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Higher commodity prices weigh on performance

In line revenue, EBITDA/adjusted PAT below our estimate

* GOAGRO reported an in line revenue with robust growth (25%). EBITDA came in below our estimate due to gross margin pressure, led by higher commodity prices. EBIT margin witnessed a contraction across segments, except Palm Oil, which was aided by higher prices.

* We reduce our FY22E/FY23E earnings estimate by 9%/8%, factoring in its 2QFY22 performance. We value the stock on a SoTP basis to arrive at our TP of INR755 per share. We maintain our Buy rating.

Margin contracts across segments, except Palm Oil

* Consolidated revenue grew 25% YoY to INR21.5b (est. INR21.3b). EBITDA margin contracted by 120bp YoY to 8.8% (est. 10.4%) due to a gross margin contraction of 230bp. EBITDA stood at INR1,904m, up 10% YoY (est. INR2,216m). Adjusted PAT rose 2.1% YoY to INR1,093m (est. INR1,427m).

* Animal Feed business: Revenue grew 49% YoY in 2QFY22 (to INR11.3b), owing to growth in all feed categories (i.e. cattle, broiler and layer) and price hikes. EBIT margin contracted by 120bp to 5.1%, as profitability of the Aqua Feed business was adversely impacted by its limited ability to pass on the raw material price increase. EBIT grew 21% to INR576m. EBIT/kg stood flat YoY (-15% QoQ) at INR1.7/kg.

* Revenue/EBIT for the Palm Oil business surged 37%/89% YoY to INR4,014m/INR781m. The prices of crude palm oil (CPO)/palm kernel oil (PKO) increased by 55%/76% YoY, which aided the strong growth in revenue and profitability.

* The Crop Protection business fell 23%/30% YoY to INR2.6b/INR521m. Sales/EBIT in the standalone business declined by 13%/24% YoY due to an erratic monsoon, resulting in lower sowing, which was further impacted by steep inflation in raw material prices.

* Dairy business: Revenue grew 10% YoY to INR2.8b, aided by 38% growth in value added products. EBITDA declined by 63% YoY to INR41m due to increase in milk procurement costs, which could not be absorbed as there was no price hike taken by competition.

* Revenue/EBITDA/adjusted PAT grew 26%/6%/10% in 1HFY22. Higher investment in working capital led to negative CFO of INR1.4b in 1HFY22 v/s INR4.1b (positive) in 1HFY21.

Highlights from the management commentary

* Astec Lifesciences: New Herbicide plant has been commissioned in 2QFY22 and commercial production has started. The plant is expected to reach optimum utilization levels in three months. Some of these products are expected to be exported in the next few months.

* GOAGRO was able to pass-on the increase in RM prices with a minor lag. The company has 3-4 months of soya and protein inventory (low cost), which aided its quarterly performance.

* Astec Lifesciences: Revenue/EBITDA declined by 34%/30% YoY due to closure of the plant on account of floods for ~15 days and global container shortage, which limited its ability to ship goods on time, resulting in deferment of sales.

Valuation and view

* The Crop Protection business is likely to do well going forward, due to: a) product launches in the standalone business (over the next 1-2 years), b) correction in RM prices, with an improvement in logistics operations, c) better performance in Astec Lifesciences owing to its expertise in triazole chemistry, and c) commencement of a new Herbicide plant.

* Performance in the Animal Feed segment was affected due to lower demand from the HORECA segment due to the COVID-19 outbreak and increase in commodity prices. Going forward, it is expected to deliver a better performance v/s FY21 on a low base.

* We reduce our FY22E/FY23E earnings estimate by 9%/8%, factoring in its 2QFY22 performance. We value the stock on a SoTP basis to arrive at our TP of INR755 per share. We maintain our Buy rating.

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