Godrej Agrovet Limited (GODREJAGRO) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Godrej Agrovet Q2 FY '27 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Probal Sen from ICICI Securities Limited. Thank you, and over to you, sir.

Thank you very much. Good afternoon, everyone. Thank you for making the time to attend this post-Q2 earnings call of Godrej Agrovet. With us, we have members of the senior management of the company, including Mr. Burjis Godrej, the Chairperson of the company; Mr. Sunil Kataria, the CEO and Managing Director; Mr. Ravishankar, the CFO; and we also have Mr. Arijit Mukherjee, who is the Chief Operating Officer of Astec Lifesciences. As always, the management will first give their briefing on the results and their strategic outlook, post which we will have an interactive Q&A session. So without further ado, I'll hand over to the management. Over to you, sir.

Thank you, Probal. Good afternoon, everyone, and welcome to Godrej Agrovet earnings call for the second quarter and first half of FY '27. Thank you for joining us today. Before I begin, I would like to extend my warm wishes to you and your family on the occasion of Diwali. The second quarter was marked by a challenging operating environment. El Nino intensified into a super event with the monsoon ending about 13% below normal and reservoir levels at a 10-year low, creating uncertainty for the rabi season. Geopolitical volatility and inflation across milk, feed and packaging continued to pressure input costs. Despite these headwinds, our diversified portfolio, disciplined execution and risk management helped us deliver a strong performance. Strength in Animal Nutrition offset pressure in Crop Care, Dairy and Astec, while our transformation agenda continued to progress. We delivered double-digit revenue growth with Q2 consolidated revenue growing 17% year-on-year to INR 2,995 crores, driven by higher realizations and volume growth led by Animal Nutrition, Oil Palm and our [ B2C ] Food segment, while our Bangladesh JV maintained strong momentum. EBITDA remained stable at INR 222 crores despite significant cost inflation with margin at 7.4%. Profit before tax grew 5% to INR 131 crores, and PAT was up 22% to INR 103 crores. This earnings resilience was achieved through focused interventions. Now let me briefly touch upon our businesses. Animal Nutrition delivered another strong quarter with revenue growth of 14% and segment profit growth of 32%. Growth was supported by higher realizations and volume gains across key segments, while margins improved through favorable mix and operating efficiencies. We exited the shrimp feed business to sharpen our focus on profitable growth segments. Oil Palm revenue grew 28%, supported by higher realizations and a 14% growth in fresh fruit bunch volumes as our plantations continue to mature. Segment profit increased 4%. During H1, we added 13,000 hectares of plantations and inaugurated India's first integrated oil palm complex in Khammam in Telangana. The complex brings together every stage of the oil palm value chain under one roof: seed and genetics, nursery, R&D, mill and upcoming state-of-the-art refinery in the complex. We commissioned a mill at the complex along with the CPKO refinery and biogas plant during the quarter, strengthening our integrated ecosystem. Crop Care was significantly impacted by the El Nino and El Nino-led demand weakness and an unfavorable product mix. While revenue grew on a lower base, profitability declined, partly mitigated by our diversification into newer Crop Care segments. We continue to scale differentiated products such as Ashitaka, though demand conditions remain challenging. At Astec Lifesciences, weak enterprise demand offset growth in the CDMO business. EBITDA was also impacted due to lower realizations and elevated input costs. However, we remain focused on transformation through new products, capacity utilization and cost optimization. Dairy revenue grew 6%, led by calibrated pricing and growth in value-added products, which now account for 49% of the portfolio. Profitability remained affected by elevated milk procurement, packaging and logistics costs. Godrej Foods continued to shift towards higher-value products with B2C growing by 50% and its salience increasing to 38%, supported by consumer demand and successful launches. Our Bangladesh joint venture, ACI Godrej Agrovet, delivered another strong quarter with robust volume, revenue and growth in profit. For the first half of FY '27, consolidated revenue grew 13% to INR 5,847 crores. Profitability was impacted by inflation and adverse weather with EBITDA and PBT declining modestly. The H1 PAT stood at INR 231 crores. Working capital management remains strong with net working capital improving to 21 days from 32 days last year. Absolute working capital reduced to INR 655 crores, strengthening balance sheet and returns on capital. On sustainability, renewable energy now accounts for 79.3% of our portfolio, while Scope 1 and 2 emissions reduced by 11.1%. We also retained our CDP A- leadership rating and continued progressing towards our SBTi-approved emission targets. Looking ahead, we remain mindful of weather-related uncertainty, input cost inflation and geopolitical volatility. However, our strong market position, diversified portfolio and healthy balance sheet give us confidence in navigating near-term challenges while continuing to invest for growth. We remain positive on the long-term opportunities across our businesses and India's agricultural and consumption story. In closing, I would like to thank our employees, farmers, channel partners, customers and all stakeholders for their continued trust and support. Our focus remains on executing our transformation agenda, driving operational excellence and creating sustaining long-term value. Thank you, and we will now be happy to take your questions.

