Photo: Reuters
Photo: Reuters

Godrej Agrovet’s elusive margin recovery could shrink valuations

  • Revenue and profit from the crop protection business have been under pressure too, declining about 5% in the March quarter
  • Shares of Godrej Agrovet have been under pressure in the past year and have corrected by about 28%

It’s not just humans who feel the pinch of rising food prices. The animal feed market is also going through a challenging environment. And Godrej Agrovet Ltd, a leading animal food company, is facing stress in margins due to rising animal feed input costs.

While there has been a decent growth in volumes, margins have been steadily contracting. Volumes rose 10% in the March quarter due to demand in the broiler feed segment.

However, overall Ebitda (earnings before interest, tax, depreciation and amortization) margins have come at just about 5.6% in the March quarter. In fact, rising input costs have been a bane for some time now for the company. Consider this, Ebitda margin stood at 9.4% in the first quarter of FY19.

Not surprisingly, shares of Godrej Agrovet have been under pressure in the past year and have corrected by about 28%.

Revenue and profit from the crop protection business have been under pressure too, declining about 5% in the March quarter. Although smaller in terms of revenue, this segment accounted for 45% of profits in FY19.

The palm oil business, which contributes about 11% to the revenue, also saw its margins shrink.

“Margin recovery remains elusive. Godrej Agrovet ended FY19 on a weak note with overall margins disappointing yet again notwithstanding healthy growth in revenues during Q4 FY19. A recovery in animal-feed margins, albeit comforting, was inadequate to mitigate headwinds in other segments," said Kotak Institutional Equities in a note to clients. The recovery is with reference to a sequential improvement in margins.


In the coming quarters, of course, food input costs are expected to stabilize. Other businesses such as oil extraction could see improvement in yields since the company has added a new sterilization technology which will improve yields.

Still, the agro-industry is moving slowly than before, and that could keep the pressures up. The stock may be hard-pressed to hold up in this market. While the consensus one-year forward price-earnings multiple has shrunk from 40.9 times a year ago to 29.1 times now, it appears quite stiff given that challenges still remain.

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