Initiating Coverage: Godrej Agrovet Ltd.
19-04-2023

About the Company:

Godrej Agrovet (GODREJAGRO) is a significant player in the Indian agriculture sector, with a diverse portfolio spanning across animal feed, crop protection, palm oil, and dairy, which account for 49%, 13%, 15%, and 14% of its revenue, respectively. The company's market-leading positions in agricultural inputs and outputs, strategic focus on less-regulated segments, and superior management and parentage make it an attractive investment opportunity in the agriculture industry. GODREJAGRO has a solid long-term track record of consistent growth and generates robust return ratios. Its well-diversified business portfolio, combined with its market dominance, sets it apart as a strong player in the sector.

Business Segments:

Feeds:

GODREJAGRO offers a range of animal feed products, including cattle feed, layer feed for chickens, and aqua feed for shrimp and fish. It holds the position of being the largest feed player in India with over 30 manufacturing plants and a total volume of 1.4 million metric tonnes. The feed industry is currently experiencing margin pressure, resulting in lower profitability, and the company's realizations per tonne decreased from an all-time high of Rs. 35,000 to Rs. 30,000 between June and December 2022.

GODREJAGRO is closely monitoring competition from agri-tech companies that have entered the market and launched their own animal feed products. However, the company is committed to increasing its volume growth and market share in this segment.

Crop Protection:

The Crop Protection segment of GODREJAGRO comprises both the Standalone crop protection business and Astec Lifesciences, in which the company holds a 66% stake. The portfolio of products includes Plant Growth Regulators, Organic Manures, Biostimulants and Crop Protection chemicals. The company has invested in backward integration to diversify its raw material sourcing and reduce dependence on international markets, resulting in benefits being realized. Astec LifeSciences has commercialized two new CDMO products during the year. However, realizations and export revenue have been affected recently.

The company is concentrating on the Contract Development and Manufacturing Organization (CDMO) part of the business to achieve sustainable and profitable growth, with a goal of doubling CDMO revenues this year and maintaining 30% to 50% growth year-on-year. To be immune to volatility, the strategy is to diversify and expand into higher margin products and the CDMO business.

Oil Palm:

GODREJAGRO holds the largest market share of palm oil production in India with 30% of the market. The company has a potential plantation area of 2,00,000 hectares and aims to increase it at a rate of 10,000 hectares per annum, from the current 3,000 to 4,000 hectares per annum. Despite the current steep fall in palm oil prices, the company is still generating high realizations as the prices of palm oil have seen a sharp rise in the post-Covid inflationary era. To insulate the business from the volatility in oil prices, Godrej Agrovet has made investments in a 400-ton refinery and a solvent extraction plant of 100 TPD.

Dairy:

GODREJAGRO's subsidiary Creamline Dairy Products Limited sells packaged milk and dairy products under the brand name "Jersey." The dairy segment witnessed an increase in volume growth for both milk volumes and value-added products; however, it was offset by a continuous rise in milk procurement prices. Currently, the segment is facing losses, and the management is looking to break even by achieving 50% revenue from value-added products.

Processed Foods & Poultry:

GODREJAGRO has a joint venture with Tyson India Holdings Limited, with a ratio of 51:49, to produce processed chicken and frozen foods. The products are marketed under the brands "Real Good Chicken" and "Yummiez". The company aims to increase its production capacity by 15-20% in the coming year. The company's major clients include HORECA, and it plans to grow its branded business with QSR and D2C companies to reduce volatility.

Business Performance:

GODREJAGRO reported strong business performance in Q3 FY2023 and the nine months of FY2023, with healthy topline growth of 12% and 17% year-on-year, respectively. The animal feed segment achieved the highest ever quarterly volumes in Q3 FY2023 with a 7% year-on-year volume growth, while the poultry segment recorded strong growth in both topline and profitability.

In terms of segment-wise performance, the vegetable oil segment registered 13% growth in Fresh Fruit Bunch volumes in Q3 FY2023. The dairy segment sustained volume growth in value-added products and milk volumes, but there was a continued rise in milk procurement prices. However, the crop protection business has experienced headwinds due to muted domestic demand and price erosion in the export market, while the Bangladesh business has been impacted by price controls on essential food commodities.

The supply chain efficiency and improvements in the production process have resulted in an improvement in Oil Extraction Ratio (OER) in the palm oil business. The company expects Crude Palm Oil (CPO) prices to rise slightly but not significantly.

Historical Revenue Mix:

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