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

I had a few to start with on the Oil Palm segment. Could you please help update us on the health of the plantations, especially in Andhra Pradesh, in the context of a large rainfall deficit in that state in the backdrop of El Nino, followed by, I believe, in the past few weeks, twin cyclones that seem to have hit that part of the country? So how is the output looking like, fresh fruit bunch arrivals for this year and next year? If you could please share your thoughts on that.

Abhijit, Sunil here. So Abhijit, on the Oil Palm business, definitely one thing which happened in the quarter 2 was that India faced one of the driest June -- in the month of June in 100 years, where we had some 40-odd percent rain deficit. That's one part. The heat continued into the Andhra Pradesh and Telangana states during July and August. So if you see geographically, Andhra, Telangana, Karnataka, the southern states have had the highest shortfall of rainfall. So the impact of that actually showed to us in the drop in the oil extraction ratio in this quarter. If you were to remember the data in the first quarter, we have been doing very well in OER. In the first quarter, we were much ahead of last year's first quarter itself, thanks to our own efficiency drive. But clearly, this kind of heat wave impacted that oil extraction ratio in this quarter. That is one piece which happened. Now obviously, Bay of Bengal has this whole phenomena of cyclone, which come together towards October, November. And the last few weeks, we have seen 2 cyclones pan out. The good news is these cyclones have dumped a lot of rain water in big bulk quantities in all the mandals across the coastal region, which, in a way, is good because this, kind of, refreshes some part of the soil water level, which is very good for the palm trees. So I would say the cyclones, while they will not fully make up maybe for the deficit, but actually have turned out to be pretty much of a boon. In terms of any uprooting of trees and all, there has been no widespread piece or any trees getting damaged, but this sharp jump of rain, which has happened in the last, I would say, 2, 3 weeks, it's in a way pretty good for the coming few quarters. Overall, what we are seeing in OER is that despite taking a hit in June, July, August, 3 months, from September onwards, with some intervention that we have done, some of these cyclone phenomenas happening, the OER has started coming back. Our September OER was pretty much close back to last year's September OER. And October is marginally ahead of last year October. Now this trajectory shift which has happened is what augurs well for the future. So I would say, barring any big changes which were to happen on the weather, I think the 2, 3 months that we saw of extreme heat wave-led impact, as of now, it seems a bit behind us. And our focus is very clearly to keep scaling up OER back over the next 5 months and see if we can -- the target is really that can we make up for the 3 months' hit and end up the year back at the overall OER of the last year level at an annualized basis.

Got it, Sunil, that's helpful. So just to clarify, from a fresh fruit bunch arrival standpoint, we had expectations of double-digit growth both for fiscal '27 and '28. So despite whatever is going on in terms of weather, do you still feel confident that, that is achievable?

