Will ethanol development hold promise for Godavari Biorefineries’ IPO success?

In this analysis, we take a closer look at Godavari Biorefineries Ltd and present you with the exclusive IPO details.

About the issue  

Godavari Biorefineries Ltd is preparing to launch its Initial Public Offering (IPO) for equity shares. See the issue details below.

Objects of the Issue  

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. Repayment/pre-payment, in full or in part, of certain outstanding borrowings availed by the company.

2. General corporate purposes.

Promoter holding  

Samir Shantilal Somaiya, Lakshmiwadi Mines and Minerals Private Limited, Somaiya Agencies Private Limited and Sakarwadi Trading Company Private Limited are the promoters of the company. The promoters and promoter group currently hold a pre-issue shareholding stake of 81.06 per cent in the company.

Company profile  

Godavari Biorefineries Ltd is an ethanol-based chemical manufacturer in India and operates as an integrated bio-refinery with an installed capacity of 570 KLPD for ethanol production as of June 30, 2024. According to a Frost & Sullivan report, it ranks among India’s largest ethanol producers by volume as of March 31, 2024. The company has also pioneered the setup of India’s first bio-based EVE manufacturing facility.

In response to government initiatives aimed at increasing fuel ethanol blending, Godavari Biorefineries plans to expand its distillery capacity from 600 KLPD (as of June 30, 2024) to 1,000 KLPD, having already secured environmental clearance for this expansion.

The company's product portfolio includes bio-based chemicals, sugar, various ethanol grades, and power, catering to a diverse range of industries such as food, beverages, pharmaceuticals, flavours and fragrances, power, fuel, personal care, and cosmetics.

Its clientele features well-known names like Hershey India Pvt Ltd, Hindustan Coca-Cola Beverages Pvt Ltd, M/s Karnataka Chemical Industries, M/s Techno Waxchem Pvt Ltd, and major oil marketing companies. The company operates two manufacturing facilities, one in the Bagalkot district of Karnataka and the other in the Ahmednagar district of Maharashtra.

Financials  

While the company achieved notable topline growth in FY23 compared to FY22, its net profit growth remained minimal. FY24 marked a significant setback, with performance falling below FY22 levels. In Q1FY25, the company reported substantial losses.

According to management, the losses were due to the company’s main cane-crushing season starting in the last month of Q2, with stronger financial performance typically occurring in the second half. The poor performance in FY24 was attributed to natural calamities that impacted their operations, along with the Government of India's ban on ethanol production to curb rising sugar prices.

Although management remains optimistic about strong overall performance for FY25, the previous inconsistencies in the company's financials raise concerns.

Valuation & Outlook

*RoE: Based on FY24 data

The issue is priced with a P/BV ratio of 6.31 times, calculated using its Net Asset Value (NAV) of Rs 55.75 as of June 30, 2024.

When calculating the PE ratio based on the company’s annualized FY25 earnings and fully diluted paid-up equity capital, the ratio turns negative due to the company reporting losses in Q1FY25. Considering FY24 earnings, the PE ratio is 120, indicating that the offer is significantly overpriced.

For FY24, the company reported a return on equity (RoE) of just 5 per cent, significantly lower than its listed peers. Given the inconsistent financial performance, overvaluation, and lower returns, we recommend that investors avoid this IPO due to the associated risks.