Retain ‘add’ on Godrej Agrovet with revised TP of Rs 555

Analysing the price curve of commodities that influence Godrej Agrovet’s (GAVL) revenues, we note, the 68% increase in prices of palm oil in past one year is likely to drive revenues and profitability the vegetable oil segment; the ~8% y-o-y increase in milk prices will boost revenues from cattle feed, but will impact profitability of the dairy segment; shrimp prices have increased from $11.35/kg in Oct’20 to $11.93/kg in Feb’21 and this is likely to boost revenues from shrimp feed; and revival in prices of chicken and egg (after decline due to bird flu) will increase revenues from poultry and poultry feed.

We model most segments of GAVL to recover in FY22E given favourable base of FY21. We remain confident of value creation (RoE > cost of equity) and maintain ‘add’ with a DCF-based target price of Rs 555 (26x FY23E; earlier TP: Rs 575.

Revival in shrimp prices to drive revenues from shrimp feed: Shrimp prices have revived from a low of $11.35/kg in Oct’20 to $11.93/kg in Feb’21. This will increase profitability for all players in the shrimp value chain such as farmers, feed manufacturers and processing companies. We expect GAVL’s revenues and profitability from shrimp feed (~8% of sales) to increase given higher shrimp prices.

Increase in milk prices to help cattle feed, but will hurt dairy segment: Higher milk procurement prices will likely boost revenue growth in the cattle feed segment (20% of revenues), but will impact profitability of the dairy segment (~20% of sales).

Higher palm oil prices to benefit vegetable oil segment: The palm oil segment accounts for ~10% of sales and its revenues and profitability are directly linked to prices of palm oil, which have increased by 68% y-o-y . The increase in prices will drive profitability upward.

Revival in chicken and egg prices to benefit poultry feed and poultry business: Prices of chicken and egg had declined post outbreak of bird flu in Q4FY21. While that is likely to impact revenues for Q4FY21, we believe the subsequent revival in prices is likely to boost revenues from poultry feed (~25% of sales). It will also boost poultry segment revenues.

Maintain ‘add’. We expect GAVL to report revenue and PAT CAGRs of 4.9% and 12% respectively, over FY20-FY23E. Return ratios (average RoE 18% over FY21E- FY23E) are also expected to be higher than the cost of capital. We maintain ‘add’ on the stock with a DCF-based target price of `555 (26x FY23E EPS). Key risks: failure of new products and prolonged slowdown in out-of-home consumption.