Godrej Agrovet Limited (GODREJAGRO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Godrej Agrovet Limited 4Q FY '24 Earnings Conference Call hosted by Kotak Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijit Akella from Kotak Securities. Thank you, and over to you, sir.

Thank you, Darwin. Good afternoon, everyone, and thank you for joining us on the Godrej Agrovet Q4 and FY '24 Earnings Conference Call. From the company, we have with us Mr. Nadir Godrej, Chairman of the company; Mr. Balram S. Yadav, Managing Director; Mr. S. Varadaraj, Chief Financial Officer; and Mr. Anurag Roy, Chief Executive Officer of Astec LifeSciences. We'd like to begin the call with brief opening remarks from the management, following which we will have the forum open for an interactive question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. Participants are requested to note that this is an earnings call in respect of performance of Godrej Agrovet Limited. We would like to request all participants to limit their questions to the performance of the company and refrain from asking questions with respect to the Godrej family settlement, which the company believes does not impact Godrej Agrovet. I would now like to invite Mr. Nadir Godrej to make the initial remarks. Thank you, and over to you, sir.

Good afternoon, everyone. I welcome you all to the Godrej Agrovet earnings call. Godrej Agrovet recorded consolidated revenue from operations of INR 9,561 crore in fiscal year '24 as against INR 9,374 crores in fiscal year '23. While the revenues were flat, fiscal year '24 augured well in terms of a strong resurgence in profitability. Profit before tax improved by 55% to INR 434 crores as compared to INR 280 crores in fiscal year '23. This growth in profitability was primarily driven by exceptional performance of the domestic crop protection business, structural turnaround of the dairy business, market share gains in Animal Feed and robust volumes and margin growth in branded products in the Poultry business. During the year, Godrej Agrovet also focused on achieving the long-term sustainability targets, guided by the Godrej Group's Good & Green vision. We are 1 of the 2 companies in Indian agricultural sector to be included in the A-List leadership brand of Climate Disclosure Projects, climate disclosure. GAVL's CDP scores are ahead of the global averages. We made good progress towards achieving 2025 sustainable targets, led by, a, 77% of energy consumption from clean renewable energy sources as against the target of 90%; and b, being water positive company already conserving 20x more water than our consumption. Coming to the key financial and business highlights of each of our business segments. In Animal Feed, while volumes remained flat, segment margins improved significantly in quarter 4 due to favorable commodity positions and higher realizations in the cattle feed category. For fiscal year '24, sustained volume growth in cattle feed and fish feed 11% and 19%, respectively, over fiscal year '23 was partly offset by lower poultry feed sales, resulting in volume growth of 3%. Segment margins improved sharply as compared to fiscal year '23 on account of softening commodity prices and higher realizations in cattle feed and fish feed category. Our Vegetable Oil segment margins in quarter 4 were adversely impacted by lower fresh fruit bunch arrival and lower sales volume on account of lower inventory of palm kernel oil brought forward from the previous quarter as compared to quarter 4 fiscal year '23. The oil extraction ratio, however, improved sequentially as well as versus quarter 4 fiscal year '23. For fiscal year '24, fresh fruit bunch volume growth of 6% was more than offset by lower crude palm oil and palm kernel oil prices, which came off the highs of fiscal year '23 and normalized in fiscal year '24. The CPO and PKO prices were lower by 20% and 28%, respectively, compared to fiscal year '23. This resulted in segment margins being lower. Stand-alone crop protection segment results witnessed strong growth in quarter 4 as well. Stellar performance throughout the year, driven by higher sales of in-house and in-license portfolio and lower sales returns as compared to fiscal year '23 has resulted in top line growth of 37%. The segment margin of 31% in fiscal year '24 was 3.4x that of fiscal year '23. For Astec LifeSciences, quarter 4 top line and margin profile improved on account of higher salience of contract manufacturing and new products. The full year top line and segment margin was severely impacted by sluggish demand for key enterprise products and a sharp drop in realizations due to the demand-supply imbalance. The Poultry segment recorded strong growth in profitability in quarter 4, driven by higher live bird prices and an increase in volumes of branded products. Segment revenues declined primarily due to lower volumes in the live bird business. In terms of fiscal year '24, this segment delivered excellent growth in profitability led by higher live bird prices, consistent improvement in volume and margins of branded products and operational efficiencies. For the dairy segment, fiscal year '24 was a year of structural turnaround as a result of significant improvement in operational efficiencies and improved milk spread. Salience of value-added products has improved to 36% of total sales from 32% a year ago. Quarter 4 fiscal year '24 also witnessed a robust improvement in segment margin led by operational efficiency and lower procurement costs as compared to quarter 4 fiscal year '23. GAVL's joint venture in Bangladesh, ACI Godrej, recorded revenue growth of 8% year-on-year in fiscal year '24. Profitability improved remarkably and was higher by 117% over fiscal year '23 on account of lower input costs. That concludes our business and financial performance update for the quarter. With this, I close my opening remarks. We will be now happy to answer your questions. Thank you.

