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.

(Sarvesh Kumar Sharma/Mint)


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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