Godrej Agrovet - Dairy segment continues to disappoint - ICICI Securities

Three pointers from Q4FY21: (1) Lower demand from HoReCa sector for milk, eggs and chicken continues to impact overall consumption of these commodities. It also affected the Animal feed segment, (2) Dairy segment continues to report weak numbers in-spite of lower milk procurement prices and re-branding under 'Godrej Jersey' brand and (3) the company shifted from supplier financing to short term borrowings with lower cost of borrowing. We expect most segments of the company to show recovery in FY22 with favourable base of FY21. We remain confident of value creation (RoE > Cost of Equity) and maintain ADD with a DCF-based target price of Rs555 (24x FY23E).

- Q4FY21 result performance: Godrej Agrovet reported revenue, EBITDA and PAT decline of 10.1%, 11.1% and 19.9%, respectively. Animal feed and Dairy segments reported revenue decline of 9.3% and 0.3%, respectively YoY. Oil Palm and Crop protection segment reported revenue growth of 7.9% and 6.2%, respectively. Astec reported revenue decline of 4.8% YoY.

- Deflation in input prices leads to higher gross margin: The company reported 50bps higher gross margin but EBITDA margin declined 10bps YoY. Due to higher effective tax rate, PAT declined 33% YoY. Lower input prices resulted 330bps higher EBIT margin of Animal feed segment.

- Decline in demand from HoReCa segment: The company's multiple segments depend on HoReCa such as milk and poultry. The animal feed segment is also indirectly dependent on HoReCa. With lower consumption of milk, chicken and eggs, the demand for animal feed declined in FY21.

- Weak performance of Dairy segment continues: Dairy segment reported revenue decline of 0.3% with loss of Rs36mn at the EBIT level. In-spite decline in milk procurement prices and re-branding of the dairy products under 'Godrej Jersey' brand, the Dairy segment continues to report weak performance.

- Drivers for FY22: Apart from favourable base of FY21, we believe GAVL can benefit due to (1) forecast of normal monsoon in FY22, (2) essentials goods such as animal feed, milk, palm oil continue to do well, (3) possibility of recovery in HoReCa sector in FY22 and (4) benefits of cost savings initiatives.

- Maintain ADD: We expect GAVL to report revenue and PAT CAGRs of 13.2% and 20.2% respectively, over FY21-FY23E. The return ratios are also expected to be above cost of capital over FY21-23. We maintain ADD with a DCF based target price of Rs555 (24x FY23E). 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.516 as compared to the previous close of Rs. 511.65. The total number of shares traded during the day was 9357 in over 722 trades.

The stock hit an intraday high of Rs. 517.95 and intraday low of 510.5. The net turnover during the day was Rs. 4815650.

Source : Equity Bulls

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