GODREJ AGROVET : Perfectly Poised For Growth
Healthy product mix and penetrating existing markets while entering new markets is the growth mantra for Godrej Agrovet
Godrej Agrovet Limited is a diversified, research and developmentfocused agri-business company. Its operations span over five business verticals: animal feed, crop protection, oil palm, dairy, and poultry and processed foods. The agriculture sector is expected to show superlative growth in the coming quarters and is expected to recover rapidly from the current pandemic. For the financial year 2019-20, the agriculture sector is estimated to grow at 4 per cent compared to the low growth rate of 2.4 per cent seen in the previous financial year, thanks to the strong Rabi season.
Key Business Segments
Animal Feed : In FY20, the first nine months of the year saw volume growth at 7.9 per cent driven by fish feed and layer feed segments. However, the volumes declined by 11.3 per cent in the fourth quarter, thus lowering the annual growth rate to 2.9 per cent for FY 2019-20. Under this business segment the company makes leading compound feed for cattle, broiler, layer, fish and shrimp. It has reported improvement in volume momentum on month-on-month basis but the extended lockdown in Q1FY21 has impacted volumes across segments. The volume decline in broiler and layer feed was higher than the decline in fish and cattle feed even as the shrimp feed volumes witnessed growth over the previous year. For the animal feed business segment, the sequential improvement in volumes and favourable input prices are expected to drive profits in the near-term. Godrej Agrovet’s 50:50 joint venture with Advanced Chemical Industries Limited (ACI), Bangladesh, named ACI Godrej Agrovet Private Limited, saw performance improving significantly over the previous years with the company posting revenue growth of 56.9 per cent YoY and growth in profit before taxes of 339.6 per cent YoY.
The recorded growth was on account of strong volume growth in all segments, namely, cattle, poultry and aqua feed. For this business segment at least, the growth strategy is to have deeper penetration in existing geographies and entering new geographies. The company is expected to leverage digital analytics and automation in raw material purchase and supply chain management which will help optimise the costs in this segment.
Oil Palm : Godrej Agrovet is one of the largest domestic producers of crude palm oil and palm kernel oil. The revenue in this business segment was supported by increase in palm oil prices and palm kernel oil prices in the current quarter over a similar quarter in the previous fiscal year.
Crop Protection : The company launched ‘Hitweed Maxx’ which is an in-house herbicide and a one-stop solution for controlling all major weeds in the cotton crop. The company also launched new herbicides during the quarter– ‘Delete Aqua’ and ‘Impool-X’. Another product, ‘Hanabi’, has also been launched which is used for managing mites in tea plantation. An array of new products such as ‘Bloxit’, ‘Veteran’, ‘Prudens’ and ‘Rohelus’ have also been introduced which will now enhance the product portfolio of Godrej Agrovet in the crop protection business.
This will also help the company to enter new crops and new markets. The business segment has been negatively impacted due to the extended lockdown with production disruptions which resulted in lower-thanexpected volumes of higher margin specialty products. This has adversely impacted the segment results in the current quarter. The company, however, has witnessed cash collections of Rs224 crore in the current quarter compared to collection of Rs131 crore in the corresponding quarter of the previous year.
In this segment, the company has posted a superlative performance of Astec Lifesciences, which was acquired by Godrej Agrovet in 2015. Under this business, the company produces agrochemical active ingredients, intermediates and pharmaceutical intermediates. Astec Lifesciences is a niche fungicide player and offers off-patented chemistries to domestic agrochemical marketers and also for exports to the US, Europe, Southeast Asia and Latin America. Q1FY21 has been one of the strongest first quarter performances by the company. Astec Lifesciences reported 45 per cent top-line growth. The EBIT margins improved to about 20 per cent as compared to the typical Q1 average margins of 7 per cent owning mainly to better product mix and backward integration of a key molecule.
Growth in the segment was driven by strong volumes and higher realisations in the enterprise sales segment. Exports have grown faster than domestic sales, geographically. Several projects undertaken for backward integration and for expanding capacities and entering newer chemistries are expected to be completed in the current year. The commencement of the new herbicide plant is expected to drive growth for Astec Lifesciences H2FY21 onwards.
Dairy : The extended lockdown has impacted the mild demand from the institutional segment and out-of-home consumption of milk products, especially in South India. This has led to lower demand for milk and value-added products during Q1FY21, thus translating into decline in volumes, sales and margins.
Godrej Tyson Foods Limited : Increased consumption of ready-to-cook products by households has led to sharp uptick in brand ‘Yummiez’ segment volumes and sales. The increase in market-share reflects the good response received by the products from customers both in the vegetarian and the non-vegetarian frozen food product categories. Favourable input prices in Q1FY21 over the previous year helped improve the profit margins for the segment.
Financials
We can see from the below table that the revenues for the crop protection segment and oil palm business segment have improved while the revenues have suffered for animal feeds and dairy businesses.
Investment Rationale
Even though extended and intermittent lockdowns have disrupted production and demand across the company’s business segments, the situation is improving on the ground and there has been sequential recovery witnessed in prices and demand of poultry and poultry products after the corona virus-linked rumours receded from April 2020 onwards. The uptick in all the segments on a month-on-month basis augurs well for the stock. Logistics and labour availability is improving across states, which is comforting.
The opportunities in the Indian agrochemical sector are increasing in both domestic and international markets. The company’s strategy to focus on expanding its product portfolio through in-house developments or through in-licensing arrangements can be expected to deliver good results.
Increasing market-share in existing business verticals is one of the biggest strengths of the company along with its pan-India presence with an extensive supply and distribution network. The company’s diversified business with synergies in operation is its core strength along with strong research and development capabilities.
The company does not shy away from looking at opportunities to grow inorganically. Thus, the growth opportunities in existing business verticals and the open-minded approach to inorganic growth opportunities make Godrej Agrovet an interesting investment prospect. Better than expected profitability in the animal feed segment with margins up by 164 bps YoY, turnaround in the poultry business and robust performance from Astec Lifesciences are big positives for the company. Benign raw material prices have helped the company expand the blended profit margin. The struggling business segments of animal feeds, palm oil and dairy are all expected to show improvement QoQ.
The commercialisation of its plant in Q2 for cost rationalisation in animal feeds, backward integration benefits along with higher incremental sale of value-added products in Astec Lifesciences even as the palm oil price is up by almost 38 per cent in July (YoY) and expected to remain steady are some of the factors pointing to the fact that the blended profit margins could be steady for Godrej Agrovet. All this makes a strong investment case in favour of Godrej Agrovet and we therefore recommend investors to BUY this scrip.