We initiate coverage on Godrej Agrovet (GAVL) with a Buy rating and DCF based target price of Rs 723. We like the business due to three key reasons: (i) The company has developed multiple moats which allow it to generate return ratios in excess of cost of capital, (ii) it operates in large unorganised markets where it can continue to grow in excess of nominal GDP growth through market growth and market share gains, and (iii) diversification across multiple sub-segments of agri which helps maintain growth rates and margins despite pressure on any one segment. We expect the company to report revenue and PAT CAGR of 11.4% and 20.6% over FY17-20 with return ratios above cost of capital.
Strong moats in growing segments: GAVL operates in multiple growing segments. Cattle & aqua feed, crop protection, palm oil plantation and dairy segments have grown at CAGR of more than 10% over past 5 years.
Well diversified business model: GAVL operates in four major segments: Animal feed, agri chemicals, palm oil plantations and dairy.
Major player in unorganised industries: GAVL largely operates in segments where the organised competitive pressure is relatively lower. With demonetisation and GST roll-out, we expect unorganised players to lose market share to organised players like GAVL.
Initiate with Buy: We value the stock on a DCF basis to arrive at a target price of Rs 723. Assumptions include cost of equity at 11.8% and terminal growth rate of 5%. At our target price of Rs 723 and FY20e EPS of Rs 21.0, the stock trades at PE of 34x.