Higher palm oil prices (up 60% YoY) have increased realisations as well as profitability of Godrej Agrovet's vegetable oil segment. Lower supplies from South-East Asia are leading to higher palm oil prices in India. With gradual reopening of the economy, demand from HoReCa segment is likely to improve, which may further increase palm oil prices. For every 5% increase in palm oil prices, Godrej Agrovet's earnings can increase by c.2%. Customs duty on palm oil imports has been cut from 37.5% to 27.5%. However, we believe there is still large gap between Indian and imported palm oil prices and this differential will ensure healthy demand for palm oil produced by GAVL. We remain confident of value creation (RoE > Cost of Equity) by Godrej Agrovet and maintain our ADD rating with a DCF-based target price of Rs560 (27x FY22E).
- Sharp increase in palm oil prices: Palm oil prices are up c.60% YoY. Demand for palm oil in India is still muted considering weaker demand from HoReCa segment. However, reduction in supply from South-East Asia is resulting in higher prices of palm oil. Increase in demand from HoReCa post reopening of the economy is likely to push palm oil prices higher.
- Expect profitability of 'vegetable oil' segment to increase: We expect Godrej Agrovet to benefit from higher palm oil prices. Company generates c.10% revenues and c.19% EBIT from its vegetable oil segment. Revenues as well as margins of the segment will increase with higher prices of palm oil. Improving demand and higher selling prices, coupled with favourable base, will increase profitability of the segment.
- Reduction in import duty on palm oil imports: Import duty on palm oil was reduced from 37.5% to 27.5% in Nov'20. While this is likely to reduce the prices of imported palm oil and narrow the price gap between palm oil sold by Godrej Agrovet and its imported counterpart, we believe there is still large scope for domestic players to generate healthy demand and profitability.
- Earnings sensitivity: While we don't factor-in the profitability changes due to higher palm prices, we believe if crude palm oil prices rise 5% YoY, there is a likely upside of c.2% to Godrej Agrovet's earnings.
- Maintain ADD: We expect the company to report revenue and PAT CAGRs of 6.9% and 12.3% respectively, over FY20-FY22E. We remain confident of value creation with RoE > Cost of Equity and maintain our ADD rating with a DCF-based target price of Rs560 (27x FY22E P/E).
Shares of Godrej Agrovet Ltd was last trading in BSE at Rs.509.7 as compared to the previous close of Rs. 509.9. The total number of shares traded during the day was 25944 in over 2117 trades.
The stock hit an intraday high of Rs. 518 and intraday low of 502.3. The net turnover during the day was Rs. 13194553.