Every 5% rise in prices can raise EPS by c.2%; ‘Add’ retained with TP of Rs 560
For every 5% increase in palm oil prices, Godrej Agrovet’s earnings can increase by c.2%.
Higher palm oil prices (up 60% y-o-y) have increased realisations as well as profitability of Godrej Agrovet’s vegetable oil segment. Lower supplies from South-East Asia are leading to higher palm oil prices in India. With gradual reopening of the economy, demand from HoReCa segment is likely to improve, which may further increase palm oil prices. For every 5% increase in palm oil prices, Godrej Agrovet’s earnings can increase by c.2%.
Customs duty on palm oil imports has been cut from 37.5% to 27.5%. However, we believe there is still a large gap between Indian and imported palm oil prices and this differential will ensure healthy demand for palm oil produced by GAVL. We remain confident of value creation (RoE > Cost of Equity) by Godrej Agrovet and maintain our Add rating with a DCF-based target price of Rs 560 (27x FY22e).
Sharp increase in palm oil prices: Demand for palm oil in India is still muted considering weaker demand from HoReCa segment. Higher demand from HoReCa is likely to push palm oil prices upwards.
Expect profitability of ‘vegetable oil’ segment to increase: Company generates c.10% revenues and c.19% Ebit from its vegetable oil segment. Revenues as well as margins of the segment will increase with higher prices of palm oil. Improving demand and higher selling prices, coupled with favourable base, will increase profitability of the segment.
Maintain Add: We expect the company to report revenue and PAT CAGRs of 6.9% and 12.3% respectively, over FY20-FY22e.