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Weak revenues but higher margins due to lower commodity prices

Three pointers to note from Godrej Agrovet’s Q3FY21: (1) There is still lower demand from HoReCa for milk, eggs and chicken. It impacted the company’s Animal feed and Dairy segments, (2) Re-branding all dairy products under ‘Godrej Jersey’ brand will strengthen the dairy segment and will improve the ability to raise prices and maintain margins and (3) GAVL has continued to reduce investments in working capital which will lead to higher return ratios. Though Bird flu disease is expected to impact Poultry feed and Godrej Tyson for 1-2 quarters, we expect most segments of the company to show recovery in FY22 with favourable base of FY21. We remain confident of value creation (RoE > Cost of Equity) and maintain ADD with a DCF-based target price of Rs575 (25x FY23E).

* Q3FY21 result performance: Godrej Agrovet reported revenue decline of 14.4% and EBITDA and PAT growth of 11.7% and 21.2%, respectively. Animal feed, Oil Palm and Dairy segment revenues declined 22.7%, 16.6% and 10.1%, respectively due to localised lockdown, white fly attack, lower commodity prices and lower institutional sales. Astec reported revenue decline of 7.1% YoY.

* Deflation in input prices leads to higher gross margin: The company reported 540bps higher gross margin and EBITDA margin expanded 170bos YoY. The input prices for most segments were lower YoY. We believe cost savings measures initiated post covid have also helped to report better margins. The change in revenue mix (Higher share of Astec and palm oil and lower share of Animal Feed) also helped to improve the margins at consolidated level.

* Likely impact of Bird Flu: With Bird Flu disease impacting birds in multiple states in India, we believe the consumption of chicken and eggs to be impacted. We expect the impact to hurt the revenues of Poultry feed and Godrej Tyson for 1-2 quarters. We expect the situation to be back to normal by Q2FY22.

* Dairy business branded as ‘Godrej Jersey’: The company has re-launched all the dairy products under the brand ‘Godrej Jersey’. We expect higher investments in the dairy business. We also believe Godrej brand equity will help to improve addressable market as well as improve the ability to raise prices and maintain margins. We expect benefits of this strategy in FY22-23.

* Maintain ADD: We expect GAVL to report revenue and PAT CAGRs of 4.9% and 12% respectively, over FY20-FY23E. The return ratios are also expected to be above cost of capital. We maintain ADD with a DCF based target price of Rs575 (25x FY23E). Key risks: Failure of new products and prolonged slow-down in out-ofhome consumption.

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