Stock Call . Will Godrej Agrovet gain from reviving poultry demand?

Good monsoon is keeping farmers cheerful. Increased procurement of grains and pulses under the MSP (minimum support price) programme and doles under PM-KISAN have left more money in the hands of farmers.

The demand for agri-inputs has been robust in the past few months. While many agri stocks have rallied, Godrej Agrovet has lagged its peers. The company derives a significant portion of its revenues from animal feed (50 per cent) and dairy products (20 per cent).

Given the initial concerns over poultry consumption amid the Covid-19 pandemic, Godrej Agrovet saw demand for animal feed drop sharply. Business of its subsidiary Godrej Tyson, which is into selling poultry, was hit, too. The logistics issues also impacted the segment.

But with concerns about poultry consumption easing and demand picking up, it may be good time for investors to consider the under-the-radar stock for the long term.

At the current market price of ₹428, the stock is trading at a price-earnings ratio of 33 times (FY20 earnings, excluding income from sale of real estate).

Given the company’s diversified presence in the agri sector (including crop protection chemicals) and likely recovery in animal feed business in the second half of the fiscal, the valuations are justified.

March quarter — a washout

Volumes in the animal feed business declined by 11.3 per cent (y-o-y) in the March quarter. Sales of cattle and fish feed dropped, too.

The segment ended with a revenue decline of 0.1 per cent and EBIDTA decline of 28 per cent (y-o-y). Godrej Tyson saw both sales volume and price drop.

It reported a 5 per cent decline in revenue and incurred an operating loss of ₹33.5 crore. Drop in demand for milk and value-added products due to the Covid lockdown and increase in procurement price for milk impacted the dairy business of the company’s subsidiary, Creamline Dairy.

In the March quarter, the subsidiary recorded a muted 5 per cent growth in revenue; EBIDTA declined by a sharp 83 per cent.

The palm oil business saw 5 per cent revenue growth; higher crude palm oil prices helped profit margin expand. The crop protection chemicals segment recorded a revenue growth of 48 per cent (y-o-y), thanks to strong demand.

However, the lockdown-related logistics issues hurt business and margins suffered.

Overall, in the March quarter, the company’s total income was ₹1,509 crore, up 7.5 per cent over the same quarter last year. Profit before taxes (excluding non-recurring income) was ₹18 crore, down 67 per cent.

Demand is recovering

The problem that started in March continued into April and May. However, since the beginning of June, there has been recovery in demand. Price of chicken (wholesale) is back to where it was in December— ₹120/kg. In some regions, prices are quoting at ₹170-180/kg. This is thanks to supply shortages as many farmers had abandoned their birds in April.

The country now produces about 60 million broilers in a week, but this is not enough to meet the demand. In the coming weeks, with more restaurants opening, prices may inch higher as supply may return to normalcy only after two-three months.

As institutional demand for milk revives when all restaurants, tea/coffee shops and sweet stores open, demand for cattle feed may also go up. Demand for feed for shrimp and fish has been good.

In the crop protection business, demand has been strong in past two months, thanks to the timely onset of monsoon and higher kharif sowing in paddy and other crops. The company’s herbicide sales are also likely to be good given direct seeding of rice in North India due to labour shortage. The palm oil business has not been impacted by Covid-19.

Arrivals of fresh fruit bunches in the past two months have been strong, and the company’s mills are running at a capacity of about 70 per cent currently.

The utilisation will increase in July — the peak arrival season for palm oil. With crude palm oil prices having moved up to ₹65,000/tonne now from ₹59,000-60,000/tonne in May, the prospects for the June quarter look good.

However, lower oil recovery in Andhra Pradesh (company’s all three mills are in West Godavari district of AP) could offset the benefit of higher prices.

While the management, post the concall, stated that working capital borrowings may go up, the company’s debt-to-equity of 0.32 times (as of end-March 2020) lends comfort.