Godrej Agrovet: Why it’s a good investment for those with a medium-term horizon

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Even though Indian equities have delivered stellar returns post-Covid, with prices of many stocks rising multi-fold over the past four years, there are still opportunities for investors with an eye on the medium-term horizon. One such opportunity in the agribusiness sector is Godrej Agrovet, part of the over $4 billion Godrej Group.

The company’s business can be broadly divided into five major divisions: animal feed business (accounting for almost half of the company’s revenue as of 9MFY24), dairy (15 per cent), vegetable oil (13 per cent), crop protection (12.5 per cent ) and poultry processed food (10 percent).

The company’s expansion initiatives in crop protection sector, vegetable oil and dairy business will drive good growth in the medium term. At the current price of ₹485, the stock trades at 28 times its trailing twelve-month earnings, while the five-year average is 30 times. We believe the stock has good prospects over the next 2-3 years, as management now has a clear vision of focusing on businesses with strong growth potential, improving operating efficiencies and improving the bottom line. Strengthening the business with.

On a relative basis, the stock may appear fairly valued compared to the industry. However, this is due to the decline in earnings seen in the last two years. With profit growth expected to continue at a good pace over the next few years, this stock is a good investment for those with a medium-term horizon.

Business

The group’s consumer reach began as early as 1897 through products such as Swadeshi soap. The group has since organized all its businesses and Godrej Agrovet is the agribusiness company of the Godrej Group.

Currently, the animal feed business, which includes poultry, cattle and aqua feed, is the largest segment within Godrej Agrovet, accounting for over 48 per cent of revenues ($9M FY24). With over 30 manufacturing units and a presence not only in India, but also in Bangladesh through its joint venture ACI Godrej Agrovet, the company is the largest compound feed company in the Indian market. Strong growth in the fish feed sector and the commissioning of a new facility in Uttar Pradesh last year to meet the needs of the northern and eastern markets should support growth.

However, challenges remain due to regulatory steps such as allowing soymeal imports, which could jeopardize short-term growth. Last year, the company had invested ₹20 crore in Godrej Maximilk Pvt Ltd, which is engaged in the development of high quality animal embryos, following which the company announced that it had achieved new milestones in R&D and production. Have done.

The third largest segment – ​​vegetable oils, in which the company manufactures and sells crude palm oil and palm kernel oil, accounts for 13 per cent of Godrej Agrovet’s revenue. The company is the largest producer of oil palm and has more than 30 percent share in the Indian market. Interestingly, India imports more than 97 percent of its palm oil needs.

Godrej, with partnerships with over 9,000 farmers across the country and a potential cultivation area of ​​over 2 lakh hectares, is well positioned to capitalize on the huge local demand. A new refinery with a capacity of 400 MTPD and a solvent extraction plant with a capacity of 200 MTPD, and commercial MoUs with various state governments – Assam, Manipur, Tripura, Nagaland and Odisha – for palm plantations – will drive growth in the sector.

The plant protection chemicals segment contributes about 12 percent to the company’s revenue. This includes the Astec business which is the institutional business in which the company undertakes contract research and development (CRDO) for other large players. In addition, the company also has a domestic formulations segment in which it sells generic branded fungicides, herbicides and insecticides to end customers.

The portfolio also includes a wide range of products that cover the entire lifecycle, such as plant growth regulators and organic fertilizers. It is the world’s largest producer and marketer of homobrassinolides, a plant hormone used to stimulate growth and increase yield. The company has undertaken capital expansion projects worth ₹300 crore to expand in Astec Lifesciences and is confident of strong revenue growth every year.

The dairy business under Creamline Dairy Products currently accounts for 15 per cent of the revenue. Sold under the “Jersey” brand name, the company is focusing on value-added dairy products. The company has a total processing capacity of 1.36 million tonnes per day and has a strong presence in South-Tamil Nadu, Andhra Pradesh, Telangana, Karnataka and Maharashtra. Last year, it expanded its packaging capacity, adding a new line, with which today its capacity stands at 70,000 liters per day. Value added products and capacity expansion should drive growth in this sector.

Poultry and processed foods sold under the Real Good Chicken and Yummies brands account for 10 percent of revenues. The division is a joint venture between Godrej and Tyson Foods, US.

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In FY23, the company reported weak performance due to some one-off reasons, such as adverse regulatory steps to allow import of soymeal, input price fluctuations resulting in impact on operating profit margins. While revenue grew by nearly 13 per cent to ₹9,374 crore over the previous year, operating profit declined by 22 per cent due to increase in raw material prices.

However, in 9MFY24, although revenue growth was flat, the company managed to grow operating profit by 21 per cent thanks to good performance in domestic plant protection chemicals business, dairy segment. Over the next two-three years, operating leverage and expansion in CRDO, dairy and animal feed should support sustainable growth in revenues and profits.


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