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Higher commodity prices underplay robust revenue growth

In line PAT, EBITDA below our estimate

* GOAGRO registered robust revenue growth due to a recovery in demand across segments. The Animal Feed and Palm Oil business drove performance on the back of a demand uptick and price hike. EBITDA margin contracted by 220bp YoY due to a surge in commodity prices, thereby affecting gross margin.

* We largely maintain over earnings estimate for FY22E/FY23E, as its 1Q performance was broadly in line with our estimates and the continued demand recovery across segments. We value the stock on a SoTP basis to arrive at our TP of INR760. We maintain our Buy rating.

Palm Oil and Animal Feed business drive revenue growth

* Consolidated revenue grew 28% YoY to INR19.9b (est. INR18.6b). EBITDA margin contracted by 220bp YoY to 8.5% (est. 10.1%) due to gross margin contraction of 300bp. EBITDA rose ~2% YoY to INR1,695m (est. INR1,883m). Adjusted PAT increased 20% YoY to INR1,060m (est. INR1,033m).

* Animal Feed business: Revenue grew 34% YoY in 1QFY22 (to INR10b) owing to demand uptick in the Food category, coupled with price hike taken by the company to offset an increase in commodity prices. EBIT margin contracted marginally (10bp) to 6.4% as the Aqua Feed business was affected due to higher RM prices and was unable to pass on the same to customers. EBIT grew 32% to INR637m. EBIT/kg grew 12% YoY (+5% QoQ) to INR2/kg.

* Revenue/EBIT for the Palm Oil business surged 84%/5x YoY to INR2,888m/INR326m. High Crude Palm Oil (CPO) and Palm Kernel Oil (PKO) prices in 1QFY22, and higher Oil Extraction ratio (OER) v/s 1QFY21 aided performance.

* The Crop Protection business grew 15% YoY (to INR3.7b). EBIT margin contracted by 390bp (to 22.4%). Sales/EBIT in the standalone business grew 16%/6% YoY. Astec Lifesciences: Revenue increased by 15% YoY, despite a drop in the prices of key products in the international market. EBITDA declined by 14% YoY due to raw material cost inflation.

* The Dairy business revenue grew 13% YoY to INR2.7b, despite a demand slowdown due to sporadic lockdowns across southern states. Operating loss stood at INR31m in 1QFY22 v/s an operating profit of INR103m in 1QFY21. Operating performance was affected due to elevated RM prices since Jan’21 and lower demand. As a result, it was unable to hike prices in this segment.

* Revenue for Godrej Tyson Foods grew 7% YoY (to INR1.8b), whereas operating loss stood at INR3m (v/s an operating profit of INR215m in 1QFY21).

Highlights from the management commentary

* Revenue in the Palm Oil segment grew 84% YoY in 1QFY22 due to increase in CPO and PKO prices. Volume growth stood at 7% in 1QFY22 on the back of improvement in the oil extraction ratio to 16.95% (v/s 16% last year) and higher (2% YoY) arrival of fresh fruit bunches. Crude Palm Oil prices increased by 76% YoY in 1QFY22.

* In the standalone Crop Protection business, growth in the next few years would be driven by: i) the launch of six new products, which are in the pipeline (four herbicides, one fungicide, and one PGR), and ii) four products that are in the pipeline, including in-licensing products (two insecticides, one herbicide, and one fungicide).

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, c) better performance in Astec Lifesciences, owing to its expertise in triazole chemistry, and d) commencement of a new herbicide plant.

* Performance in the Animal Feed segment was affected on lower demand from the HORECA segment due to the second COVID wave and increase in commodity prices. Going forward, with the lifting of lockdown across regions, it is expected to deliver a better performance on a low base of FY21.

* Volume growth in the Palm Oil segment is likely to return in FY22E on higher arrival of FFBs and better yields from the new plant, with improved technology. Higher prices would aid margins.

* We largely maintain over FY22E/FY23E earnings estimate as the performance is broadly in line with our estimate and continued demand recovery across segments. We value the stock on a SoTP basis to arrive at our TP of INR760. We maintain our Buy rating.

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