Godrej Agrovet reported muted set of Q4 numbers with a mixed performance across segments. After a weak performance in the previous quarter, the animal feed and crop protection businesses saw some recovery, but the same was offset by a seasonally weak show in the palm oil business and hurdles in the dairy business. Revenue increased around 16 percent year-on-year (YoY) and earnings before interest tax and depreciation (EBITDA) improved around 17 percent. EBITDA margin remain flattish YoY, however, around 170 basis points improvement was seen sequentially.
Segment wise performance:
After consecutive quarters of substantial de-growth in the broiler feed segment, the company managed to arrest the de-growth resulting in an overall improved performance of the animal feed segment, which forms more than 50 percent of the company’s business. The segment volumes saw a healthy growth of almost 19 percent during the quarter supported mainly by cattle and layer feed. Cost cutting initiatives have started to pay off. In the upcoming year the management expects a robust mid-teen revenue growth for the segment on the back of added research and development.
Crop protection business
Robust growth in exports coupled with an improved performance in the domestic business enabled a healthy growth in the segment. As per the management, post adjusting for the GST impact, revenue improved around 13 percent while the earnings before interest tax and depreciation (EBIT) saw a 22 percent uptick. New product launches and improved performance of herbicides and fungicides portfolio drove performance.
The company is currently in the process to expand capacity and has a product line up, benefits of which would start flowing in towards the end of FY19.
As a strategic initiative Astec Lifesciences (a company in which Agrovet has a stake) had invested around Rs 45 crore in backward integration to enable production of required raw material rather than importing from China, benefits of which are expected to start flowing in the current year.
Q4 remains a sequentially weak quarter for the oil palm business which is majorly concentrated around the monsoon months, around Q2 and Q3. Owing to the seasonality and softer palm oil prices, the quarter saw a weak performance. Volumes remained soft during the quarter and margins contracted almost 380 basis points YoY. Overall FY18 volumes grew around 12 percent YoY.
Policy reforms stand as a tailwind for the segment which is positioned to benefit from increased import duties on palm oil which would make imports more expensive and companies in palm oil in India more competitive.
India imports nearly 10 million tonnes of palm oil and around 3,000 tonnes is produced domestically. With domestic production becoming more competitive, the segment stands to benefit substantially and the company is in a position to capture market share rapidly. The management has also expressed interest in inorganic expansion for this segment which might redefine the segment contours, and would be something to watch out for.
The segment faced headwinds on account of adverse milk prices and low butter prices during the quarter. The growth in topline was aided by improved realisation from the value added product (VAP) portfolio. However, volatility in milk prices ate away from the margins which contracted almost 65 percent. The VAP portfolio forms around 25 percent of the segment currently and the company plans to expand this rapidly to around 30 percent by end of FY19 which would help in improved margins in the longer run.
With strategic plans and policy tailwinds, segment performance is expected to improve in the current year. Import duty on palm oil will make the domestic palm oil business more competitive. New product launches in crop protection segment are expected to drive growth by the end of FY19. Arresting the de-growth of the broiler feed segment is expected to improve the animal feed performance. Dairy margins are expected to stabilize owing to expansion towards value added products, though volatility in milk prices can play a spoil sport.
Post its October17 IPO at Rs 460, the stock had run up around 39 percent. However, in the past one month it has corrected by around 7 percent. It is trading at a 2019E PE of 37x and an EV/EBITDA of 23x, below its 50 day moving average. Although some hurdles in the operating environment have curbed growth currently, we expect these to stabilize and overall earnings to improve in FY19. We see GAVL as a quality stock positioned to give healthy long term returns.
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