on working capital management, Rs 433 crore has been realised in the first half of fiscal 2021 as compared to Rs 299 crore over the corresponding period in the previous fiscal. However, any significant bad debt write-offs remain key monitorable. Also with minimal/negative working capital requirement in other key segment, overall working capital intensity for the company remains moderate.
Liquidity Strong

Cash accrual (post-dividend), expected at Rs 300-400 crore each in fiscals 2021 and 2022 should comfortably cover annual debt servicing of Rs 60-80 crore each fiscal. Bank lines of Rs 765 crore had minimal utilisation of 15% in the six months through September 2020. Working capital has also been met from commercial paper issuance of Rs 300-350 crore over the same period. Also being part of Godrej group, GAL enjoys strong financial flexibility which lends comfort to overall liquidity.

Rating Sensitivity Factors
Downward Factors
* Significant decline in revenue and profitability impacting accruals and return indicators
* Large debt-funded acquisition or capex impacting the financial risk profile with gearing levels moving above 1 time on a sustained basis.

About the Company

GAL, part of the Godrej group, has presence across animal feed, vegetable oil (palm oil), crop protection, dairy and poultry and processed meat with about 31 manufacturing facilities and 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, Bangladesh.

In the crop protection business, the company has products across insecticides, fungicides and plant growth regulators with a pan India network of ~7,000 distributors. Through subsidiary Astec, company in involved in the manufacturing and sale of intermediates, active ingredients and formulations.

In the palm oil segment as on March 31, 2020, GAL had around 70,000 hectares of palm tree plantations across nine states for producing crude palm oil and palm kernel.
 
The company has presence in the dairy segment through subsidiary Creamline Dairy Products Ltd ('CRISIL AA-/Stable/CRISIL A1+') and in processed poultry and vegetarian food products through Godrej Tyson Foods Ltd.

Key Financial Indicators
As on/for the period ended March 31 2020 2019
Revenue Rs crore 7000 5977
Profit After Tax (PAT) Rs crore 299 344
PAT Margin % 4.3 5.8
Adjusted debt/Adjusted networth Times 0.3 0.2
Interest coverage Times 12.9 15.1

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Cr) Complexity levels Rating assigned with outlook
NA Commercial Paper NA NA 7 to 365 Days 600 Simple CRISIL A1+
 
Annexure - List of Entities Consolidated
Name of entity Extent of consolidation Rationale for consolidation
Godvet Agrochem Ltd Full Subsidiary
Astec LifeSciences Ltd Full Subsidiary
Behram Chemicals Pvt Ltd Full Subsidiary
Astec Europe Sprl Full Subsidiary
Comercializadora Agricola Agroastrachem Cia Ltda Full Subsidiary
Creamline Dairy Products Ltd Full Subsidiary
Godrej Tyson Foods Ltd Full Subsidiary
Godrej Maxximilk Pvt Ltd Full Subsidiary
ACI Godrej Agrovet Pvt Ltd Equity JV
Omnivore India Capital Trust: Equity JV
Al Rahba International Trading Limited Liability
Company, United Arab Emirates		 Equity Associate
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  600.00  CRISIL A1+    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Group Support
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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