Godavari Biorefineries IPO Analysis 2024: Should You Subscribe?

The IPO (initial public offering) of Godavari Biorefineries Ltd (GBL) commences on October 23 and concludes on October 25, 2024. On Tuesday, the company successfully garnered Rs 166 crore from anchor investors, including prominent entities like HDFC Mutual Fund, Whiteoak Capital Fund, and Goldman Sachs (Singapore) Pte Ltd.

Despite the involvement of these notable investors, retail investors should thoroughly evaluate both the potential rewards and risks before subscribing. This IPO analysis provides a comprehensive review to help make an informed decision.

Godavari Biorefineries IPO Details

• Issue Size: Rs 554.75 crore
• Fresh Issue: Rs 325 crore
• OFS: Rs 229.75 crore
• Price Band: Rs 334 – Rs 352
• Lot Size: 42 shares
• Listing Date: October 30, 2024

Godavari Biorefineries IPO Subscription Status

As of 5 p.m. on the opening day, the IPO of Godavari Biorefineries Ltd was subscribed 0.28 times overall. Non-institutional investors subscribed 0.12 times their allocation, while retail investors subscribed 0.51 times. Meanwhile, qualified institutional buyers were yet to subscribe to their reserved portion.

Overview of Godavari Biorefineries

GBL is an integrated bio-refinery in India with a production capacity of 570 KLPD for ethanol as of June 30, 2024. It produces ethanol-based chemicals and offers a diverse product portfolio, including bio-based chemicals, sugar, various grades of ethanol, and power. These products serve industries such as food, beverages, pharmaceuticals, flavors and fragrances, power, fuel, personal care, and cosmetics.

Godavari Biorefineries Key Strengths

• Market Leadership: As of March 31, 2024, GBL stands as one of India's leading ethanol producers by volume. It holds the distinction of being the largest global manufacturer of MPO (3-Methyl-3-penten-2-one), one of only two producers of natural 1,3 butylene glycol, and the sole manufacturer of bio ethyl acetate in India.
• Marquee Clientele: GBL serves prominent clients including Hershey India Pvt Ltd, Hindustan Coca-Cola Beverages Pvt Ltd, Karnataka Chemical Industries, Escorts Chemical Industries, along with major oil marketing companies.

Godavari Biorefineries Risk Factors

• Deteriorating Financials: GBL observed a downturn in both revenue and profit in FY24, notably recording a loss in Q1 of FY25. This downturn is linked to the Government of India's sudden prohibition on ethanol blending. 
• Declining Margin & Returns: Over the past three years, the net profit margin declined from 1.12% in FY22 to 0.72% in FY24. Similarly, Return on Equity and Return on Capital Employed decreased from 8.21% to 4.73% and from 10.64% to 9.53%, respectively.
• High Debt Levels: As of June 30, 2024, GBL reported a total consolidated debt of Rs 748.88 crore, with a Debt-to-Equity ratio of 3.01x.
• Supplier Dependency: GBL relies heavily on a limited number of suppliers for a substantial portion of its raw materials (excluding sugarcane), with the top 3, 5, and 10 suppliers accounting for 68.94%, 84.10%, and 94.71% of raw material purchases, respectively, as of FY24. Disruptions in these supplies could negatively affect its manufacturing and operational results.
• Client Concentration: In FY24, GBL generated approximately 57% of its revenue from its top 10 clients. The loss of a key client or multiple clients could significantly impact its financial performance.
• Cash Flow Concerns: GBL experienced negative cash flows from operations during the quarter ending June 30, 2024. If this trend continues, it could undermine the firm’s operational efficiency and financial health.
• Legal Risks: GBL is involved in ongoing legal disputes related to its promoters and directors. Unfavourable outcomes in these cases could harm the company's reputation and financial stability.

Godavari Biorefineries Valuation & Recommendation

GBL has shown fluctuating performance in its financial indicators. While FY23 experienced growth in revenue and profits, FY24 witnessed a slowdown and with a notable loss recorded in Q1 of FY25. Further, its profit margins have consistently deteriorated in the recent years.

The IPO is aggressively priced, with a price-to-earnings (P/E) ratio of 120x based on FY24 earnings, raising concerns about its valuation. Although the company could benefit from the recent easing of ethanol production norms, the high IPO valuation is not justified due to significant risks, including a substantial debt burden, despite optimism about future performance.

Considering these aspects, long-term investors should keep this stock on radar and monitor the firm’s performance for the next two quarters before investing, as the inherent risks currently outweigh the potential benefits.

For a deep dive into other IPOs, explore: IPO Corner on Liquide