Gaurav Parikh

What happens to a smaller company when a bigger and stronger company takes it over? Well, the smaller company gets stronger. Just like MRPL did when ONGC bought out Aditya Birla Group’s stake in it in 2003 and when BSE-listed Dhanprayog Investment changed its name to Westlife Development in 2008 and McDonald’s’ west and south India franchising business was reverse merged into it. Now, it is the turn of the listed Astec LifeSciences. This small company has been acquired by the bigger, unlisted Godrej Agrovet of the Godrej group.

What’s the deal?

Diversified agri business company Godrej Agrovet, a subsidiary of Godrej Industries, acquired the promoter holding of 45% in Astec LifeSciences in early April this year, paying ₹190 a share to add up to an aggregate of ₹167 crore. Astec’s equity capital stands at ₹19.46 crore at a face value of ₹10. The promoter group of founder Ashok Hiremath held a 55.29% stake in the company, which enjoys a market capitalisation of ₹475 crore. Godrej Agrovet has launched an open offer — which closes on December 8 — to acquire another nearly 51 lakh shares at ₹246.60, taking the overall acquisition cost to ₹292 crore. 

A fully successful open offer would take Godrej Agrovet’s holding in the company to 71.34%. The share purchase agreement requires that in case Godrej Agrovet is unable to move its stake to at least 50.32% in the open offer, then Ashok Hiremath, who has retained a 10% holding, will have to sell additional shares at ₹190 to Godrej Agrovet to bring the latter’s stake up to 50.32%.

So, what’s the ‘Big’ deal? 

The Godrej Group is now the promoter of Astec LifeSciences and will consolidate its financials. Adi Godrej, the chairman of the Godrej Group, had this to say about the acquisition: “Very synergistic... will add a lot of value in the quarters to come.” In the event that the open offer is successful, Godrej Agrovet’s stake will rise to 71.34%. However, this is unlikely, as shareholders will certainly not participate in the offer, given that it will put Godrej in the driver’s seat. Godrej Agrovet’s final holding in the company shall be clear only once the end of the year is in sight. Whatever be the case, Astec will now be a subsidiary of Godrej Agrovet and its financials will be consolidated in the books of Godrej Agrovet which, in turn, will have its financials consolidated in the books of the listed Godrej Industries, which holds a 60.81% stake in it.

Analyse this

Astec LifeSciences is engaged in researching and developing, manufacturing, distributing and selling agrochemicals. The company operates in three distinct segments: enterprise sales, contract manufacturing and branded sales. In catalogue products, it manufactures Triazole fungicides. The company has 214 product registrations across 32 countries, including 139 product registrations in India. It has two multi-product plants in Mahad, Maharashtra, and an R&D site, manufacturing and pilot plant in Dombivli near Mumbai. The company has been generating close to 60% of its revenue from its top five customers and 83% of revenue from its top five products, with gross margins ranging from 27% to 46% for the past three years. In FY15, enterprise sales accounted for 78% of net sales, whereas contract sales made up 21% of net sales. Exports contribute approximately 35% of the consolidated revenue, with Europe and America accounting for a major share. 

Godrej Agrovet’s operations are spread across three segments: animal feed, agri inputs and oil palm. The company expects its business to grow by 18% from ₹3,800 crore in the last fiscal to around ₹4,500 crore in FY16, largely driven by the Astec acquisition. Also, Singapore government’s investment arm Temasek in 2012 had invested around ₹572 crore for a close to 20% stake in Godrej Agrovet. This is India’s single-largest alternative investment in the agri business space, which then valued Godrej Agrovet at ₹2,860 crore.

This year, the poor monsoon has affected the Kharif season and it is expected that the Rabi season will make good to some extent. The animal feed segment has been facing several headwinds, which the company expects will dissipate early in 2016. Animal protein prices are coming down and input prices are going up, resulting in increased costs. Animal feed contributed 60% of the company’s FY15 top line and 50% to the bottom line. Godrej Agrovet has now urged the government to waive by 15% the import duty on non-genetically modified oilseed crops.

The company has been incurring capex of ₹125 crore to ₹150 crore every year for the past five years and this is expected to continue for another three years. R&D forms an essential part of the business and is almost 10% of PBT, as innovation is very critical to making animal products inexpensive. The company’s animal husbandry centre in Nashik was making less expensive ingredients to reduce the dependency on soya bean and corn. This led to a more than double the sector CAGR growth of 13% in the past three years in the layer feed and cattle feed business.

 In step

Due diligence by the Godrej Group before the acquisition has led to a clean up of Astec’s accounts, which was evident in the second quarter of September 30, 2015. The exceptional item of ₹9.22 crore constitutes provision for the government dues of ₹2.8 crore, which are doubtful. Then, there is the write-off of ₹3.3 crore of capital work in progress and a further provision for doubtful debts of ₹3.09 crore. Clearly, this is the first signal of a higher standard of corporate governance one can expect from the Godrej Group, which will not allow for overstatement of assets and understatement of liabilities.

FY16 should see the consolidated financials of Godrej Agrovet showing a top line of ₹4,500 crore and a bottom line of ₹250 crore, with a net worth of over ₹800 crore. At over 30x earnings and over 3.5x book, Astec is not exactly a bargain. But just check out the market cap of the three listed Godrej companies: Godrej Consumer Products is at around ₹43,000 crore, Godrej Industries is at around ₹13,330 crore and Godrej Properties is at around ₹6,500 crore, aggregating ₹62,800 crore market cap for the Godrej Group, which is now significantly bigger than the unlisted flagship brand Godrej & Boyce Manufacturing. Now, consider Astec LifeSciences, which has a market cap of less than ₹500 crore. With its impressive pedigree, it’s a given that the fortunes of Astec will be closely intertwined with that of the Godrej group. And in due course of time, one can also expect Godrej Agrovet to get listed either through a reverse merger with Astec LifeSciences or in a restructuring exercise in order to add value to the shareholders of both companies. In short, here’s a multibagger that has got a new shot at life.

The writer and his clients have an interest in this stock

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