Godrej Agrovet: Equirus initiates coverage at CMP of Rs 510 with 20 pct upside for a target of Rs 610

Godrej Agrovet, at CMP of 510, is trading at a 31x/25x PE and an EV/EBITDA multiple of 17x/14x on our FY21E/FY22E estimates, says Equirus. Since all business segments have a different opportunity size, growth and returns profile, Equirus used the SOTP (some of the parts valuation) methodology to arrive at a target price of Rs 610 and initiate coverage on the stock with LONG. TP implies a 30x PE on our FY22E.

Key agriculture reforms by Government of India (GOI) and infrastructure funding support is set to drive India’s farm output over the medium to long term. Equirus believes the company is diversified Agri play with presence in animal feed, crop protection, oil palm, dairy and poultry and processed foods is set to benefit from growth in India’s Agri sector. The company’s pan-India presence with Godrej parentage and R and D capabilities have enabled it to grow significantly, ahead of largely unorganized competition.

Equirus believes the Agriculture sector will see significant structural changes post reforms. In the ‘Aatmanirbhar’ 'package, GOI announced key reforms with a potential to structurally change the Indian agriculture sector. These reforms, if implemented in the right earnest, will improve farm storage infrastructure, lead to better price discovery, and minimise market-related risks for farmers.

Godrej Agrovet is a proxy play on Indian agriculture with a presence across diversified yet interlinked business segments. It provides exposure to both Agri-input (animal feed, crop protection) and Agri-output segments (palm oil, dairy, poultry products). A diversified business model along with extensive geographical presence provides a hedge against risks associated with any industry or geography.

Equirus believes all segments are set for a sharp recovery over the next three years, and the trend seems to have already begun in FY21. Below are the key highlights of segmental growth drivers:

1)Animal feed: Covid led lockdown in Q1 of FY21 had hurt consumption of all animal proteins (milk, chicken, and eggs). This in turn has hit demand of all types of animal feed i.e. cattle, broiler, and layer. However, demand has been improving with each passing day as India continues to ease restrictions. The segment has a strong tailwind of benign raw material costs (corn, soybean, rice bran) given the good monsoon and Kharif sowing this year.

2)Crop protection: Legacy business posted muted growth in FY20 given the company’s focus on collections and reducing debtor days. Q1 of FY21 was particularly weak and the company underperformed the industry as its Jammu factory was under lockdown, leading it to a miss in some key months of sale. However, the company saw good sales in July/August and tried to make up for a grim Q1 of FY21. Going forward, the company plans to launch 2-3 new products every year to support growth.

3)Palm oil: Good monsoons this year will improve FFB (Fresh Fruit Bunches) arrivals and help oil content in the fruit. Though new FFB pricing formula is awaited, this segment will remain main on solid footing given the high CPO (Crude Palm Oil) prices and R&D initiatives taken by the company to better it's OER (Oil Extraction Ratio).

4)Dairy: FY19 was marred by butter provisioning and FY20 was negatively impacted by a sharp increase in milk procurement costs. As 30% of Godrej Agrovet’s milk sale is to institutions, the lockdown had impacted sales; however, demand is improving, and the industry expects to grow in 2HFY21. With milk procurement prices being stable, margins are expected to return to normal levels. Post majority stake in Creamline Dairy Products limited, the company has struggled in this segment; however, the company has taken steps in the right direction to increase direct procurement, reduce dependence on buffalo milk, and increase its parlor networks. In our view, this segment will turn around from FY21 itself.

5)Poultry: False rumours linking Covid-19 spread with chicken consumption led to a sharp fall in poultry and related product prices towards FY20-end. Though lockdown has impacted the overall chicken consumption, the processed meat (Yummiez) segment of the company has witnessed a sharp uptick in volumes and sales, driven by increased consumption of ready-to-cook products by households. The company has gained market share, both in the vegetarian and the non-vegetarian frozen food product categories. Raw material prices also remain benign, which will aid margins.

Investment risks:

1) HORECA (Hotel/Restaurants/Cafe) segment continues to remain weak: Covid-19 lockdown has impacted the consumption of dairy and poultry products. Though everything is opening but if the HORECA segment remains weak, demand may remain muted.

2) AP government changes the Fresh Fruit Basket pricing unfavourably for processors: The new revised Fresh fruit bunches (FFB) pricing formula is still awaited from AP government, if they change the formula too much in favour of farmers, it may impact margins of processors.

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3) Any sharp increase in the raw material prices: This year due to good monsoon, good kharif sowing and muted demand, most of the Agri-commodities are trading at low levels, which are working in favour of processors. Any sharp increase (which looks unlikely) may impact profitability.

By Rahul Kamdar