Godrej Agrovet: A good yield

Given the firm’s diversified business and healthy market positioning valuations seem justified

The government’s concerted efforts to reduce farm distress and increase income for farmers should bear some fruit in the next five years. If you are looking for a stock to bet on the rural theme for the long run, you can consider that of Godrej Agrovet, a diversified player in the agri-business. The arm of the Godrej Group has an annual turnover of over ₹5,000 crore and a presence in animal feed, dairy, crop protection chemicals and palm oil. At the current price of ₹502, the stock discounts its expected earnings for 2019-20 by 32 times. Given the company’s diversified business, healthy market positioning and strong growth expectation, the valuations seem justified. Over the next 2-3 years, the growth for the company will be driven by new product launches in the crop protection segment, higher volumes in palm oil and R&D-led new nutrition products in the animal feed category. In 2018-19, the company reported revenue growth of 13.1 per cent to ₹5,923.9 crore.

Over the past five years, while revenue has grown at a CAGR of 13.5, profit has grown 17 per cent.

Business

In 2018-19, Godrej Agrovet saw 52 per cent of its revenue come from the animal feed business and 20 per cent from dairy; the rest was divided between crop protection and vegetable oil businesses.

In animal feed, Godrej Agrovet is among the largest companies in the domestic market. It has 35 manufacturing facilities with a total capacity of 2.4 million tonnes.

India’s annual consumption of animal feed is estimated to be 25-27 million tonnes. The country’s animal feed market is expected to grow in double digits for at least the next 5-7 years given increasing animal protein consumption among the population and more farmers upgrading to better breeds of cattle for higher yield. Currently, the industry has a large number of unorganised players. But there has been a slow shift to organised players and branded products with increased awareness, creating opportunities for players such as Godrej Agrovet.

Godrej Agrovet supplies animal feed to over 4,000 distributors across the country. Not just cattle feed, the company also sells feed for poultry, fishes and shrimp. Operating margins in this business are 4-6 per cent. Increases in raw material cost (largely of maize and soya bean) are passed on to consumers, though with a time lag. The company, over the past year, has been working on new livestock nutrition products that could fetch better prices and aid margins. In 2018-19, the animal feed segment recorded a sales volume growth of 14 per cent with a value increase of 18.3 per cent.

Raw material price increases led to the margin shrinking to 4.2 per cent from 6 per cent in the previous year. While prices were hiked in the last quarter of 2018-19, it didn’t help to offset the increases in input cost entirely.

In dairy business, the company operates through its subsidiary, Creamline Dairy Products, and sells milk and milk products. In 2018-19, the company’s revenue in this segment was flat; cost efficiency and premium-product launches aided the margin despite low prices for butter and SMP (skimmed milk powder) in the domestic market. Operating profit margin was 3.7 per cent versus the 3 per cent in 2017-18. The challenge in this business is that increases in the procurement price of milk can’t be easily passed on to the consumer, and the lag effect may be longer than expected sometimes.

Crop protection is the business that drives profitability for the company. Though the segment contributes only 16-17 per cent of the revenue, the EBIT (earnings before interest and taxes) contribution is 45-48 per cent. The company manufactures a wide range of products including plant growth regulators, organic manures, generic agrochemicals and specialised herbicides, and supplies pan-India.

 

 

Given the growing pressure on farm incomes, the demand for crop protection chemicals (to increase yields) is only set to rise. In 2018-19, Godrej Agrovet registered a 7.5 per cent growth in revenue in the crop protection segment. Operating profit margin was 29.1 per cent against the 27.9 per cent in the previous year.

During the year, the company launched new products under herbicides, insecticides and fungicides that helped strengthen margins. For the current year, too, new products are in the pipeline. It needs mention here that Godrej Agrovet has a subsidiary — Astec LifeSciences (acquired in 2015) — that manufactures agrochemicals. Its products are sold in India and also exported. Astec LifeSciences also undertakes contract development and manufacturing services for other agro chemical companies.

In vegetable oil, Godrej Agrovet is engaged in producing a range of palm plantation products including crude palm oil, crude palm kernel oil and palm kernel cake. It purchases fresh fruit bunches (FFBs) from palm oil farmers and works closely with them by providing planting material, agricultural inputs and technical guidance. As per last year’s annual report, the company has access to approximately 64,125 hectares under oil palm plantation. Given that India currently imports 60-70 per cent of its palm oil needs and as the government is wanting to cut the import bill, there could be a thrust to help producers in the domestic market increase production.

While Godrej Agrovet is already the largest crude palm oil and crude palm kernel oil producer in India with around 35 per cent of the market share, it has the potential to grow further. In 2018-19, the segment saw a revenue growth of 16 per cent, but the profit growth was only 1.1 per cent due to a drop in operating profit margin to 16.7 per cent versus 19.2 per cent in the previous year. The margins shrunk due to a drop in palm oil prices and higher prices paid for FFB.

Margin outlook

In 2018-19, while total earnings were ₹5,923.9 crore, up 13.1 per cent over the previous year, at the operating level, the profit was up only 7.2 per cent. This is because of higher operating costs. Margin at the operating level was 8.6 per cent, versus 9.1 per cent in 2017-18.

Margins, going ahead, can improve given that the company is focussing on cost efficiencies and launching premium products in every segment. The company’s efforts to improve its yield in palm oil can also help boost profitability.

 

 

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