Godrej Agrovet: Is it a Medium-term Investment Horizon Gem?

Despite the impressive performance of Indian companies after the Covid pandemic, with many experiencing significant price increases over the past four years, there are still areas of potential for investors looking at a medium-term perspective.

An example of an opportunity in the agricultural business sector is Godrej Agrovet, a subsidiary of the Godrej Group, which has a total worth exceeding $4 billion.

The company’s operations can be categorized into five main divisions:

1. Animal feed business (which contributes to approximately 50% of the company’s revenue as of 9MFY24)
2. Dairy (15%),
3. Vegetable oil (13%),
4. Crop protection (12.5%), and
5. Poultry processed food (10%).

The company’s efforts to expand in the crop protection sector, vegetable oil industry, and dairy business will contribute to substantial growth in the foreseeable future.

The stock is currently priced at ₹485, which is 28 times its earnings over the past twelve months.

This is slightly lower than the five-year average of 30 times. We are confident in the stock’s promising prospects for the next 2-3 years. This is due to the management’s current efforts to streamline the business by prioritizing ventures with high growth potential, enhancing operational effectiveness, and emphasizing bottom line enhancement.

From a relative standpoint, the stock’s valuation seems reasonable when compared to the industry.

However, the cause for this is the decrease in profits observed over the past two years. Given the anticipated continuation of strong profit growth in the next years, the company presents a favorable investment opportunity for individuals with a medium-term investing timeframe.

Business of Godrej Agrovet

The group’s entry into the consumer market began in 1897 with the introduction of products like swadeshi soaps.

Subsequently, the group has successfully arranged all of its companies, with Godrej Agrovet serving as the agriculture entity inside the Godrej conglomerate.

The animal feed company, encompassing chicken, cattle, and aqua feed, is presently the most significant division within Godrej Agrovet, contributing to more than 48 percent of the revenue in the first nine months of fiscal year 2024.

The company is the dominant player in the Indian market for compound feed, with a presence in both India and Bangladesh through its joint venture ACI Godrej Agrovet.

It operates more than 30 manufacturing units. The fish feed category experienced robust growth, and the establishment of a new factory in Uttar Pradesh last year to serve the North and East markets is expected to contribute to further growth.

Nevertheless, the difficulty persists due to governmental actions like permitting imports of soymeal, which may jeopardize immediate economic expansion.

The company invested ₹20 crore in Godrej Maxximilk Private Limited last year. This company specializes in the generation of high-quality cattle embryos.

Following this investment, the company declared significant advancements in research and development as well as manufacturing.

Godrej Agrovet’s third largest segment, vegetable oil, contributes 13% of the company’s sales.

This segment include the production and sale of Crude Palm oil and Palm Kernel Oil. The firm is the dominant producer of oil palm and holds a market share over 30 percent in India.

India’s oil palm needs are imported at a rate exceeding 97 percent, which is rather remarkable.

Godrej, having collaborations with more than 9,000 farmers nationwide and a potential cultivation area over 2 lakh hectares, is in a favorable position to take advantage of the substantial domestic demand.

The addition of a new refinery with a capacity of 400 metric tons per day (MTPD) and a Solvent Extraction plant with a capacity of 200 MTPD, along with the establishment of commercial Memorandums of Understanding (MoUs) with many State governments including Assam, Manipur, Tripura, Nagaland, and Odisha for palm plantation, will significantly contribute to the expansion of this sector.

The plant protection chemicals division accounts for around 12 percent of the company’s total sales.

This refers to the Astec business, which involves providing contract research and development (CRDO) services to other major companies in the institutional sector. In addition, the firm operates a domestic formulations segment in which it sells generic branded fungicides, herbicides, and insecticides directly to consumers.

The portfolio also encompasses a diverse array of goods that address the entirety of the lifecycle, including plant growth regulators and organic manures.

It holds the title of being the largest global manufacturer and promoter of Homobrassinolides, a type of plant hormone that is utilized to encourage plant development and enhance crop production.

The company has initiated capital expansion projects valued at ₹300 crore to expand its operations in Astec Lifesciences. It is optimistic about achieving robust annual revenue growth.

The dairy sector, operated by Creamline Dairy Products, presently contributes 15 percent of the total revenue.

The company is primarily focused on producing value-added dairy products, which are marketed under the brand name “jersey”.

The corporation possesses a total processing capacity of 1.36 million tonnes per day and maintains a significant presence in the southern regions of Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, and Maharashtra.

The company increased its packing capacity last year by incorporating a new production line. As a result, its current capacity has reached 70,000 liters per day. The growth in this area is expected to be driven by value added products and capacity expansion.

Real Good Chicken and Yummiez brand products, which include poultry and processed goods, contribute about 10% of the company’s sales.

This division is a joint venture between Godrej and Tyson Foods, a company based in the United States.

Performance of Godrej Agrovet

In the fiscal year 2023, the company’s performance was poor due to a few exceptional factors, including the unfavorable regulatory decision to permit imports of soymeal and volatility in input prices, which negatively impacted the operating profit margin.

Revenue increased by around 13 percent compared to the previous year, reaching ₹9,374 crore. However, operational profit decreased by 22 percent mostly due to the rise in raw material prices.

Despite stagnant revenue growth in the 9MFY24, the company achieved a 21% increase in operating profit, primarily due to strong performance in the domestic plant protection chemicals industry and dairy segment.

During the upcoming two to three years, the utilization of operating leverage and the expansion in CRDO, dairy, and animal feed sectors are expected to contribute to sustainable growth in both revenue and profitability.