Godrej Agrovet Limited (GAVL) – Margin of Safety coupled with opportunities of upside due to management initiatives towards margins expansion

Summary

· Based on a very conversative valuation (SoTP method using EV/ Revenue multiples of peers), GAVL offers a decent margin of safety in terms of current valuations.

· Due to ongoing transformational initiatives by management GAVL offers a strong upside as margins stabilise and become less volatile

· Amidst the margin of safety offered and potential for upside , GAVL deserves a look for investment

DETAILED REPORT

A . About the business

Godrej Agrovet Limited (GAVL) is a diversified agri-business company operating in 4 different segments – animal feed, crop protection, oil palm, dairy and poultry processed foods

In Dairy GAVL operates through a subsidiary Creamline Dairy Products which is a leading dairy player in South India with operations across Telangana, Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra. Further in poultry the company operates through a JV with Tyson Foods USA.

B . GAVL diversified presence across segments (All amounts in INR Cr)

C. Recent Initiatives by the company to boost its margin profile

GAVL has been focussing on high – margin product strategies across its divisions to reduce the volatility in margins and improve its margin profile. Futher via Astec Lifesciences its also trying to enter into the agro-chemicals CDMO space which is currently facing strong tailwinds due to China+ 1 and US Biosecure Act

D. Company Valuations – Current market valuations have decent margin of safety

I have tried to perform a EV/Sales multiple valuation for GAVL based on sum of the parts method via following steps

(Why EV/Sales multiple has been chosen – In my opinion right now earnings multiples may not be reliable indicators of value in case of GAVL . GAVL is currently undergoing lot of transformational and strategic shifts which is right now denting its earnings . Eg – Upfront capex investments in CDMO, gradual reduction of live bird sales in poultry business etc)

Step 1 – Identifying peers for each business segment . I have identified following companies as peers in each segment.

Step 2 – Selection of multiples for business segments of GAVL (with reference to the peers listed above)

- Crop Protection – GAVL is the market leader in cotton herbicides in this segment. Further EBIT margins in this segment has crossed 40% in H1 in this year due to ongoing efforts of management as listed above . PI industries (~ 30 % EBIT margins) , the marquee name in this is trading at a revenue multiple of 12.5 . Meghmani is into losses , Dhanuka and Rallis have EBIT margins of around ~ 20% . So I believe that GAVL deserves a good multiple for this segment . However being extra cautious and to ensure I have a margin of safety I will value this segment at an EV/ Revenue multiple of 7

- Animal feed – GAVL is the market leader in this space . #1 compound feed player in India. However I will still be conservative and value it at just 1.5 x Revenue due to the commoditised nature of business

- Vegetable Oil – In this segment also GAVL has major presence being the largest producer of crude palm oil in India. Furthermore management is taking lot of steps to move away this business from being commoditised. But again being conservative , I will value this at 1.6 times revenue

- Astec Lifesciences CDMO business – Early stage business with long runway. Good CDMO companies are being valued very high in the current environment. Here too I will be a bit cautious and value it at 3x revenue

- Dairy business – Being a regional dairy player , I will value dairy business on similar lines as other regional peers . I will take the most conservative multiple of 1.6.

- Poultry business – Since only one listed peer is available i.e Venky’s , I will value it on same lines . However GAVL’s business deserves better multiples as Venky’s is facing some corporate governance issues. . But anyways I will stick to multiple of 0.74

Step 3 – EV based Valuation based on above multiples

- To calculate the value I have annualised the H1 FY 2025 revenues and applied the above selected multiples

(All amounts in INR Cr)

Based on above EV , I then arrive at the equity value

Hence based on a conservative view GAVL currently presents a good margin of safety . Please note that the above valuation is based on H1 FY 25 numbers . It does not factor in any manner the growth in revenues . Further the valuation multiples have been also been very conservative and holding co discounts have been applied to 50%

D. How does market usually value such transformations ( from commodity to value added ; from volatile to non -volatile )

Here I highlight one past case and one ongoing case when transformations from volatile to a steady value added play lead to valuation reratings

- Neuland Labs – The transition from commoditised API’s from niche CDMO play lead to improvement in margins and hence valuation re-rating

- DFPCL - Another currently ongoing transition which we can see right now is in Deepak Fertlizers and Petrochemicals (DFPCL). DFPCL has been undergoing capex to vertically integrate itself in the Technical Ammonium Nitrate value chain to reduce the impact of volatility in global ammonia prices on its margins . The results have started showing off recently and the markets have started valuing that

E. Conclusion and recommendations

So it appears like GAVL presents a good buying opportunity right now . A decent margin of safety in current valuations coupled with prospects of rerating when the management initiatives as listed in previous section show on results can provide a good upside

Do let me know your thoughts on GAVL .

Disclaimer - Invested and hence thoughts may be biased