[Operator Instructions] The first question is from the line of Nitin Awasthi from InCred Equities.

Sir, the first question which I had was regarding the fishmeal prices, which have been, I mean, quite high, astronomically high in India because of the international dynamics, if I'm not wrong. How are they panning out right now? Is there any relief on that side? And how does it affect us given that our fish feed business is growing rapidly?

So you're absolutely right that the fishmeal prices were very high. But what we are seeing now is some kind of softening has started happening. And good thing is that we don't have too much of stock either in Bangladesh or India. So my sense is that we're reasonably well placed in case the price falls.

Okay, sir. And the fish feed formulation that we use so it's heavily dominated by fish feed -- fishmeal, or are we using alternatives? I don't know whether you can disclose that or not, what specifically I'm asking is, are we anywhere close to using insect meal in our feed?

Using? Can you say that again please?

Insect meal, sir.

No insect meal is being used. And the only animal protein we use is the fish meal. And I'm sorry, I won't be able to give you what percentage we have in our formulation because there are, I think, almost a dozen SKUs in fish feed and almost equal number in shrimp feed, if I remember. So I think formulation-wise, SKU-wise, it differs.

Understood, sir. Understood. That works. Sir, second question was predominantly regarding use of DDGS, which is maize DDGS within our Animal Feed segment? And are we currently tying up with distilleries around India, who have an excess DDGS production happening because of the maize ethanol program right now?

Yes. So because of ethanol, bad news was the corn prices went up, because almost 6 million tonnes out of 35 million tonnes was taken by ethanol. The good prices -- a good thing which happened is that we have substantial DDGS availability. So if the energy prices because of corn have gone up, the protein prices because of DDGS have come down, which has helped neutralize the cost increase in our feed segment. And I must also say that we are producing good quality DDGS in India.

[Operator Instructions] The next question is from the line of [ Sarvan Vora ], an individual investor.

My first question is on Godrej Agrovet. Could I get a view how does the management see palm oil prices going ahead in F '25?

Sir, would you like to take this question?

Yes. Palm oil prices have dropped somewhat, but they seem to be stabilizing now. And of course, they could rise a little bit. We don't expect that palm oil prices will go very high, but Indian prices also depends on the import duty and since we have a bumper red seed crop and farmers have to be kept satisfied, it is likely that after the elections, import duties on imported oil could be raised.

Got it. And my second question is, sir, we've discussed in the previous call also that like you had highlighted that you are looking at maybe different corporate structure or any other -- restructuring kind of things for Godrej Agrovet to enhance shareholder value. So any updates that you can share on that point?

We have no update on that. And I think in case we are thinking something like that at the right time, we will let you know also.

Okay. And my third question is on Astec LifeSciences. So in the previous quarter, Mr. Roy had highlighted that you had launched some new products, and we see it in the press release this time also. So just wanted to get a color on how those products are doing in the current quarter? And how do we see F '25 for those products?

Yes. I think we mentioned about the new products last 3 or 4 quarters with our new R&D center, we have been actively focused on putting some new products, CDMO products in the pipeline. And our target -- considering enterprise business was under stress, our target was to get those products commercialized as soon as possible. So happy to say that some of it is even factored into the Q4 numbers, financial performance as well that some of those new products we have been working on are almost getting commercialized. So as we move forward in FY '25, say from July-August onwards, we will start seeing the financial performance kicked in from some of these new products, which we have been working on.

Got it. Just finally, sir, any outlook you can share for CDMO business for F '25? You've highlighted in the past that we're looking to grow top line by 50% to 100% and also for enterprise business, if you're hearing anything from your clients, when do we see some recovery? Just both businesses separately.

