Stock corner: Maintain ‘buy’ on Godrej Agrovet with target price of Rs 584

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Published: December 6, 2019 1:09:05 AM

The country intends to implement B30 biodiesel (from B20 currently), which in turn would increase its domestic consumption by 3MMT.

Stock corner, Godrej Agrovet, GOAGRO, production of biodiesel, palm oil production, palm oil prices, diesel importsIn this note, we highlight the event and its impact on Godrej Agrovet (GOAGRO).

Indonesia and Malaysia — that account for ~86% of the world’s palm oil production — are planning to increase the usage of palm oil for the production of biodiesel. This should eventually lead to palm oil prices increasing as palm oil supply for food and other usages would decrease. In this note, we highlight the event and its impact on Godrej Agrovet (GOAGRO).

Indonesia accounts for 54% of the global palm oil production. The country intends to implement B30 biodiesel (from B20 currently), which in turn would increase its domestic consumption by 3MMT. Thus, the implementation of B30 would incrementally take away 9% of Indonesia’s palm oil supply. Malaysia accounts for ~32% of the global palm oil production and is also in the process of implementing B20 (from B10 currently), which would increase its domestic consumption by 1MMT (5% of its production). Thus, the intention of the two countries (together account for ~86% of the global supply) to use palm oil for biodiesel will divert ~6% of the global supply to biodiesel, resulting in palm oil prices inching up. We believe that this event would be a positive for GOAGRO’s palm oil division in FY21 (expect segment revenue/EBIT to grow at 34%/91% YoY in FY21). We haven’t factored in any material improvement in FY20 as ~60% of the segment’s revenue is realised in the 1H of the fiscal year. We have a Buy rating on the stock with SOTP-based TP of Rs 584.

Indonesia and Malaysia are the world’s largest palm oil producers and together account for ~86% share of palm oil production globally. According to media articles, both the South-East Asian countries are likely to increase the usage of palm oil for the production of biodiesel, which shall be used for their own consumption. The increase in allocation of palm oil towards biodiesel comes on the back of lower palm oil prices. Also, it should aid the two countries in saving precious foreign exchange from the reduction in diesel imports. The Indonesian government intends to implement B30 biodiesel (from B20 currently) in 2020, which would increase domestic consumption of crude palm oil by 3MMT.

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