Post meeting with management of Godrej Agrovet (GAVL), we remain positive on GAVL as (i) animal feed segment is expected to report strong volume-led growth ahead with revival in volumes of broiler feed, (ii) steady flow of new product launches and entry in combinations to drive growth of crop protection, (iii) import duty increase on palm oil will support domestic manufacturers like GAVL, and (iv) lower milk procurement prices will drive dairy segment margins north. With strong tailwinds in all four segments, we expect GAVL to report earnings CAGR of 32.9% over FY18-20. We reiterate Buy on the stock with a TP of Rs 710.

Mid-teen growth in Animal feed business

Animal feed business is expected to report mid-teen revenue growth due to (i) launch of R&D-based higher efficacy products, (ii) aggressive focus on six key states in India, (iii) steady distribution expansion, (iv) revival in broiler feed volumes and (v) strategy to operate at mid-single digit margin in order to reduce competitive pressures.

Crop protection business on a strong footing

Crop protection business is expected to report 15%+ CAGR over FY18-20 due to (i) steady launches of products such as Oryzostar and Ovitan, (ii) launches of combination products in H2FY19 and FY20, (iii) distribution expansion in India and (iv) higher order book for Astec. However, rising crude oil prices and rupee depreciation may impact the margins.

Palm oil business to benefit from customs duty on imports

The customs duty on palm oil imports has increased from 30% to 44% in Mar, 2018. This will ensure higher growth for palm oil producers in India. As of now palm oil plantation is spread across 66,000 hectares and company wants to expand ~4,000 hectares per annum.

Margins of Dairy segment to expand

The dairy segment reported Ebit margin of just 1.1% in FY18 due to steep increase in procurement prices. We note that with fall in milk procurement prices in past 6 months and some pricing actions, the margins will revive sharply. GAVL expects dairy business to generate steady state PBT margin of 4%. We expect launches of products such as premium ice cream and fresh milk products such as milk shakes will also improve revenues and margins.

Retain Buy

We expect GAVL to report revenue and PAT CAGRs of 14.4% and 32.9%, respectively, over FY18-20. Return ratios are also expected to improve over the period. We reiterate Buy with DCF-based target price Rs 710 (Implied target PE of 35x FY20E EPS).

Strong tailwinds across segments

Post strong Q4FY18, we interacted with the management of Godrej Agrovet and came back positive. Apart from expectation of normal monsoon in CY18 and structural growth factors such as lower penetration and shift from unorganised to organised products, the company is also working on growth factors like the following:

R&D-based launches: GAVL has steadily launched some superior products over the past two years.
Arresting decline in broiler feed: After decline for four straight years, the company has arrested the decline in broiler feed in FY18.

Focus on lower competitive segments: The competitive pressure from organised players in Cattle feed and Layer feed segments is lower than pressure in shrimp feed and broiler feed. GAVL plans to focus more on cattle feed and Layer feed.

‘Six states’ strategy: The company has identified 6 states as the key markets and plans to invest in these states.
Mid single digit margins: Godrej Agrovet has passed on the entire benefit of lower commodity prices to end consumers in FY18. This has allowed the company to gain market share from smaller players. As GAVL operates at mid-single digit Ebit margin, most of the competitors cannot play pricing games.