Right. So on CDMO, if you would have seen from the last 2 years or so, we have been almost doubling our revenues. This year, we have grown by almost 67% from last year. And we have a very good confidence that we'll continue to maintain that run rate as we get into FY '25. Now our base for the CDMO and new products have also crossed INR 250 crores, so getting to almost similar kind of run rate means significant revenue generation as we get into FY '25, and that's where our energies or our new R&Ds our all developments are focused on. On the enterprise side, we haven't seen any green shoots in the market. But internally, I would hate to give any forecast on when the market should revive back. In turn what we are focusing on are the things which are in our hands, which are the CDMO and the new product development and our entire goal and ambition is that as we get into FY '25, we completely de-lever ourselves from enterprise profit and the CDMO and new products itself can take care of the majority of financial performance. And if the market turns back, that will be a big plus, plus, on the enterprise side.

Yes. Sir, just a follow up on that because you talk about margins and profitability. So CDMO margins are significantly higher than our traditional enterprise margin. But that even with increasing share, that doesn't seem to show in the numbers. So any highlights you can give there on that part?

So clearly, the CDMO numbers are at much higher margins. But on the enterprise portfolio, the deterioration has been significant. If you see the contribution generated on enterprise portfolio is barely nil or in fact negative. That's 1 factor. And the second important thing which you have to look at the numbers closely is below the contribution margin. If you see over the last 2 years, we have also taken a lot of investment for future growth, be it be the new herbicide plant, be it be the new R&D center. So if you are looking at the profitability or the PBT levels, clearly, you see a lot more negative. But if you dig a little bit deeper, we would have been even much more negative if CDMO and the new products have not kicked off at this fast pace. So there's been a lot of investments, which have been put up in the last 2 years. The revenue generation from those new investments for the CDMO and new products will kick in, in the coming year.

The next question is from the line of Dhananjai Bagrodia from ASK.

Congratulations on a very good set of numbers given the current environment. My question is more on the dairy business. What are we doing exactly to change it structurally, because now we are showing good numbers in this kind of business and we have increased our VAP percentages?

So I think multiple initiatives were taken, and we also had consultant to work on our teams to bring in a lot of efficiencies in the business. And I think one of the things which I can highlight is that we shrunk the business a little just to get rid of products where we were not taking money and the regions where we were bleeding. So I must say that major improvement has come from our cost structure in our procurement system from over 100 chilling centers will be procured milk, now we procure milk from less than 60 chilling centers. The denser we are, the nearer we are, the cheaper we are, so that added to the margin. Apart from that, several other experiments in procurement have been concluded and they will be rolled out this year, which will further make our procurement efficient. Rationalization of SKUs and certain geographies, we've closed down. So as a whole lot of things have happened, that is why our gross margins are at par with the industry leaders in the private sector in Q4. And we are very sure because we -- the benefits have not been fully realized on an annualized basis, because most of these projects started yielding results in Q2 and Q3. I believe this progress will continue this year, and we will see those benefits. Apart from that, our continued focus on value-added products is yielding results that from 32% salience we became 36% salience. And we hope that this year, we will grow the salience by another 4%, 5%. So I think it's a combination of things, and I -- we are very confident that in case the milk prices remain benign, which they are following a regular pattern of a normal year rather than the shortages which we saw in calendar year at '23 and '24, which ate into our margins. In case the margins in -- for the cost of milk remains at a normal level, I'm very sure that we will up the margins further in this year.

Okay. And how are we -- now just to have an idea, are we looking at now for this volume growth? Are we looking at more VAP percentage growth? Because now we've done all the hard work in terms of stabilizing the company -- sorry, the division. Any thoughts on that? And how is competitive intensity been now in this segment? Because more and more players are trying to get into proteins and other things in this milk products.

No, I must tell you very honestly that the competitive intensity in liquid milk is very high in all parts of the country where cooperatives are also big. In South, there are a lot of private players. So that will always be highly competitive, and that will also be price sensitive also. But I think last few quarters, I have conveyed that our focus is on branded value-added products that will be the focus area. Whatever growth we will get this year or we are going -- we are getting this year since April has gone. I think most of the growth is coming from the value-added segment, which we also like because it has higher contribution margins than liquid milk and less price sensitive. So I think that will be the course of action. However, for liquid milk, we also have a strategy. We are not represented in all geographies in these 5 Southern Indian States we operate. We plan to at least saturate these geographies in the next 2 years and grow to a level where our plant utilizations from currently 60% come to about 75%, 80%, which is the ideal. But yes, focus will definitely be value-added products, premiumization, new product development and branding.

Okay. Fantastic. So congratulations on doing such an incredible job in turning around a division like this, which has historically been tough for other players.

[Operator Instructions] The next question is from the line of Abhijit Akella from Kotak Securities.

Sir, a few questions from my side. First, on the Animal Feed segment, while cattle and fish have been growing strongly in terms of volumes, poultry lagged behind a little bit last year. How do you see that shaping up in the year ahead? And can we expect cattle and fish to sustain double-digit volume growth going forward? Also, any comments on the margins that you would like to make for Animal Feed?

