Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Godrej Agrovet Ltd (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 49.5% for the fiscal 2024 from 80% in fiscal 2012) supports its overall business risk profile and provides cushion against slowdown in any business segment.

 

In the fiscal 2024, overall revenue saw modest growth of 2% year-on-year, largely on account of healthy volume growth in most of the business segments, apart from the business under the subsidiary, Astec Lifesciences, which faced competitive pressures for its key enterprise products. The volume growth was offset by negative or modest expansion in realisations, especially in the palm oil, poultry and animal feed segments, leading to a muted revenue growth.

 

Operating margin, however, improved on a year-on-year basis, to 7.6% for the fiscal 2024, as against 5.7% for fiscal 2023, backed by lower input prices in dairy and poultry segments and higher operating levels in the animal feed and crop protection segments. The improvement in operating margin was the highest in crop protection segment, supported by strong volumes and realisations in the in-licensed product portfolio, apart from the dairy segment where operating margin improved substantially, on the back of lower milk procurement prices and operating efficiency, from operating losses seen last year. On the other hand, operating margin declined in the Astec Lifesciences segment, as it faced continued price erosion and subdued demand for its key enterprise product, despite robust performance by its contract manufacturing segment.

 

• Dominant position in the domestic animal feed and palm oil segments: GAL enjoys a dominant position in the domestic organised animal feed industry with presence across various sub-categories such as cattle, broiler, layer, fish, shrimp 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, especially in cattle feed and aqua feed, during the fiscal 2024.

 

Being the second largest consumer of palm oil in the world, India’s demand for domestic palm oil is expected to remain robust. The segment registered compounded annual growth rate of 13% over the nine fiscals through 2024, with healthy operating margin of above 18% over the period. Strong volume growth expected over the medium term, along with the longer shelf-life volumes coming from company’s newly set up oil refinery, would help keep operating margins healthy.

 

• Strong financial risk profile: Financial risk profile remains strong as reflected in gearing of 0.51 times as on March 31, 2024 and interest coverage of 7.27 times in the fiscal 2024, versus 0.55 times and 6.57 times, respectively, as on March 31, 2023. Debt levels declined slightly to Rs 1,309 crore as on March 31, 2024 from Rs 1,321 crore as on March 31, 2023. Debt levels are expected to remain range-bound over the medium term on the back of strong cash accruals from the business, despite the capital expenditure (capex) plan and working capital requirements, because of which 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. During the fiscal 2024, operating margin was impacted by high raw material cost in the animal feed 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 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 2023, erratic monsoons in key states had 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 a decline in yield.

 

• 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 over fiscals 2025 to 2027 should comfortably cover annual debt servicing and majority of capex plans. Bank lines of about Rs 400 crore had minimal utilisation of 21% on average in the 12 months through December 2023. The working capital requirement is partially met through issuance of commercial paper worth around Rs 700 crore availed at attractive rates of 7.2% (as of April 2024). GAL enjoys strong financial flexibility being part of the Godrej group, which lends comfort to overall liquidity.

 

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.
• 77% of GAL’s energy consumption during the fiscal 2024 was from clean, renewable sources, as against a target of 90% by 2026. Its oil palm facilities use of waste of fruit bunches as renewable boiler fuel, which has led to around 99.8% energy being generated through renewable energy sources.
• GAL is a 20 times water positive company, having sequestered around 37 million cubic metres of water during fiscal 2024.
• Company became one of the first agri companies in India to commit to reduction in Scope 1 & Scope 2 GHG emissions by 37.5% and Scope 3 emissions by 16.0% by 2035.
• The governance structure is characterised by 50% 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 50+ 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