IGI Logo

Broad-based improvement in margin profiles

Operating performance in line with estimates

* Godrej Agrovet (GOAGRO) reported healthy operating performance (EBIT grew 11% YoY) in 2QFY25 despite a decline in revenue (down 5% YoY). This can be attributed to the improved profitability in the Animal Feed (AF)/palm oil/dairy business (EBIT up ~24%/7%/2.9x YoY), which was partly offset by a decline in the operating profitability in the Crop Protection (CP)/Poultry (Tyson) business (EBIT down 15%/97% YoY).

* Despite subdued revenue growth in 2Q (down 5% YoY), GOAGRO has been able to improve its overall profitability backed by strategic initiatives incorporated across businesses. We expect continued improvement in profitability in 2H and FY26.

* We largely maintain our FY25/26 EBITDA estimate and reiterate our BUY rating on the stock with an SOTP-based TP of INR910.

Volumes in AF, palm oil, and Tyson remain under pressure in 1H

* Consolidated revenue declined 5% YoY to INR24.5b (est. INR24.8b). EBITDA margins expanded 130bp YoY to 9.1% (est. 9.2%), led by expansion in gross margins by 190bp YoY to 25.6%. EBITDA stood at INR2.2b, up 11% YoY (est. in line).

* Adjusted PAT declined 9% YoY to INR958m (est. INR1.3b). The decline of adjusted PAT in 2Q is attributed to the withdrawal of indexation benefit on LTCG. The company has reversed the deferred tax assets created on certain capital assets (carried at indexed cost), having a one-time noncash impact of INR196m on adjusted PAT. Without this, adjusted PAT grew 10% YoY to INR1.2b in 2QFY25.

* AF: Revenue declined ~3% YoY to INR12b, led by a volume decline of 3% YOY to 362kmt on account of lower volumes in cattle feed as a result of lower milk prices. EBIT/kg grew 27% YoY to INR1.95, led by favorable commodity positions and optimization measures.

* Palm Oil: Revenue declined 1% YoY to INR4.4b, led by the delay in the arrival of fresh fruit bunch (volume down 13% YoY) majorly offset by higher realizations in Crude Palm Oil (CPO) and Palm Kernel Oil (PKO). EBIT margin expanded 135bp YoY to 16.7%, leading to EBIT growth of 7% YoY to INR736m, led by improved Oil Extraction Ratio (OER) and increased downstream VAP.

* CP: Consolidated CP revenue declined 22% YoY to INR3b, led by demand and realization pressure in both standalone CP and Astec (down 24%/17% YoY to ~INR2b/INR987m). Consolidated CP EBIT declined 15% YoY to INR551m, largely due to operating loss in Astec (INR300m), while standalone CP EBIT grew 10% to INR850m.

* Dairy business’s revenue grew ~3% YoY to INR4b, while EBIT grew 2.9x to INR84m due to significant improvement in operational efficiencies and improved milk spread.

* Poultry and Processed Food business’s revenue declined ~17% YoY to INR2b, primarily due to lower volumes in the live bird business and seasonally weaker quarter for branded products. EBIT margin contracted 604bp YoY to 0.26%, leading to a 97% YoY decline in EBIT at INR5m.

* In 1HFY25, the revenue declined 6% to INR48b while EBITDA/Adj. PAT grew 14%/10% to INR4.5b/INR2.3b; implied revenue in 2HFY25 is expected to decline 4% due to lower realization, while EBITDA/Adj. PAT is expected to grow 18%/21% led by margin expansion.

Highlights from the management commentary

* Palm Oil: The company expects 2HFY25 to be better on a YoY basis as the oil palm season in India has been slightly postponed (FFB arrivals have been deferred to 2H). The prices are expected to rise going forward due to an increase in the basic custom duty.

* Astec: The company reaffirms its guidance of 5% YoY growth for FY25 and anticipates ~INR4-4.5b revenue from the CDMO business. Astec is expected to breakeven in 2HFY25 and achieve profitability by 4QFY25.

* Animal Feed: The demand for the cattle feed business is returning as volumes grew 10% MoM in Oct’24. The Fish Feed business was adversely impacted by higher rainfall during 1H, and the company is anticipating a volume decline in the segment on a YoY basis in FY25.

Valuation and view

* GOAGRO is witnessing margin expansion across businesses, led by strategic initiatives taken over the last few years.

* Its AF and standalone CP businesses are likely to sustain their healthy performances. Meanwhile, Astec is facing short-term hurdles in its enterprise products and CDMO segment, which are expected to recover from 2HFY25 onwards. The dairy and Tyson businesses sustained the turnaround witnessed in 4QFY24 and are expected to maintain robust performance in 2HFY25. This growth trajectory is led by an enhanced focus on value-added/branded products.

* We largely maintain our FY25/26 EBITDA estimate and reiterate our BUY rating on the stock with an SOTP-based TP of INR910.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412