The promoters of Astec have agreed to sell their 45% stake at Rs.190 per share, following which Godrej has announced the open offer.
The open offer values Astec at 30 times the 2014-15 earnings per share (EPS) and appears reasonable. Its closest peer P I Industries Ltd is trading at 39 times the previous fiscal earnings. In FY15, Astec’s earnings were hit by an extraordinary expense, which crimped profit.
The valuation difference can also be explained by the superior margins that P I Industries delivers.
Also, Astec’s balance sheet is not stress free. In the year to March, the company’s trade receivables more than doubled. Short-term borrowings increased sharply. As a result, finance costs jumped 38% last fiscal. They continue to increase and were up 12% in the June quarter.
Considering these factors and the stock’s increase of 3.6 times in the past year, Astec’s investors are getting a fair deal. Godrej’s entry will allow it to access working capital finance more easily and, possibly, at better rates as well.
For Godrej, acquiring Astec can help reverse the growth slowdown in its agri-business. Godrej Agrovet’s revenue has not risen in the past two quarters. The sharp drop in animal feed and palm oil prices (the core businesses of Godrej Agrovet) are weighing on revenue. Compared with that, Astec’s revenue grew 12% in the last quarter and in the March quarter, revenue almost doubled. With the current animal feed and palm oil prices stuck in the commodity cycle, Astec will help Godrej Agrovet diversify its business.
Astec makes agrochemical intermediate products and formulations and also does contract manufacturing. Though it also sells branded formulations, the majority of the company’s revenue comes from sales to enterprises. In a presentation released last year, Astec said it aims to clock an average annual revenue growth of around 25% for the next five years, helped by commercialization of new products. Last fiscal its revenue increased 29%.
But the revenue growth of 12% in the June quarter is substantially slower than the 22% increase in the year-ago quarter. That points to business pressures in Astec’s export markets. One of Godrej’s first challenges will be to ensure that the company regains its growth momentum.
(This article was first published on Livemint.com)