Godrej Agrovet Ltd
(BSE Code: 540743) (CMP: Rs.509.45) (FV: Rs.10)
Incorporated in 1991, Godrej Agrovet Ltd (GAL) belonging to the Godrej Industries group operates through the following segments: Animal Feed; Crop Protection; Vegetable Oil; and Others. It offers animal feed such as cattle, poultry, aqua and speciality feed along with on-farm technical support services. It is engaged in oil palm cultivation with ~61,700 hectares of plantations across Andhra Pradesh, Telangana, Tamil Nadu, Goa, Maharashtra and Mizoram producing crude palm oil, crude palm kernel oil and palm kernel cake. It also produces plant growth regulators and bio-stimulants, which are sold under the ‘Vipul’, ‘Double’ and ‘Combine’ brands in India and are exported to USA, Kenya and Mauritius as well. It offers herbicides, insecticides, fungicides and soil conditioners and organic manures. It sells poultry and meat products under the ‘Real Good Chicken’ brand; vegetarian and non-vegetarian ready-to-cook products under the ‘Real Good Yummiez’ brand; and milk and milk-based products under the ‘Jersey’ brand. It produces agrochemical active ingredients, intermediates and pharmaceutical intermediates. It also offers off-patented chemistries to domestic agrochemical marketers and also for exports to USA, Europe, West Asia, South East Asia and Latin America. It is also involved in the seed and real estate businesses as well as energy generation through its windmill.
In H1FY19, GAL adopted a strategy to aggressively enhance its focus on driving volume growth in its Animal Feed segment. The management plans to operate at lower margins but concentrate more on volume-growth ahead. This stance somewhat disappointed us as GAL requires price-offs/ promotions to push volumes in a large segment with various smaller unorganised competitors. Commodity (milk, egg, shrimp) prices are in a deflation zone now. Though rising labour charges are resulting in a structural shift from unorganised to organised feed, we believe that commodity prices also play an important role in driving demand for animal feed. Lower commodity prices will dissuade farmers from shifting to organised animal feed in the near term, impacting volume growth for GAL. Soybean prices have declined from the peak attained in April 2018 but are still ruling higher on YoY basis. Maize prices are also up 12% YoY. Given the current raw material prices, we believe GAL does not have much scope to cut selling prices/ increase promotions to push volume growth. We expect GAL to report revenue and PAT CAGR of 10.8% and 15.5% respectively over FY18-FY20. In order to boost volumes, the management has taken an aggressive stance to compromise on margins.
The GAL share looks good on the daily chart for medium-term investment. It has formed a downward channel and is consolidating near its lower channel line. The stock trades below all important moving averages like the 200 DMA level on the daily chart.
Start accumulating at this level of Rs.509.45 and on dips to Rs.485 for medium-to-long term investment and a possible price target of Rs.585+ in the next 6 months.