Yes, that we don't -- if you see actually quarter 2, despite this huge challenge of June and -- June, July, August, I would say, 3 months of crazy heat, I mean we have grown our -- this thing -- double-digit growth on FFB right now. And the quarter 2 overall collections that we had, they have been a record high collections for us. It's all done. Just to give you a number, we have -- yes, so if you see on an H1 basis, we are pretty close to a double-digit growth almost still, this despite 3 months and 6 months being extreme weather conditions. And I think what is coming into play, part of it is, as I've always talked to in the narrative whenever I talk to you, that this demographic dividend keeps coming up is a bit of a buffer for us that we have these new plantations, which keep coming -- moving from juvenile period to productive period, then the ones which are in the early, what you call, adolescent stage, they get into maturity. So I think that is something which keeps coming in handy and they will keep coming in handy for any such adverse conditions. So despite, I would say, 3 out of 6 months being hit, we are still very, very close to a double-digit growth, and it should only get better.

That's good to hear. The other question I just had was on the PKO derivatives plant. The slides do mention that it has been commissioned now. Did it make any financial contribution in 2Q? Or if not, then does it begin from 3Q? And shouldn't we expect that this itself could lead to a substantial improvement in Oil Palm segment margins in fiscal '28?

Okay. So first of all, it's going to open only on 1st of September, okay? And then these plants take their own time to kind of early feeding, scaling up, et cetera. So no meaningful number came up in quarter 2 because we just got 30 days. And then in the 30 days, obviously, there's ramping up issues and all that stuff, which happens. So it will -- it has started. It's now settling down. And also in this plant, if you see, we have done right now the first phase of rollout. The full-fledged hydrogenation and fractionation piece will come in December. Right? So this is also -- scale-up is happening in 2 parts. So the first part has just gone into place. The second one will come in December. And then meaningful impact of this will start coming in from, I would say, quarter 4 and then scale up really in FY '28.

Yes. Just to sort of reiterate, I mean, what sort of margin expansion can we expect because of this in FY '28 for the Oil Palm...

Abhijit, we have given a guidance that as these businesses scale up fully -- the downstream business scales up fully that in the midterm, let's say, over a 2- to 3-, 4-year period, this will add overall roughly around 2% to the overall EBITDA margin of the oil palm business.

2 percentage points to segment EBITDA. Got it.

And I think that's a bit of a -- when it stabilizes and scales up in terms, so we can take in the midterm of 2 to 3 years, that's what we will end up adding to the overall EBITDA margin of the business.

Yes. Perfect. And just one last thing from my end. On the crop protection side of things, obviously, things look very difficult right now, both with Astec and the domestic business. What are our thoughts with regard to how to turn these businesses around?

