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Lower margins but likely market share gains across segments

Godrej Agrovet has reported healthy 13.5% YoY revenue growth in Q2FY23, fuelled by growth across segments. However, margins remained stressed as all segments reported margin contraction YoY. While margin in crop protection segment was impacted by input material inflation and unfavourable product mix, dairy segment’s profitability was dented due to higher procurement cost and low price hikes. We believe the company has likely gained market shares across segments. We model GAVL to report revenue and PAT CAGRs of 20.7% and 12%, respectively, over FY22-24E, and remain confident of value creation (RoE > cost of equity). We cut our earnings estimates to factor in the lower profitability of the company in Q2FY23. Maintain ADD with DCF-based target price of Rs550 (implied P/E 24x of FY24E EPS).

* Q2FY23 performance: GAVL reported revenue growth of 13.5% YoY. However, EBITDA and PAT declined 21.1% and 38%, respectively. Gross and EBITDA margins contracted 261bps and 269 bps, respectively, YoY. PAT margin fell 214bps YoY.

* Segment-wise performance: All segments (ex-oil palm) reported strong revenue growth in Q2FY23. Animal feed, crop protection, and dairy segments grew 7.6%, 44.3%, and 27% YoY, respectively. Volume growth in oil palm segment was off-set by lower crude palm oil prices during the quarter.

* Crop protection segment update: Astec business drove revenue growth for crop protection segment. However, increase in input material prices, low price-hikes and unfavourable product mix, pulled the EBIT margin of the segment down 442bps YoY. We believe the newly commercialised herbicide plant will likely drive volume growth for the segment in near term.

* Market share gains continue: We note Godrej Agrovet gained market share in cattle feed with strong volume growth of 15% YoY. EBIT margin of animal feed business also improved sequentially. With strong 27% YoY volume growth in valueadded products, we believe the company has gained market share in dairy segment as well. While losses of Dairy business continued, we note Creamline has reported revenue growth higher than peers in South India.

* Maintain ADD: We expect GAVL to report revenue and PAT CAGRs of 20.7% and 12%, respectively, over FY22-FY24E. The return ratios are also expected to be above cost of capital over FY22-24. We maintain ADD with a DCF-based target price of Rs550 (implied 24x of FY24E EPS). Key risks: Sharp movement in input material prices and/or irregular and erratic monsoon.

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