So I must say that cattle feed and fish feed the game is wide open. There is no integration likely to happen because cattle feed market is huge, category conversion is at 20% level, and we believe cattle feed and fish feed can both grow in double digits for next at least foreseeable future. Poultry is integrated, particularly broiler as more and more companies integrate and feed becomes part of the input for producing broilers, the market is shrinking, but we believe that we will have a dominant share in this shrinking market, and we will be in this segment maybe a very small improvement in volume, but definitely, we will be able to maintain volumes in this segment. Layer feed suffered because of very high egg prices. The replacement of chicks was not very high because people continued with the flock, which was aimed to realize the benefit of high egg prices. And now that replacement has started, we believe layer feed which was a growing segment for us, barring last year, will start growing again. So in all in all, I think this year, I believe that the growth in Animal Feed will be driven by fish feed, cattle feed and layer. On the margin, I will tell you that steadily, we have been improving the margins. And I can definitely -- yes. So I'll give you some color quarter-on-quarter. So I must say that if you see, Q4 of last year, we had dropped to about INR 1,223 per tonne, EBIT margin. Then we -- Q1, we went to INR 1,442; Q2, INR 1,531; Q3 is always a tough year in the Animal Feed business, because the new crops starts coming and players start dropping prices, even though the crop is not usable because of a high moisture. So that's always been a poor quarter for us in EBIT per tonne, but a very good quarter for volumes. And Q4, we have gone to INR 1,874. So my sense is that the upward trend will continue, and I'm very sure whatever -- on the year-on-year basis, I'm saying, and we will be able to maintain close to Q4 numbers in this quarter also.

Okay. So INR 1,800-plus for FY '25 is what we are looking at?

No, I'm talking about quarter-on-quarter. Our average last year was about INR 1,500 something...

INR 1,531.

INR 1,531. And I can definitely -- FY '24 was INR 1,531. Only thing I can say that FY '25 will be better than that.

Understood, sir. And there is also a comment in your presentation about increasing realizations in both cattle feed and fish feed. Is this primarily driven by the new product launches? And then there's also a lot of mention of new products launched in Q4 in cattle feed. So any specific features or attributes that we are targeting here to continue to gain market share?

Yes, all these products, there are only 2 segments where we are launching products, newer geographies to compete with the existing competitors and new products to cater to very high-yielding animals.

Got it, sir. On the oil palm business, you seem to have started some trading revenues, which contributed quite significantly. So if you could please just elaborate on the strategy behind what's happening there?

So oil palm, as you know, we have commissioned our refinery and for the purpose of refinery, we sort of -- to ensure that the refinery is completely up and running, we do sort of getting through buying crude palm oil and refining and further selling it.

In lean months.

In lean months. So that is what the trading fees is there. So Abhijit, I want to specify that normally, the refinery and solvent extraction capacities are higher than our in-house production of palm kernel cake for solvent extraction and CPO for refinery. So -- and just to utilize the refinery, I think marginal contribution is very, very important. So we buy oil and refine it and sell only in Stearin and PFAD. I'm very sure that we will have to do it for a year or 2, but my sense is that all our capacities will match with our production in 2 years' time.

Understood, sir. And then just on the Godrej Tyson business, if you could please just help us with the breakdown of the revenues between the branded business and live bird? And also what sort of growth rates are we seeing in the branded business going forward?

So we are defocusing on commodities. So the live bird has started degrowing from last year onwards, it will continue to degrow, because more and more birds are going into the processing plants. Yummiez grew about 13% and Real Good Chicken grew about 15.6%. And if we take the blended number, then the branded volumes grew by about 15% in FY '24 over FY '23, and that is the focus for this year also.

And you've mentioned in the past that the target is to by FY '28 take this branded share to maybe 80%-plus?

I think this will happen much earlier because we are getting very good traction in our processed chicken business. And a good thing with did is that about 2 years ago, we enhanced capacity marginally. So my sense is that it will happen earlier because our growth rate in Real Good Chicken is pretty good.

And so what would be the margin differential approximately between the brands and the commodity business here?

So live bird can be minus 25% to plus 25%. You can chose whichever number you want, okay? And Yummiez, our contribution margin, which is margin after variable, is about 35%-plus and Real Good Chicken is close to 15%. I must tell you that a large portion of Real Good Chicken is B2B to QSRs and e-comm and direct to home companies.

