Looking for turnaround story? Kotak says 'Buy' this smallcap stock 

A smallcap company has undertaken serious measures to cut costs and turn around underperforming businesses. It is focusing on value-added and specialty segments across almost all segments. Kotak Institutional Equities said the transformation is likely underappreciated by the Dalal Street, leading to what are still-attractive valuations.

Kotak said investor interest in the stock got faded in the past few years due to sluggish earnings growth caused by a combination of internal missteps and external headwinds. But the domestic brokerage's recent field trips and management meetings indicate that management has undertaken serious measures. There have also been changes in the business head level in the past 2-3 years.

This is Godrej Agrovet Ltd. "We believe that these interventions should help reduce GAVL’s vulnerability to cyclical downturns and drive a higher margin and less volatile earnings stream in the years to come," it said.

Kotak suggested a fair value of Rs 740 on the stock. The target suggests 20 per cent potential upside over Monday's intraday levels of Rs 618.50.

The domestic brokerage said Godrej Agrovet has already turned around its standalone crop protection business, which demonstrated 37 per cent YoY revenue growth in FY2024, along with an industry-leading 31 per cent EBIT margin, owing to an 80 per cent revenue share from specialty products.

"Currently, the dairy segment’s turnaround also seems sustainable, with Ebitda margins at 8 per cent in 4QFY24 due to substantial cost-cutting measures and a rising share of value-added products," it said.

In addition, the poultry segment has also reported improved profitability for similar reasons—the higher-margin branded product portfolio is growing strongly. The oil palm business is poised for accelerated growth on the back of the government’s thrust on the NMEO-OP scheme and Godrej Agrovet's focus on derivative products.

Animal feed continues to grow steadily.

"We estimate a 27 per cent EPS CAGR for GAVL over FY2024-27E, driven by an expected turnaround at Astec LifeSciences — underpinned by growth in the high-margin CDMO business — accompanied by continued improvement in the dairy, poultry and standalone crop protection businesses. The oil palm growth story may take a few years to fully translate into financial benefits, but should scale up sharply thereafter," Kotak said.