Buy Godrej Agrovet Ltd For Target Rs.690 by Motilal Oswal Financial Services Ltd
Near-term weakness with recovery underway
* Godrej Agrovet (GOAGRO) reported subdued operating performance in 2QFY27, with EBIT declining ~9% YoY due to an operating loss of INR56m in the Crop Care business (vs EBIT of INR163m YoY, negative 2% mix in EBIT) caused by inflation due to El Niño and geopolitical volatility. In contrast, the Animal Feed business delivered strong performance, with EBIT growth of 32% YoY (41%). Further, the Palm oil business showed a muted growth of 4% (64%).
* GOAGRO’s focus on diversifying its Crop Care portfolio across key crops, prioritizing cattle and layer feed in Animal Nutrition, driving FFB (Fresh Fruit Bunch) volume growth through the expansion of its planted area and downstream integration in Oil Palm, and increasing the share of B2C and value-added products in Foods and Dairy is expected to support growth.
* Factoring in 2QFY27 performance and the soft operating environment, we cut our FY27/28 EBITDA estimates by 11%/9% and reiterate our BUY rating on the stock with an SOTP-based TP of INR690
Highlights from the management commentary
* Guidance: Management continues to target double-digit PBT growth in FY27, although achieving this has become more challenging due to El Niño-led weakness and input cost inflation in Crop Care and palm oil price volatility. Palm Oil is expected to deliver a healthy double-digit volume CAGR in FY27 and FY28, aided by plantation maturity, FFB volume growth and downstream integration.
* Crop protection: Crop Care performance was impacted by El Niño-led rainfall deficiency and prolonged heat stress, particularly in the cotton crop. Management expects near-term demand to remain weak, with low reservoir levels posing risks to the Rabi season. The company is diversifying its portfolio to reduce dependence on cotton and chilli, targeting seven crop segments by FY30. Ashitaka (maize herbicide) has witnessed a strong launch, with first-year revenue expected to exceed INR1b.
* Palm oil: The Palm Kernel Oil (PKO) derivatives plant commenced operations in September, with hydrogenation and fractionation facilities expected by Dec’26. Commercial ramp-up is expected from Q4FY27, with meaningful scale-up in FY28. Downstream integration is expected to improve segment EBITDA margins by approximately 200bp over 2-3 years. Crude Palm Oil (CPO) prices are expected to remain range-bound at INR42,000-43,500 in the near term, while PKO prices are expected to remain elevated.
* Foods: Godrej Foods is transitioning toward a B2C-focused, consumer-oriented protein business. B2C revenue grew ~50%, increasing its contribution from 25% to 35%. Key growth categories include frozen chicken, momos, and nuggets, supported by increasing consumer preference for hygienic branded products and the expansion of quick commerce.
Valuation and view
* The near-term operating environment remains challenging, with deficient rainfall and El Niño conditions weighing on Crop Care demand, while weak global agrochemical demand, lower realizations and elevated input costs continue to pressure Astec.
* However, the medium term outlook remains positive supported by its strategic portfolio realignment initiatives, including:
i) diversification of its crop protection portfolio through entry into new herbicide and insecticide categories and diversification across multiple crop segments
ii) targeted geographic expansion in animal nutrition
iii) investments across the palm oil value chain
iv) the transition of the animal feed business toward an ‘animal nutrition’ model.
* We have built in a revenue/EBITDA/Adj. PAT CAGR of 10%/11%/16% over FY26- FY28E. We reiterate our BUY rating on the stock with an SOTP-based TP of INR690
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