Godavari Biorefineries IPO analysis

Godavari Biorefineries IPO (initial public offering) will open for subscription on October 23, 2024 and close on October 25, 2024. Below is a breakdown of the ethanol maker's strengths, weaknesses and growth prospects to help investors make an informed decision.

Godavari Biorefineries IPO in a nutshell

• Quality: Between FY22 and FY24, Godavari Biorefineries reported an average three-year ROE and ROCE of 7 and 9 per cent, respectively.
  
• Growth: During FY22-24, its revenue and net profit declined nearly -1 and -20 per cent per annum, respectively.
  
• Valuation: Godavari Biorefineries's stock is valued at a P/E and P/B of 148 and 3 times, respectively.
  
• Overview: Godavari Biorefineries can benefit from the EBP (Ethanol Blended Petrol) programme, under which the central government aims to increase the ethanol blend in petrol to 20 per cent by 2025. However, sugarcane, a critical raw material Godavari Biorefineries uses to produce ethanol, is subject to seasonality. Natural disasters like floods, droughts, crop diseases, and other adverse weather conditions can affect the production and pricing of sugarcane, which, in turn, impacts the company's financials.

About Godavari Biorefineries

Godavari Biorefineries is among the leading manufacturers of ethanol-based chemicals in India. With an installed capacity of 570 kilolitres per day, the company is among the largest ethanol producers in terms of volume (as of March 31, 2024).

Godavari Biorefineries utilises sugarcane as a feedstock to manufacture a wide range of products, including sugar, ethanol, bio-based chemicals and power. It was among the first few companies in India to utilise sugarcane juice and syrup to produce ethanol. These products find application across various industries, such as food, beverages, pharmaceuticals, flavours & fragrances, power, fuel, personal care and cosmetics.

Strengths of Godavari Biorefineries

• Strong customer base: The company's clientele comprises prominent players such as Hershey's India, Hindustan Coca-Cola Beverages and major oil marketing companies.

Weaknesses of Godavari Biorefineries

• Heavy reliance on a single product: Godavari Biorefineries's financials are highly dependent on the sale of ethanol, which accounts for nearly 30 per cent of its revenue. Hence, external factors like regulatory restrictions or natural calamities can negatively impact the company's financials. For instance, a sudden ban by the government on ethanol blending led to the company incurring a loss in Q1FY25.
  
• Low Margins: The company has very low operating margins, ranging between 4 and 5 per cent. Thus, even a slight change in the prices of raw materials can hamper its profitability.

Risk report

Company and business

• Did Godavari Biorefineries report earnings before tax of Rs 50 crore or more in the last 12 months?
  No. The company reported a profit before tax of Rs 12 crore in FY24.
  
• Will the company be able to scale up its business?
  Yes. The government's initiative to increase the ethanol blend in petrol to 20 per cent by 2025 is expected to present significant growth opportunities for Godavari Biorefineries.
  
• Does the company have recognisable brands with client stickiness?
  No. The company operates in a B2B (business-to-business) segment with no recognisable brands and client stickiness.
  
• Does the company have a credible moat?
  No, since the company operates in a commodity market.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. After the IPO, the promoters' stake will decrease to around 63.3 per cent.
  
• Do the top three managers have more than 15 years of combined leadership at Godavari Biorefineries?
  Yes. The company's Chairman and Managing Director, Samir Shantilal Somaiya, has been with the company since 2007.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Godavari Biorefineries free of promoter pledging of its shares?
  Yes, the company is free of promoters' pledging of their shares.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. It has a three-year average ROE and ROCE of 7 per cent and 9 per cent. In FY24, it reported an ROE and ROCE of 5 per cent and 8 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. Godavari Biorefineries reported a positive operating cash flow during the last three years.
  
• Is the company's net debt-to-equity ratio less than one?
  No. As of Q1FY25, the company's net debt-to-equity ratio stood at 2.8.
  
• Is the company free from reliance on huge working capital for day-to-day affairs?
  No. As of FY24, Godavari Biorefineries reported a high working capital of 78 days. Further, it relies on short-term borrowings to finance its daily operations.
  
• Can the company run its business without relying on external funding in the next three years?
  No. The company has low profitability and has generated negative free cash flow in two out of the last three years. Thus, to finance its capex, the company may need to rely on external funding in the future.
  
• Is the company free from meaningful contingent liabilities?
  No. The company's contingent liabilities as a percentage of its net worth stood at 88 per cent as of June 30, 2024.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. Godavari Biorefineries's stock offers an operating earnings yield of around 3 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  No. The stock is valued at a P/E of 148 times compared to its peers' median of 25 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  No. The stock is currently valued at a P/B of almost 3.1 times compared to its peers' median of 3 times.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

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