Okay. So if you see, to our mind, part of the -- okay, definitely, agchem environment is tough, and that's visible in the industry across the results that you guys -- I mean, you obviously track so many of them, that it's a matter of degrees depending on the portfolio diversification. But yes, everybody has kind of taken a huge hit. I think a large part of this is primarily -- we -- nobody saw this kind of a super El Nino impact panning out. In fact, I remember the last conversation we had in the last call, I was pretty hopeful that the Indian Ocean Dipole will play out. July had started looking a little better. But what has panned out, I would say, after 15 July again, June was horrible, which impacted our cotton business because it's a very -- we are at the early stage of emergence. So we got impacted a huge on the cotton because of a very, very crazy dry heat in June. We were hopeful that now something will improve from July onwards, but August, September, October have been extremely tough. So I think the pieces that we have to brace for is that India is going to see a tough rabi season because the reservoir levels have crashed, right? So that is something that, this year, I think, overall agchem will have to brace for impact. That is one piece which we are very clearly seeing. And the question is now where do we see the long-term part of the business? I think 2 parts in the strategy, I would say, which we stay the course. One thing is we are on course for crop diversification over the next 3, 4 years in Crop Care business. Let me take that first. The good news in all these dark clouds of agchem is that we have rolled out successfully the first diversification of maize herbicide. Now Ashitaka is off to a rock star start. It is, by any industry standard, what I understand from the people who are more experts here in this industry, a very rock star launch. Obviously, what happened is the state that we have the market for or TAM for Ashitaka, markets like Madhya Pradesh, they got fantastic regular monsoon. And we have created a number which -- okay, let me maybe give you a directional number. This would be the launch, which in its first year would have crossed -- could cross INR 100 crores in revenue. Now that I can tell you by any standard of imagination would be a very, very successful launch. And that's what we believe will still happen in a very disastrous agchem industry here. Now if this, we can keep building further -- and this has happened on the back of, I think, a super execution into field activations, field marketing, brand building and distribution. So this, I would say, is our first foray. Second one is we have rolled out insecticide Takai which is a multi-crop piece. That I believe will be a little longer haul because it has to be invested continuously. Third, we are rolling out now -- we have just rolled out in this month, a soybean herbicide called Ghassnash. So these couple of products have started coming in. Some are turning blockbusters from the moment. Some we'll have to continue to invest. But as I declared earlier, a lot of pipeline products are going to come in every year, maybe 1 or 2. Three are coming this year. Then every year, 1 to 2 will come. And we are targeting that by actually FY '29-'30, we'll have -- FY '30, we'll have 7 different crop segments playing in. Once that come into play, our dependence on cotton and chili would sharply reduce, and that's where the intent is. But yes, in the short term, I think there's going to be a bit of a pain, which we'll have to brace for. The same thing coming to Astec, maybe let me take that also. I think Astec also saw a challenging environment, partly domestic, which is not very big for them. But I think the global environment has been [ down ], whether it's Brazil, whether it's U.S., some of our core products go to the U.S. kind of market, we have seen toughness there. But I think we are doing the right things, I will ask Arijit to pitch in here also, I think the pipeline of CDMO, the funnel remains strong, right? We'll tell you a few details about how the conversion of funnel is happening. So I think, again, this one tough year will happen, but where are we headed? We are very clearly -- in the midterm, we are looking at CDMO business being 50%, 55% of our thing. We could have deviations in 1 year or 2 because of toughness. But we will also like to tell you what is happening on our funnel pipeline of CDMO. So Arijit, you want to pitch in on that?

So now currently, if you see the quarter 2, so almost the conversion from inquiries to R&D, means there are different stages of development our product goes through, so conversion has been almost 90%. So about 90% of the inquiries have converted to an R&D stage. So that proves 2 points. One, the quality of inquiries now we are getting, which is cutting across agrochemical specialties has improved. And the partnership also we are getting. The partners we are getting for the long run is also -- the quality has improved. So this is one of the strengths we have built in. And secondly, currently, we are having almost 15 products in pipeline in the R&D stage. So this commercialization, small bit have started this year. And next 2, 3 years, we will get to significant numbers, which will be commercialized. So in terms of R&D improvement, last 2 quarters, in fact, Q2 has seen a major improvement.

And we know that once the product reaches the R&D stage, after that, the conversion into commercialization is very, very high. It's almost 70%, 80% of that would get into commercialization. So I think the good part is, are we building for the future, Abhijit, as we put in the strategy? The answer is yes. Yes, there are these 1 year which nobody saw coming, which are panning out, which is going to hit the agchem businesses. But I think in both the businesses, there is structural correction underway. There is a structural transformation underway. We need to be a little patient and it may take a couple of years in both the businesses. That's I think the way [indiscernible].

[Operator Instructions] The next question is from the line of Arun from Unifi Capital.

My question is again on the oil palm. So what was the extraction that we had in this quarter? And should we be back to the 19.8% levels in the next 2 quarters? So how do you see that? That's the first question. And the second one is, as the Andhra Pradesh government issued the new crude price order for this year. Since last year's order assumed 20.01%, and do you expect that -- the new one to assume a lower rate? So that would be a question. And the last one is on palm oil prices. We have been seeing palm oil prices are down 5% to 8%, 9% from the September highs. Import duty have been cut. And several food companies in their con calls have been guiding for lower palm oil prices. So where do you see palm oil prices moving from here?

