Buyer of first resort

The stock price of Godrej Agrovet hit its 52-week high of Rs 661 the very next day after managing director Balram Yadav sold stock worth Rs 570 million. After the recent sale, Yadav’s holding has reduced from 2.23% to 1.71%. The interesting part about this insider selling was that the buyer was also an insider. Holding company Godrej Industries has consistently mopped up shares during the past year and that has moved up total promoter holding from 70.07% to 71.45%.

This aggressive buying has happened as the agribusiness company coped with COVID-19 disruption. FY21 revenue at Rs 62.94 billion was down 8.5%, compared with FY20 revenue of Rs 68.76 billion. Animal feed contributed to almost 50% of revenue but crop protection had the highest PBIT margin at 44.5% compared to 34.2% for animal feed. Dairy and poultry, which contributed 26% of revenue, are intensively competitive but the management recently converted Godrej Maxximilk into a 100% subsidiary.

Post the Q4FY21 investor call, Motilal Oswal Securities had retained its ‘buy’ rating with a target price of Rs 615. That sum-of-the-parts valuation was driven by the expectation of better growth in the crop protection business as well as volume and margin expansion in palm oils. Citing resumption in earnings growth, IIFL Securities had a similar price target of Rs 620 stating, ‘valuations at 23x/20x FY22/23 estimated P/E seem reasonable, relative to an estimated EPS CAGR of 25% over FY21-23’. However, Kotak Institutional Equities has a ‘sell’ rating on the stock with a ‘fair value of Rs 455 noting unfavourable risk-reward balance and rich valuation at 25.1x FY22 estimated EPS.’ While KIE’s ‘sell’ call was issued at Rs 517, with the current market price at Rs 615, that P/E seems even more elevated.

Despite its pedigree, the commodity nature of Godrej Agrovet’s businesses has led it to be under-owned by domestic institutions. For March 2021, mutual fund holding stood at 1.67% compared to 2.32 in June 2020, with Kotak Equities Opportunities Fund holding 1.04%. FII holding over the same period has dropped from 3.15% to 2.83%. Apart from QIB holding that stood at 2.19%, Temasek-affiliate V-Sciences Investments has the largest non-promoter holding at 11.88%, having made its entry as a private equity investor in 2012, much before the IPO in 2017.