Godrej Agrovet - Beneficiary of rising out-of-home consumption - ICICI Securities

Three pointers to note from Godrej Agrovet's Q2FY21: (1) There is MoM improvement in off-take with opening up of economy. There is MoM recovery in demand from institutional consumers and out-of-home consumption, (2) Re-branding all dairy products under 'Godrej Jersey' brand will strengthen the dairy segment and will improve the ability to raise prices and maintain margins and (3) GAVL has continued to reduce investments in working capital which will lead to higher return ratios. We expect most segments of the company to show recovery in H2FY21 with normal monsoon and improved agri outlook. We remain confident of value creation (RoE > Cost of Equity) and upgrade the rating to ADD from HOLD with a DCF-based revised target price of Rs560 (27x FY22E; Earlier TP-Rs473).

- Q2FY21 result performance: Godrej Agrovet reported revenue decline of 6.9% and EBITDA and PAT growth of 44.6% and 12.5%, respectively. Animal feed, Crop protection and Dairy segment revenues declined 18.8%, 2.6% and 15.4%, respectively due to localised lockdown and lower institutional sales. With higher palm oil prices, palm oil segment reported 23.9% revenue growth. Astec reported revenue growth of 10.5% YoY.

- Deflation in input prices leads to higher gross margin: The company reported 510bps higher gross margin and EBITDA margin expanded 360bos YoY. The input prices for almost all the segments were lower YoY. We believe cost savings measures initiated post covid have also helped to report better margins. The change in revenue mix (Higher share of Astec and palm oil) also helped to improve the margins at consolidated level.

- Expect a better Agri season: With normal monsoon, higher kharif sowing and increase in Government spends in FY21, we expect the company to be net beneficiary of strong agri season. Opening up of economy and increase in buying from HoReCa will lead to higher demand for dairy and poultry products.

- Dairy business branded as 'Godrej Jersey': Expect higher investments: The company has re-launched all the dairy products under the brand 'Godrej Jersey'. We expect higher investments in the dairy business. We also believe Godrej brand equity will help to improve addressable market as well as improve the ability to raise prices and maintain margins.

- Upgrade to ADD: We expect GAVL to report revenue and PAT CAGRs of 6.9% and 12.3% respectively, over FY20-FY22E. Upgrade to ADD with a DCF based target price of Rs560 (27x FY22E). Key risks: Failure of new products and prolonged slow-down in out-of-home consumption.

Shares of Godrej Agrovet Ltd was last trading in BSE at Rs.524.2 as compared to the previous close of Rs. 526.75. The total number of shares traded during the day was 5902 in over 779 trades.

The stock hit an intraday high of Rs. 534.45 and intraday low of 520.4. The net turnover during the day was Rs. 3116145.

Source : Equity Bulls

Keywords