Godrej Agrovet Share price: HDFC Securities recommends BUY in range of Rs 419-Rs 466 for base case fair value of Rs 513

HDFC Securities believes that Godrej Agrovet is an integrated play on Agriculture sector with strong presence in Animal Feed (46% of revenue), Crop Protection (17%), Palm Oil (13%) and Dairy (15%) business. The company’s segments have been affected by the pandemic, in a mixed manner. While Crop Protection business was less impacted, Dairy, Poultry & Chicken, and Animal Feed businesses were impacted largely by procurement costs, COVID-related disruptions, and supply change issues respectively. Lower Fresh Fruit Brunches production and lower prices impacted the Palm Oil segment. Godrej Agrovet Share price closed yesterday at Rs 496, up Rs 4.75 or 1%

Godrej Agrovet posted a 10% decline in revenue, mainly due to a 19% decline in animal feeds segment and 17% fall in the dairy business. EBITDA margin witnessed strong 270bps improvement on better gross margin.  Animal Feed, Astec Life and Godrej-Tyson businesses registered strong operational performance. The company’s PAT showed strong 23% yoy growth to Rs 284cr. Godrej Agrovet’s diversified portfolio with leading market positions across agricultural inputs and outputs, careful selection of less-regulated segments, and high-quality management and parentage are some of the key positives for the company. It has an impressive long-term track record of steady growth and generates healthy return ratios.

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Godrej Agrovet recorded a strong margin in 9MFY21, led by better gross margin. Animal Feed, Astec Life and Godrej-Tyson businesses registered strong operational performance. The Animal Feed (AF) segment is seeing lower demand as restaurants/hotels are still operating at a much lower capacity utilisation than pre-COVID levels. This has impacted the demand for milk, chicken and eggs. Further, opening up of the economy is critical for demand revival.

Crop Protection business is likely to do well in the coming years due to:

(i)   product launches in the standalone crop protection segment
(ii)  strong performance in Astec owing to its expertise in triazole chemistry
(iii) commencement of a new herbicide plant

Volume growth in the Palm Oil segment is likely to return in FY22 on higher arrival of FFBs (due to higher acreages) and better yields from the commissioning of the new plant with improved technology. Higher Palm Oil prices should aid margin expansion. HDFC Securities estimated 5.5% revenue CAGR, led by Crop Protection and Palm Oil business and recovery in Animal Feed business over FY20-23E.

HDFC Securities expect the company to register 50bps margin expansion in FY21-23E due to better gross margin and sustained cost control measures. Healthy topline coupled with steady margin expansion could lead to 13.5% CAGR in PAT over FY20-23E. Godrej Agrovet’s diversified products across less regulated agricultural inputs and outputs, leading market positions across all of them and high-quality management and parentage, makes it a proxy to ride the theme of Indian agriculture. Also the business is asset-light and consequently generates healthy cash flows and return ratios.

HDFC Securities recommend a BUY on Godrej Agrovet on dips to Rs 466 and add more on dips to Rs 419 for base case fair value of Rs 513 (13.5x FY23E EV/EBITDA) and bull case fair value of Rs 559 (14.7x FY23E EV/EBITDA).