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Our Take

Godrej Agrovet is an integrated play on Agriculture sector with strong presence in Animal Feed (46% of revenue), Crop Protection (17%), Palm Oil (13%) and Dairy (15%) business. The company’s segments have been affected by the pandemic, in a mixed manner. While Crop Protection business was less impacted, Dairy, Poultry & Chicken, and Animal Feed businesses were impacted largely by procurement costs, COVID-related disruptions, and supply change issues respectively. Lower Fresh Fruit Brunches production and lower prices impacted the Palm Oil segment. Among the subsidiaries, the worst hit were Godrej Tyson Foods and Creamline Dairy. However, the situation is expected to improve as a result of exit from the lockdown across the country in a graded manner. On the other hand, its other subsidiary, Astec Lifesciences, continued to perform well, attracting foreign multinationals, due to the China+1 factor. Even after disruption in its businesses, the company registered strong operational performance in 9MFY21. Godrej Agrovet posted a 10% decline in revenue, mainly due to 19% decline in animal feeds segment and 17% fall in the dairy business. EBITDA margin witnessed strong 270bps improvement on better gross margin. Animal Feed, Astec Life and Godrej-Tyson businessesregistered strong operational performance. The company’s PAT showed strong 23% yoy growth to Rs 284cr. Godrej Agrovet’s diversified portfolio with leading market positions across agricultural inputs and outputs, careful selection of less-regulated segments, and high-quality management and parentage are some of the key positives for the company. It has an impressive long-term track record of steady growth and generates healthy return ratios.

View & Valuation:

Godrej Agrovet recorded strong margin in 9MFY21, led by better gross margin. Animal Feed, Astec Life and Godrej-Tyson businesses registered strong operational performance. Animal Feed (AF) segment is seeing lower demand as restaurants/hotels are still operating at a much lower capacity utilisation than pre-COVID levels. This has impacted the demand for milk, chicken and eggs. Further, opening up of the economy is critical for demand revival. Crop Protection business is likely to do well in the coming years due to: (i) product launches in the standalone crop protection segment, (ii) strong performance in Astec owing to its expertise in triazole chemistry, and (iii) commencement of a new herbicide plant. Volume growth in the Palm Oil segment is likely to return in FY22 on higher arrival of FFBs (due to higher acreages) and better yields from the commissioning of the new plant with improved technology. Higher Palm Oil prices should aid margin expansion. We estimate 5.5% revenue CAGR, led by Crop Protection and Palm Oil business and recovery in Animal Feed business over FY20-23E.

We expect the company to register 50bps margin expansion in FY21-23E due to better gross margin and sustained cost control measures. Healthy topline coupled with steady margin expansion could lead to 13.5% CAGR in PAT over FY20-23E.

Godrej Agrovet’s diversified products across less regulated agricultural inputs and outputs, leading market positions across all of them and high-quality management and parentage, makes it a proxy to ride the theme of Indian agriculture. Also the business is asset-light and consequently generates healthy cash flows and return ratios.

We recommend a BUY on Godrej Agrovet on dips to Rs 466 and add more on dips to Rs 419 for base case fair value of Rs 513 (13.5x FY23E EV/EBITDA) and bull case fair value of Rs 559 (14.7x FY23E EV/EBITDA).

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