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Animal feed and dairy business drives operating profit

Operating performance in line with estimates

* Godrej Agrovet (GOAGRO) reported strong operating performance (EBIT up ~22% YoY) in 1QFY25, driven by improved profitability in the animal feed (AF) business (EBIT up ~45% YoY) and a turnaround in the dairy business (EBIT of INR185m vs. operating loss of ~INR25m). The crop protection (CP) business also contributed positively, with EBIT growing 9% YoY, driven by standalone CP business. However, the palm oil /poultry and processed food (Tyson) business recorded a weaker performance, with EBIT declining ~14%/28% YoY.

* Factoring in strong operating performance, we raise our EBITDA estimates for FY25/FY26 by 8% each to account for improved profitability of the AF, dairy and standalone CP businesses. We retain our Neutral rating on the stock. Revenue declines due to lower volumes in AF, palm oil and Tyson

* Consolidated revenue declined 6% YoY to INR23.5b (est. INR27b). EBITDA margins expanded by 190bp YoY to 9.6% (est. 8.3%), led by expansion in gross margins by 260bp YoY to 26.8%. EBITDA stood at INR2.3b, up 17% YoY (est. in line). Adj. PAT grew 28% YoY to INR1.4b (in line).

* Animal Feed business: Revenue declined ~10% YoY to INR11.6b, led by a volume decline of 8% YoY to 346kmt due to subdued milk prices and lower placements. EBIT/kg grew 57% YoY to INR2.26, led by favorable commodity price movement.

* Palm Oil business: Revenue grew 12% YoY to INR2.6b. EBIT margin contracted 290bp YoY to 9.2%. EBIT stood at INR241m, down 14% YoY. Lower fresh fruit bunch (FFB) arrivals led to lower segmental revenue (excluding trading revenues), while a lower oil extraction ratio (OER) affected profitability.

* Crop Protection business: Consolidated revenue declined 5% YoY to INR3.65b. However, EBIT grew 9% YoY to INR868m, led by strong performance from standalone CP business. Astec Lifesciences revenue declined 57% YoY to INR505m, while it recorded an operating loss of ~INR270m in 1Q due to continued pricing and demand headwinds in enterprise products, which necessitated write-down of inventories.

* Dairy business revenue inched up ~1% YoY to INR4.3b. Operating profit stood at INR185m in 1QFY25 vs. operating loss of INR25m in 1QFY24, due to significant improvement in operational efficiencies and improved milk spread.

* Poultry and Processed Food business revenue declined ~25% YoY to INR2.3b, led by lower volumes in live bird business as the company continues to focus on branded business. EBIT margin contracted 50bp YoY to 8.2%. EBIT stood at INR193m, down 28% YoY.

Highlights from the management commentary

* Outlook and guidance: Going ahead, production is expected to improve sequentially in Palm oil segment. The company expects to achieve steady production YoY in FY25. Within AF business, the company believes that EBIT/kg of INR2 is sustainable going ahead.

* Astec: The company’s CDMO business is expected to grow by 50-60% over the next 2-3 years. It will defer a major capex by another year and will only do debottlenecking, quality improvement and environmental spending in FY25.

* Capex: The company will incur ~INR800-900 in capex in FY25 to add one more refinery in palm oil. Also, the company has received in-principal approval for building a new facility for INR1.1b for AF business.

Valuation and view

* GOAGRO is expected to witness near-term hurdles in its enterprise product segment of crop protection business (Astec). However, AF and standalone crop protection businesses are likely to sustain their healthy performances.

* In 1QFY25, the dairy and Tyson businesses sustained the turnaround witnessed in 4QFY24 and are poised to maintain robust performance in FY25. This growth trajectory is led by enhanced focus on value-added products/ branded products.

* Factoring in strong operating performance, we raise our EBITDA estimates for FY25/FY26 by 8% each to account for improved profitability of the AF, dairy and standalone CP businesses. We retain our Neutral rating on the stock with our SoTP-based TP of INR880.

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