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Higher input costs impact operating performance

Operational performance in line with our expectation

* GOAGRO reported a subdued operating performance on the back of volatile commodity prices, higher input cost, and limited pass on of prices.

* EBIT in the Animal Feed (AF)/Palm Oil business declined by 15%/16% YoY, while the same in the Crop Protection (CP) business grew 13% YoY on the back of robust revenue growth (up 44% YoY).

* We largely maintain our FY23/FY24 earnings estimate and maintain our Buy rating, with a SoTP-based TP of INR580.

Crop Protection business drives revenue growth

* Consolidated revenue grew 14% YoY to INR24.5b (est. INR23.1b) on the back of strong growth across businesses, except the Palm Oil business (up 1% YoY). EBITDA margin contracted by 270bp YoY to 6.1% (est. 6.8%). EBITDA/adjusted PAT declined by 21%/34% YoY to INR1.5b/INR718m (est. INR1.6b/INR822m).

* Animal Feed business: Revenue grew 8% YoY to INR12.2b, led by the Cattle Feed category (up 15% YoY). Total sales volume grew 5.7% YoY to 357KMT. EBIT/kg stood at INR1.38 (down 19% YoY, but up ~2x QoQ).

* Palm Oil business: Revenue remained flat at INR4b, while EBIT margin contracted by 330bp YoY to 16.2%. EBIT stood at INR656m (down 16% YoY). Strong volume growth was offset by lower crude oil prices (Crude Palm Oil/Palm Kernel Oil prices declined by 16%/3% YoY).

* Crop Protection business: Consolidated revenue/EBIT grew 44%/13% YoY to INR3.7b/INR589m, led by higher growth in Astec (up 95%/2x YoY to INR2b/INR279m). Consolidated EBIT margin contracted by 440bp YoY to 15.9% due to higher raw material prices, limited transmission, and an unfavorable product mix.

Highlights from the management commentary

* Palm Oil business: Oil Extraction Ratio (OER) stood at 18.62% in 1HFY23 v/s 17.75% in 1HFY22, and is expected to improve further in 2HFY23, resulting in better profitability.

* Capex: GOAGRO is adding a 400MT of palm oil refinery capacity at a capex of INR700m. The same is expected to be commissioned by Apr’23, thereby improving margin by 50bp. It is building a solvent extraction plant of ~200MT, which is expected to be operational by Jun’23.

* Dairy business: The management is expecting to break-even in FY24, with a turnover of INR20b and 45% share in VAP.

Valuation and view

* The CP business is likely to do well going forward, led by product launches in the standalone business (over the next one-to-two years) and better performance in Astec Lifesciences, owing to its expertise in triazole chemistry and ramping up of the Herbicide plant.

* The AF business is expected to witness a revenue/EBIDTA CAGR of 10%/7% over FY22-24, with product launches capturing a higher market share.

* We expect consolidated revenue/EBITDA/PAT CAGR of 9%/11%/2% over FY22- 24. We largely maintain our FY23/FY24 earnings estimate and value the stock on a SoTP basis to arrive at our TP of INR580. We maintain our Buy rating.

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