Got it. And just one last thing from my side. The unallocable expenses within the segment financials, those seem to have increased quite meaningfully this quarter. So if you could please just help us understand that?

So, Abhijit, last -- when you compare it with last year same quarter, there was sale of land, which was netted off in the unallocable expenses and that is the reason why you're seeing a big jump.

Okay. Okay. So this INR 50 crore number that we are seeing for this quarter in unallocated, that's a sustainable number is it going forward?

Yes. Yes. That is a sustainable number. Last year was because of the netting off of the income, specifically.

[Operator Instructions] The next question is from the line of [ Sarvan Vora ], an individual investor.

I just wanted to understand from you in our Godrej Agrovet business, what kind of cross business knowledge because it's all related -- some business are related. So what kind of cross-business knowledge or functionalities we share among businesses?

So I think one thing which we share very well is talent. So I think most of our business either totally or at least in the supply chain are rural facing businesses, so I think talent fungibility is very high in our businesses. The second thing is that it should take -- there are several businesses where we buy commodities. ACI Godrej is a feed company in Bangladesh, our feed businesses, both aqua feed and normal animal feed plus Godrej Tyson foods' feed requirement, all this is bought by central buying organization and when we combine these volumes, the volume purchased in India, including for Bangladesh is close to 1.8 million tonnes, which is a substantial quantity. So this is another thing, plus all good practices, et cetera, which is a standard exercise. So I'm saying that there are a lot of synergies which we capitalize on.

Got it. And sir, like you mentioned about the dairy business, how we have increased the share of the value-added products and also in Tyson, we are adding more of decommoditized products, so can you just share it for the other businesses also? Just a brief on how we are trying to make our margins less commodity driven?

Yes. So I'll give the 3, 4 examples. So in oil palm plantation business, earlier, we were sellers of only crude palm oil and palm kernel oil and volatility will affect us significantly. By setting up a solvent extraction plant, other wealth from waste projects plus refineries, now we are less impacted by volatility of CPO and CPKO, because we are selling only in PFAD, Stearin, palm kernel extraction, which is 1 level of value addition. So I'm saying that I'll give you an example of this year, we had a target of INR 184 crores PBT, and there was a significant drop in CPO prices. There was almost 12%, 13% drop in crude palm oil price and...

20%.

20% drop. So if we were only in crude palm oil and palm kernel oil, our profit should have fallen by 40%. But because of these profits came down only by about 20%. Now this is the way to go in this business. We will not stop here. We will start going into further value addition including refining other oil also which is PKO and probably doing something with the product. So that journey has started. As we learn, I think in 3 years' time, my sense is that oil palm plantation business will be less dependent on CPO prices. Of course, we cannot totally, I would say, disconnect from that, but the impact will become insignificant on a long-term basis. Similarly, you know the story of Godrej Tyson Foods Limited. I've talked about Godrej Creamline Dairy also. So similarly, all areas we're moving towards either value-added products or down the value chain where margins are better. CDMO is another example in Astec LifeSciences.

Great. And sir, what would be our CapEx guidance for F '25 for Godrej Agrovet stand-alone as well as for Astec LifeSciences separately?

I think on an average, we keep on investing about INR 250 crores to INR 300 crores, I think we will maintain that run rate, but the investment will come. We just have to enhance some capacities in our dairy business. We have to invest in distribution in our chicken and dairy business. I'll tell you how we invest in distribution because wherever we go, we require freezers and chillers, which we invest in. And a big chunk of investment once our plans firm up for our refinery expansion in our oil palm business, but that all will be decided sometime around end of Q2.

Great. And sir, for Astec?

Astec, we have commissioned one herbicide plant and capitalized it in Q1. So I think we are in a situation that where we have capacity to fill, but I'm very sure that Astec CapEx cycle will come under discussion in Q3 and Q4, because in case contract manufacturing or CDMO business picks up, I think we will require specialized capacity for specialized products for specialized customers.

Right. And sir, because cash flows have fallen significantly for Astec this year, are we looking at any equity raise plans for Astec?

No, we are not looking at any raise, because we strongly believe that I think we have -- industry has bottomed out and now the journey will be upwards, and in this business, I'm saying that the debt equity is still about 1.3 or something. So it's not a very big concern. I think we can tide over whatever is the short-term requirement by supporting internally.

Ladies and gentlemen, we have no further questions. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you. I hope we have been able to answer all your questions. If you have any further questions or would like to know more about the company, we would be happy to be of assistance. Stay safe and stay healthy. Thank you once again for taking the time to join us on this call.

Thank you. On behalf of Kotak Securities, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.