Godrej Agrovet - Deflation in input prices leads to higher margin - ICICI Securities

Three pointers to note from Godrej Agrovet's Q1FY21: (1) With reducing fear of coronavirus, there is MoM improvement in company's revenues. However, lower off-take from HoReCa will continue to impact rest of FY21, (2) deflation in input prices for all segments will lead to better gross and EBITDA margin in FY21 and (3) the company has continued to focus on reduction in working capital which will lead to higher return ratios. We expect most segments of the company to show recovery in H2FY21 after weak H1FY21 with normal monsoon and improved agri outlook. We remain confident of value creation (RoE > Cost of Equity), but believe stock price upside is capped at current valuations of 25x FY22E. Maintain HOLD with a DCF-based revised target price of Rs473 (26x FY22E; Earlier TP-Rs401).

- Lower revenues of Dairy and Animal feed segment: Godrej Agrovet reported revenue decline of 8.7% and PAT growth of 16.5% YoY. Animal feed and Dairy segment revenues declined 15.5% and 26.2%, respectively due to lockdown as well as lower institutional sales. With higher palm oil prices, palm oil segment reported 8.2% revenue growth. Due to 45.4% higher revenues of Astec, Crop protection segment reported 11.9% higher revenues.

- Deflation in input prices leads to higher gross margin: The company reported 330bps higher gross margin. The input prices for all the segments were lower YoY. We also note the company initiated cost saving measures during the quarter. The change in revenue mix (Higher share of Astec and palm oil) also helped to improve the margins at consolidated level. With lower taxes, PAT expanded 16.5% YoY.  Expect a better Agri season: With normal monsoon, 14% higher sowing and increase in Government spends in FY21, we expect the company to be net beneficiary of strong agri season. We also model the company's EBITDA margin to improve in rest of FY21 due to lower input prices.

- Weak demand from HoReCa to continue to impact off-take: HoReCa accounts for ~30% consumption of agri products such as chicken, milk, palm oil. With lower demand from HoReCa and institutions, we expect the company's revenues to remain impacted in rest of FY21. There will be some increase in in-home consumption. Muted celebrations in festivals and postponement of marriages and other events will also hurt the demand for company's products.

- Maintain HOLD: We expect GAVL to report revenue and PAT CAGRs of 6.9% and 5.3% respectively, over FY20-FY22E. Though we remain confident of value creation with RoE > Cost of Equity, we believe upside to the stock price is limited at current valuations. Maintain HOLD with a DCF based target price of Rs473 (26x FY22E).

Shares of Godrej Agrovet Ltd was last trading in BSE at Rs.470.8 as compared to the previous close of Rs. 458.7. The total number of shares traded during the day was 33709 in over 1193 trades.

The stock hit an intraday high of Rs. 478 and intraday low of 463.6. The net turnover during the day was Rs. 15827500.

Source : Equity Bulls

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