Godrej Agrovet: Good prospects, but investors should look at stock on dips

Valuation, however, limits upside in the near term

The rally in agri-related stocks has helped Godrej Agrovet gain over 31 per cent since May 20. The gains were led by expectations of growth across segments, margin improvement, and earnings recovery in financial year 2020-21 (FY21). The company had posted muted numbers in the March quarter because of Covid-19, which dented the top line and profitability. 

Though the company has a presence across multiple segments, crop protection and animal feed account for 65 per cent of consolidated revenues. In the animal feed segment, demand from segments, such as poultry, has been muted because of the pandemic. While the situation has improved, growth rates for FY21 might stay sluggish before recovering in the second half.

Over the medium term, analysts expect the company to post steady growth rates on the back of market share gains from the unorganised segment, rise in protein consumption, and government initiatives. On the profitability front, the company’s focus on improving operational efficiencies and price hikes should help offset fluctuations in the input cost price and aid in gradual margin improvement. 

 

 

In the crop protection business, the company has posted revenue growth of 22 per cent over the FY16-20 period on the back of steady organic growth, differentiated portfolio, and the acquisition of Astec Lifesciences in 2015. New product launches by the legacy agri input business, coupled with diversification of product portfolio and backward integration at Astec, should help sustain growth rates of around 10 per cent and margins (of around 22 per cent) for the segment. 

Among the other segments, the edible oil business (palm oil plantation), which accounts for 9 per cent of revenues, is expected to see strong growth because of robust demand and government measures to boost local production amid high imports. The recovery in palm oil prices and steps to improve oil extraction ratio should aid in improving its margins. IIFL expects the business to grow at 16 per cent annually over the FY20-23 period. 

The dairy and poultry businesses account for 7-8 per cent of revenues each. The increase in value-added products for the dairy business and higher poultry prices over the past couple of months should help improve margins for the two segments. 

While prospects remain strong, the recent rally, which has increased valuations, factors in the triggers for its key segments. Investors can look at the stock on dips.