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Revitalizing profitability: A turnaround for sustainable growth across segments

* Godrej Agrovet (GOAGRO) demonstrated a resilient performance in FY24 despite facing significant sectoral challenges. With a strategic turnaround underway, the company focuses on structural changes such as aggressive cost rationalization, increasing its value-added product (VAP) mix, emphasizing branded products, and enhancing operational efficiencies—all of which are fueling robust profitability growth and setting the stage for a sustainable expansion across all segments.

* GOAGRO’s revenue growth in FY24 was muted (2%); however, EBITDA witnessed strong growth (34%), driven by strategic initiatives, cost rationalization, and a focus on VAP. The company invested in R&D for innovation, centralized key functions for efficiency, and portfolio diversification to enhance profitability across all segments.

* The animal feed business sustained strong growth, led by healthy volume growth and improved profitability. Standalone crop protection (CP) segments had a stellar year, with 3.4x EBIT growth, led by strong sales of in-house products like HITWEED and GRACIA. Astec LifeSciences (Astec) faced volume and price challenges in both domestic and export markets, resulting in losses. The dairy segment has structurally turned around, led by better VAP sales growth of 36% in FY24 vs. 32% in FY23. The poultry segment’s profitability improved, led by its focus on the branded business.

* Going ahead, GOAGRO’s animal feed and standalone CP segments are expected to maintain healthy performance, led by a better product mix and stable profitability in the dairy and poultry/processed food businesses. The vegetable oil business is expected to witness improvement in profitability by moving up the value chain (refining and solvent extraction). However, Astec may face near-term challenges in its enterprise product segment, while the CDMO segment should continue its growth trajectory.

* Most of the segments are expected to witness improvement in profitability going ahead (which was missing over the last few years) on the back of multiple segmentspecific measures. We expect the improvement to be more sustainable in nature, which was visible in its 1QFY25 earnings. We raise our FY25/FY26 EBITDA estimates for GOAGRO by 9%/8%, backed by better profitability across segments. We upgrade our rating to BUY.

Strategic moves boost near-term outlook

* GOAGRO showed resilience in FY24 despite several headwinds for the sector. The company reported flat revenue growth (2%), though several strategic initiatives and cost rationalization across segments boosted its operating profit (margins up 180bp to 7.3%).

* The company is focusing on enhancing its operational efficiencies, expanding production capacities and increasing the salience of VAP. It aims to leverage robust R&D capabilities to innovate and drive growth across segments.

* Innovation and R&D: GOAGRO continues to invest in R&D capabilities across its segments, aiming to accelerate the development and commercialization of new products for sustainable growth and market leadership.

* Operational efficiencies: The company benefits from operational efficiencies by increasing the mix of VAP (e.g., refinery and solvent extraction in palm oil and increase in branded products in Godrej Tyson) and economies of scale by centralizing key functions across businesses.

* Diversification and resilience: To navigate the inherent volatility in the food and agriculture sectors, GOAGRO has diversified its operational portfolio and aims to enhance resilience and profitability across all business segments.

Strategic downstream expansion in palm oil; feed market sustains healthy profitability

* GOAGRO, being India's largest oil palm processor, has completed the forward integration with a new refinery (400tpd) and a new solvent extraction plant (200tpd), thereby unlocking margins across the value chain. Through this expansion, GOAGRO is entering into value-added derivatives of palm oil, e.g. stearin, olein and PFAD. Despite lower prices (CPO down 20%, PKO down 28% YoY), it expanded aggressively in Assam, Manipur, Tripura, Nagaland, Orissa, and Telangana, and aims to add 60,000 hectares of plantations in the next five years. In addition, the company is focusing on enhancing the oil extraction ratios (OER), improving inventory management, and expanding operations in Andhra Pradesh to boost future revenues.

* In FY24, the animal feed business sustained volume growth (3%) and clocked a 31% increase in EBIT due to softened commodity prices and better realizations (realization/kg increased to INR33.4 from INR24.5 in FY23). The successful R&D initiatives also enabled the company to use low-cost raw materials while producing high-yielding products. The cattle feed segment reinforced its dominance in the western region with new products, particularly Samruddhi, driving robust demand. The aqua feed segment also grew and gained market share in fish feed. The company invested INR250m in Godrej Cattle Genetics Pvt Ltd for expansion and operations, achieving milestones in embryo production and sales. Its Bangladesh JV recorded strong growth, with an 8% increase in revenue and a 117% increase in profit. Moving forward, the company aims to expand its share in established markets, enter new regions, develop new products, and enhance brand visibility and customer loyalty through digital initiatives.

