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Palm oil segment doing well; Dairy disappoints

Godrej Agrovet’s Animal feed and Vegetable oil segments reported strong results but Dairy segment reported muted numbers. We note (1) favorable base, aggressive price hikes and revival in layer and broiler feed helped Animal feed segment to report 33.9% revenue growth, (2) Steep increase in palm oil prices and better extraction rate resulted in 83.5% higher revenues of Vegetable oil segment and (3) With increase in milk procurement prices, Dairy segment reported losses again.

We also note lower out-of-home consumption and closure of HoReCa due to lockdown resulted in lower off-take for segments like Dairy and Poultry. We expect most segments of the company to show recovery in FY22-23 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 Rs720 (30x FY23E).

* Q1FY22 performance: Godrej Agrovet reported revenue, EBITDA and PAT growth of 28.2%, 2.2% and 4.1%, respectively. Animal feed and Vegetable oil segments reported strong revenue growth of 33.9% and 83.5%, respectively. However, crop protection and Dairy segments reported revenue growth of 15.1% and 12.7%, respectively. Astec reported revenue growth of 14.9%, YoY.

* Higher input prices across segments: The input prices of Animal feed and Dairy have increased due to higher food inflation and higher global SMP prices. We also note the RM prices for agrochemicals business have increased due to higher crude oil prices and impact on supplies from China. The company’s gross and EBITDA margins declined 300bps and 220bps, respectively.

* Slower revenue growth due to lower demand from HoReCa: The company’s multiple segments such as Dairy and poultry generate demand from HoReCa sector. With lockdown and lower out-of-home consumption, growth rates of these segments were impacted However, we believe there is normalcy post lifting of lockdowns.

* Robust performance of Vegetable oil segment: With steep increase in crude palm oil prices, there is healthy realization growth. Increase in extraction rate also helped to improve productivity. The segment reported strong revenue growth of 83.5% and EBIT margin expanded to 11.3% in Q1FY22 from 4.1% in Q1FY21.

* Drivers for FY22: Apart from favourable base of FY21, we believe GAVL can benefit due to (1) normal monsoon in FY22, (2) essentials goods such as animal feed, milk, palm oil continue to do well, (3) Strong growth/profitability of vegetable oil segment considering steep increase in palm oil prices, (4) possibility of recovery in HoReCa sector in FY22 and (5) benefits of cost saving initiatives.

* Maintain ADD: We expect GAVL to report revenue and PAT CAGRs of 13.2% and 20.2% respectively, over FY21-FY23E. The return ratios are also expected to be above cost of capital over FY21-23. We maintain ADD with a DCF based target price of Rs720 (30x FY23E). Key risks: Failure of new products and prolonged slow-down in out-of-home consumption.

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