Okay. So let me take the third one first. Okay. If you had asked me this question, 48 hours before the U.S. -- when the U.S. results had not come in, my answer was very clearly that palm prices will remain pretty tight and range bound. And that's broadly the indication we've had until this whole U.S. election came and there's been a bit of a knee-jerk reaction, which has happened. I think 2 new inputs which have come in. One is, I think what has happened post the U.S. election where the crude oil prices have fallen sharply. I don't know where it will still stabilize. [Technical Difficulty]

Ladies and gentlemen, thank you for being on hold. The management line has been reconnected. Thanks, and over to you, sir.

Yes. Okay. I'll start answering third question here again. What I was saying is that this whole -- there has been a lot of volatility in the last 48 hours in the Brent. I mean it was at $112, it went down sharply and then now it's again back to $100. Now this has a linkage to what it does to the biodiesel mandate parity. So I think this is one thing which we'll have to wait and watch. I think this will remain range bound. That's one. Second is the second phenomena, which I think could impact over 2 months is a very high stock holding, which has been declared in the Malaysian inventory. I think they've had a higher production than we expected, and they are sitting on a higher inventory right now. So that is also putting a bit of a pressure very clearly on the exports of palm oil from Malaysia. And hence, the prices have come down very sharply in the last, I would say, 48 to 72 hours. Now this is one correction, we'll watch. My sense is -- and again, I'm not a commodity expert, but my sense is what will happen is it will remain in the range of maybe, what, maybe 4,300 to 4,400, maybe 4,250 to 4,350 kind of range over the next couple of months. And then all eyes will be what happens to the El Nino effect in Indonesia and Malaysia over the next 3 months. Now if that remains high, the prices could surge back again. Now to what level, we don't know, but from February, March. So it's a bit of an open-ended piece. In the short term, we believe, yes, it will be range bound between maybe 4,200 to 4,350 is my own sense. And then I think it will creep up by Feb, March is the sense on the pricing. On the second question on the Andhra Pradesh government G.O., yes, the last year order was 20.01%. The new order pricing has not come out as yet. We're all waiting for it. The fact is the way the formula normally should proceed is the fact that it depends on the weighted average of the benchmark that is supposed to be followed on the ground -- of the mill, and it depends on the OER, which has been there in the last 1 year. We hope that it can come down to 20.01%. And yes, if that happens, that's pretty good for us. But it's a very open-ended anybody's guess right now as to what happens. So difficult for me to honestly give any guidance because this is something not in our hands. So we'll wait and watch for what comes out from the government there. The third question was -- the first question was on OER. So let me give you some numbers. We actually, in first quarter, beat the OER, which was very good even last year first quarter. It was somewhere around 18.4% -- 18.6% in last year first quarter. And last year had a very good rainfall in the first quarter, monsoon was bumper last year. We, with our efforts, our efficiencies, we were able to take it to 18.8% in the first quarter, which I had given you a data. Now this quarter, obviously, it has taken a beating over the last year. We have ended up quarter 2 at roughly around 18.9%, which is lower than last year quarter 2. Now the question is what is happening. What I explained to Abhijit's question, which is cyclones, with recovery happening, in the month of September, we have come back to last year's September. In the month of October, we have creeped a little ahead of October. So I think there's a delta which has hit us, which will also show you in the EBIT margin of Oil Palm in this quarter only, but we are pretty confident that -- I mean, our attempt is very clearly that can we recover over the next 4 months and end the year at that 19.7% or 19.7% plus kind of a number.

Got it, sir. And the other question is on the cyclone again. So did the core oil palm areas for you, West Godavari and Konaseema -- so any damage assessment was done on the plantation, sir, particularly the younger plantations where those young trees have not yet started bearing fruit? So what is the assessment there? Do you expect -- could this push back your volume growth plan? How do you see that, sir?