Standalone CP capitalizes on in-house products; Astec targets CDMO amid challenges

* The standalone CP segment reported a stellar performance (EBIT up 3.4x YoY) thanks to higher sales of in-house and in-licensed products (higher-margin products due to limited competition). Continuous R&D efforts ensured the development of effective agrochemical solutions that enhance crop productivity and protection. HITWEED and GRACIA also contributed to the growth of the segment. HITWEED has achieved widespread acceptance due to its effectiveness in weed control. GRACIA was launched in Feb’22 and has been gaining traction since then, leveraging its introduction timing and market response. Continued focus on expanding the product portfolio (planned to launch at least one 9(3) product every year for the next four to five years in partnership with MNCs) and improving sales and distribution efficiencies should help GOAGRO sustain growth in this segment.

* The CP subsidiary, Astec, faced volume and price challenges in both export and domestic markets due to high inventories, de-stocking, and demand-supply imbalances, resulting in decreased revenues and losses in FY23-24. However, the contract manufacturing (CDMO) and new products segment grew by 67% in FY24. The CDMO business accounts for 60% of the total revenue of Astec in FY24, which is expected to clock a 50% CAGR over the next two-three years. Also, margins are better in CDMO than in the legacy enterprise business, which will drive up overall profitability. The new R&D center in Rabale, Maharashtra, began commercializing new products. In FY25, Astec will focus on scaling up its R&D projects, diversifying molecules and chemistries, expanding its CDMO customer base, and expanding the herbicides plant at Mahad.

Dairy turnaround with efficiency gains; Poultry profit soars on brand focus

* FY24 marked a structural turnaround for the company’s dairy segment by achieving profitability and improving margins through operational efficiencies in milk procurement, supply chain, logistics, and sales. The company has adopted assertive cost-reduction strategies, reducing its chilling centers from 112 to 59 and significantly increasing direct procurement from farmers to 28% in FY24, up from the single-digit in previous years. This has helped reduce not only overhead costs, but also logistics costs. Also, the share of VAP in total sales increased to 36% in FY24 from 27% in FY21. In this segment, the company is focusing on further improving operational efficiencies and expanding the share of VAP.

* In the poultry and processed food business, despite flat revenue, the company achieved strong growth in profitability (margins expanded 310bp to 4.7%) and recorded EBIT of INR464m, up 2.9x YoY. Growth in profitability was primarily led by strong volume growth in the branded category, coupled with a recovery in live bird prices. The company has acquired the remaining stake in Tyson (now it is a wholly owned subsidiary) and is shifting focus to the branded segment (mix to increase to 80-85% in next few years from 60% currently) to reduce volatility in the live bird market, thereby also reducing volatility in its margins. It is working to strengthen both its B2B and B2C businesses, adding more clients to its B2B segment (Real Good Chicken) and expanding the B2C brand, Yummiez, through e-commerce and quick commerce platforms, which are seeing strong traction. While revenue growth is expected to remain flat until FY27 due to the transition away from selling live birds, the company expects a 40% CAGR in EBIT over the next three to four years.

Valuation & View

* GOAGRO’s animal feed and standalone CP businesses are likely to sustain their healthy performances going ahead, along with sustained profitability in the dairy and poultry/processed food businesses. This growth trajectory is led by the company’s enhanced focus on VAP and branded products.

* Vegetable oil business is expected to witness improvement in profitability as it moves up the value chain (refining and solvent extraction). While the company is expected to witness near-term hurdles in its enterprise product segment of crop protection business (Astec).

* Most of the segments are expected to witness improvement in profitability going ahead (which was missing over the last few years) on the back of multiple segment-specific measures. We expect the improvement to be more sustainable in nature, which was somewhat visible in its 1QFY25 earnings. We raise our FY25/FY26 EBITDA estimates for GOAGRO by 9%/8%, backed by better profitability across segments.

* We estimate a CAGR of 9%/25%/37% in revenue/EBITDA/adj. PAT and upgrade our rating to BUY with a revised TP of INR970, based on FY26E SOTP.

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