India: Godrej buys Astec to diversify portfolio

Visual from the company website. September 2015

Astec LifeSciences Ltd gained 2.5% to Rs.246.90 on Monday on news that Godrej Agrovet Ltd, an unlisted subsidiary of Godrej Industries Ltd, plans to acquire a controlling stake in the company.

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)

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.