No. So I think we have had no ground assessment, there have been no damage to the trees. There's a little bit of a few trees here will get little tilted and all which we have enough expertise to put them back and help the farmers back into place, but no damage per se has got reported from our ground service. The only positive part of the cyclone, I would say, is it dumped a crazy amount of rain in 2 bursts in all the mandals of oil palm plantations. This is actually a decent amount of relief to the region which had seen severe heat stress. So I think that's the positive side which the ground teams tell us that this water will actually replenish part of the soil water, which really helps the oil palm trees. So I think the 2 cyclone for us, the way we read it, is actually a positive sign till now. And it will have no impact on our volume growth, or our guidance for a double-digit volume growth on FFB sales.

Got it, sir. And my final question is on the animal feed business. So we have seen 3% volume growth and 8% price growth. Is this sustainable for the H2? So how do you see this?

Okay. So first of all, let's delayer this 3%. I think we should not read too much into this figure. As we told in some of our strategy discussions earlier is we are doing a shift towards building more the cattle feed business, and we have deprioritized the broiler feed business. So our 2 -- our core segments would be primarily dairy feed or cattle feed, followed by -- in poultry, we'll try to focus a little more on layer feed. If you see the growth, cattle feed has grown at a high single digit of 8%. Layer feed has grown at a double-digit percent. We are very happy because these are 2 priorities that we've been chasing. Broiler feed has degrown very sharply. Could we have done some more volume in broiler? Very easily, we could have picked up more volume in broiler. But we have consciously let it go because we don't believe it is strategic enough right now. I could have picked up easily another thousands of tonnes on broiler, given the inflationary environment. We were getting queries. But we don't see that this will be a sustainable number because we know broiler business has been integrated to the extent of 85%, 90%. So today, people are coming to us to buy it. Maybe we have some advantages. But I know that it will immediately get corrected. So we are happy letting go of the broiler business, which is not strategic. So that leads to a 3%. But what I think you should be reading is 8% and 15%, which are the 2 segments. And that's where our focus is. So I think that's the structural piece we are driving, and that's what we are happy on. Within cattle feed, if you see, we are driving premiumization. So the growth of our premium portfolio has been pretty healthy as well, and that's what we keep chasing.

[Operator Instructions] The next question is from the line of Probal Sen from ICICI Securities Limited.

I think a lot of the questions about brand salience and premiumization have been answered. But just wanted to also understand, particularly in dairy, how are you seeing the pricing environment? And my apologies if you have already mentioned this, but that has been basically one of the key reasons for a little bit of margin weakness. But going forward in the third quarter and further ahead, with whatever has happened in the elections, if there is any sort of hope of -- I mean, any change in the environment, are we seeing any respite on the dairy price front in the next couple of quarters? That was my question.

So the answer is no. We are not seeing a respite. And I can tell you our take on this dairy pricing, and that's something I think we'll all have to start building in for future also. I think there are 2 parts which are playing on the milk prices in India, right? One is temporary. One, I believe is structural. The temporary part is, I think, the El Nino effect, which is where there's been a huge heat stress across. We have talked a lot about the heat stress, which has impacted the crop care businesses and all. But one piece which happens in the heat stress is the cattle productivity also drops. That's a very clear phenomena, which is very less talked of. And that leads to a demand and supply gap on milk itself that cattle are producing lesser milk per animal and demand may be higher. So that, I think, is maybe a phenomena, which will be a 2-quarter phenomena, maybe more to go. The next monsoon, if it is normal, it will come back. The structural piece which is here to stay, I think, is the shift all of us are driving together towards value-added products. Now the milk conversion per liter from milk to, let's say, curd or milk to paneer, there's a very significant difference. Just to make 1 kg paneer or to make a 1 kg curd, the difference is very, very sharply different. And as value-added products get driven more, which India is driving, we will see that there will be a structural reset in the milk pricing in India. So I think what we may be seeing now is a little artificial because of twin combination of El Nino-led productivity impact and structural impact. I expect this to come back if monsoon is good only after 2 quarters, not before that. So I think we'll have to expect that next 2 quarters, there's no respite. And then structural part, I think, will stay here. So that's where our take on milk pricing in India is.