‘Add’ Godrej Agrovet with revised target price of Rs 575

With several states facing concerns of bird flu, we believe animal feed and poultry segments of Godrej Agrovet are likely to be impacted in near term. However, we also expect organised players such as Godrej Agrovet to gain market share from unorganised players as consumers are willing to pay premium for hygienic and packaged products. Key learnings from bird flu epidemics in 2006 and 2008 – there was impact on consumption and prices of chicken/eggs for ~12 months post outbreak of disease but consumption as well as prices recovered after the disease was controlled and the profitability of poultry industry was impacted for ~3-4 quarters in 2006 and 2008. We remain confident of value creation (RoE > Cost of Equity) by Godrej Agrovet and maintain our ‘add’ rating with a DCF-based revised target price of Rs 575 (28x FY22E; earlier TP `560).

Bird flu in India: Several states such as Himachal Pradesh, Rajasthan, Madhya Pradesh and Kerala have reported bird flu (H5N1 or H5N8) cases. As this disease can spread from birds to poultry, the bird flu concerns are likely to hurt poultry businesses across India in next 2-3 quarters. Likely impact of bird flu, we expect the consumption of poultry products (chicken/eggs) and the prices of these products may decline. The demand for poultry feed may also decline. The profitability of entire value chain (poultry companies, poultry feed companies and farmers) is likely to be impacted in Q4FY21 and H1FY22.

Learnings from epidemics in 2006 & 2008: India suffered bird flu pandemics in 2006 as well as 2008. The consumption and prices of poultry products declined immediately after outbreak of the epidemic. However, the consumption and prices both recovered after the disease was controlled. We believe the impact on profitability of poultry companies was less than one year.

Value migration towards organised players in medium term: As the consumers are willing to pay for hygienic and packaged products, the organised players tend to gain market share during such epidemic. We expect some near-term impact on animal feed and poultry segment of Godrej Agrovet but also believe it can gain market share in medium-long term as well as recover profitability.

Maintain ‘add: We expect the company to report revenue and PAT CAGRs of 6.9% and 12.3% respectively, over FY20-FY22E. We remain confident of value creation with RoE > Cost of Equity and maintain our ‘add’ rating with a DCF-based target price of `575 (28x FY22E P/E).