01-01-1970 12:00 AM | Source: Motilal Oswal Financial Services Ltd
Buy Godrej Agrovet Ltd For Target Rs.670 - Motilal Oswal Financial Services
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Lower margin in AF and CP business hurts earnings Earnings lower than expected

? GOAGRO reported a subdued operating performance, with EBIT declining 62%/46% YoY in the Animal Feed (AF)/Crop Protection (CP) business. EBIT margin saw an expansion in Palm oil and GTFL.

? Revenue growth of 26% YoY was seen across businesses, except the standalone CP business (down 18% YoY), which was impacted due to deferred application opportunities for Agrochemicals, led by a delayed southwest monsoon in Jun’22.

? Factoring in its 1Q performance, we cut our FY23 earnings estimate by 12%, led by subdued operating performance in 1Q, coupled with volatile raw material prices. We largely maintain our FY24 earnings estimate. We value the stock on a SoTP basis to arrive at our TP of INR670. We maintain our Buy rating

Volatile raw material prices impacts performance

? Consolidated revenue grew 26% YoY to INR25.1b (est. INR23.2b). EBITDA margin contracted by 210bp YoY to 6.4% (est. 10%). EBITDA/adjusted PAT declined by 5%/22% YoY to INR1.6b/INR827m (est. INR2.3b/INR1.5b).

* Animal Feed business: Revenue grew 24% YoY to INR12.5b on robust volume growth (11%), which was led by market share gains and the development of new products. EBIT margin contracted by 440bp YoY to 2% in 1QFY23 due to high-cost inventories of key inputs and limited transmission. EBIT declined by 62% YoY to INR245m. EBIT/kg fell 66% YoY and 60% QoQ to INR0.69.

* Palm Oil business: Revenue grew 33% YoY to INR3.9b. EBIT margin expanded by 1,100bp YoY to 22.3%. EBIT rose by 2.6x YoY to INR858m. Improving oil extraction ratio (OER) and continued rise in oil prices led to a strong performance in 1QFY23. Volumes fell 8% QoQ on account of a shift in the harvesting season in Andhra Pradesh. Prices of Crude Palm Oil/Palm Kernel Oil rose 24%/41% YoY in 1QFY23.

* Crop Protection business: Consolidated revenue remained flat YoY at INR3.7b. EBIT fell 46% YoY to INR448m due to lower sales of in-house products in the standalone business and deferment of sales in Astec Lifesciences and the standalone business. EBIT margin contracted by 1,020bp YoY to 12.2%. In Astec Lifesciences, revenue/ EBIDTA grew 43%/10.6% YoY to INR1.8b/INR282m in 1QFY23, led by higher realization from exports and a rise in CMO volumes, while margin was impacted by deferment of sales and increased cost structure on account of the Herbicides plant.

* Dairy business: Revenue grew 48% YoY to INR3.9b, led by a 69% growth in value-added products. Operating loss stood at INR24m in 1QFY23, v/s a loss of INR31m in 1QFY22, due to a sustained rise in procurement and packaging costs.

* Godrej Tyson Foods (GTFL): Revenue from Poultry and Processed Food rose 40% YoY to INR2.5b. EBIDTA stood at INR209m in 1QFY23, v/s an operating loss of INR3m in 1QFY22, led by higher live bird prices and robust volume growth in the Real Good Chicken (RGC) category.

Highlights from the management commentary

* Palm Oil business: Under NMEO-OP, GOAGRO is aiming at over 10,000 hectares over the next three-to-four years in the northeast. At present, it has a nursery capacity of ~5,000 hectares. The same will increase to 8,000-9,000 hectares p.a. from FY24. OER/productivity is 20%/15-20% higher in NE regions v/s other areas, the benefits of which will accrue over the next four-to-five years.

* Guidance: In the AF business, management has guided at a volume growth of ~10% in FY23, with an EBIT margin of 5-6%. EBIT margin in the standalone CP business is expected to be is in line/slightly higher than earlier levels. We expect Astec Lifesciences to register double-digit growth in margin.

* Capex: GOAGRO has envisioned a capex of INR5b in FY23, of which 60% is for Astec Lifesciences (~INR3b), INR800m for the Palm Oil business, and INR300m in the Dairy business for one more line in the VAP business due to exhaustion of capacity.

Valuation and view

* The deferment of sales in the Palm Oil and CP business, coupled with the high cost of inventories in the AF business in 1QFY23, adversely impacted its operating performance. With the spillover of sales from 1Q to 2Q, softening of raw material prices, and liquidation of most high-cost inventory in 1Q, we expect 2QFY23 to witness an improvement.

* The CP business is likely to do well going forward, due to: a) product launches in the standalone business (over the next one-to-two years), b) correction in RM prices, with an improvement in Logistics operations, c) better performance in Astec Lifesciences, owing to its expertise in triazole chemistry, and d) commencement of a new Herbicide plant.

* The AF business is expected to witness revenue/EBIDTA CAGR of 9%/14% over FY22-24, with product launches capturing a higher market share.

* We expect revenue/EBITDA/PAT CAGR of 11%/17%/17% over FY22-24.

* Factoring in its performance in 1Q, we cut our FY23 earnings estimate by 12%, led by subdued operating performance in 1Q, coupled with volatile raw material prices. We largely maintain our FY24 earnings estimate. We value the stock on a SoTP basis to arrive at our TP of INR670. We maintain our Buy rating.

 

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