Godrej Industries - Awesome Indeed !

The past three to four months have seen a sea change in the market sentiment. A slew of reforms carried out by the government and the emergence of other economic indicators on the positive side have really helped the Indian equity markets, which have yielded a strong 22 per cent year-to-date return. While the Sensex in itself has provided good returns, there are a few stocks that have significantly outperformed the Sensex.

One such counter is that of Godrej Industries. This stock has returned four times more than the Sensex, having appreciated by as much as 88 per cent on a year-to-date basis, with much of the gains coming in over the past two months.

Godrej Industries is known for its strong management bandwidth, which has been instrumental in creating wealth for investors in the past too. The management of this group, which has four generations actively involved in the business even today, has always strived to take the company into a higher orbit.

However, a sudden up-move has created questions in investors’ minds over this stock. Is the scrip overvalued or is there still some steam left in it? Here is an objective analysis of the company that should help you decide.

Business Structure

GIL’s business structure is quiet complex in nature, and hence, one needs to understand it carefully (See Chart: Business Structure). The company’s standalone business majorly consists of chemicals, while through its subsidiaries, associates and joint ventures, its area of interest is spread across other businesses including property development, palm plantations, animal feeds and agro-products, poultry, personal care, household care, etc.

GIL’s business strategy is called ‘CREATE’, which is an acronym of the names of its four core businesses: consumer products, chemicals, real estate and agri-products. Its strategy pivots on two core values – ‘Transformation’ (drive to full potential) and ‘Emergent’ (focuses on incubation of new businesses).

Holdings Structure

As mentioned earlier, the standalone business includes chemicals and also constitutes a smaller estate management and financial services segment. Apart from this, it has a stake in companies like Godrej Agrovet (75.20 per cent), Godrej Consumer Products (21.64 per cent), Godrej Properties (61.46 per cent) and lastly, Godrej Nature’s Basket (100 per cent). Of these, Godrej Consumer Products and Godrej Properties are listed entities.
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Chemicals Business

On a standalone basis, its chemicals business brings in more than 80 per cent of its turnover. Of this, fatty acids & glycerin contributed 25.2 per cent of its turnover for H1FY2013, fatty alcohol accounted for 38 per cent of the revenues and the remaining 36.8 per cent came from specialty chemicals. These oleo-chemicals are used in various segments like personal care (hair care, skin care, oral care and cosmetics), home care (laundry detergents) and pharmaceuticals. With the FMCG sector witnessing sustained good volume growth, the demand for products of this business is expected to remain robust going ahead.

GIL is concentrating more on its speciality chemicals business, which enjoys better margins and has put in good growth in the past and in H1FY13 too. The company has also added capacity in this segment, having spent Rs 220 crore raised from internal accruals. The plant at Ambernath, which will focus on manufacturing specialty chemicals, is expected to become operational in Q1FY2014.

Apart from this, GIL is also focusing on the export segment, with around 42 per cent of its turnover in FY2012 having come from the overseas markets. With a leadership in the domestic market coupled with growing exports, we believe that the company would continue to perform better in the chemicals business. On the valuations front, considering the conservative valuation of 8x (EPS Rs 3.75 for FY13E), the price per share works out to Rs 30.

Consumer Products Business

GIL has a stake of around 21.64 per cent in Godrej Consumer Products (GCPL), which has a top-line of Rs 4866 crore and a bottom-line of around Rs 726 crore (FY12). GCPL is a market leader in the hair and home care segments and holds the second place in the personal wash category. Its portfolio comprises very strong brands that include Good Knight, Hit, Cinthol, Godrej No. 1, Godrej Expert Powder Hair Colour, etc.

We had recommended GCPL (DSIJ Vol. 27 Issue No. 4, dated February 12, 2012) at a price of Rs 410 per share and the current market price is Rs 695 per share. This translates into capital appreciation of around 70 per cent over the past 10 months. The company has performed well in H1FY13.

GCPL has strong brands coupled with a good market share, and hence, is poised to grow well both organically as well as inorganically in the coming years. The current value of GIL’s stake in this company comes to around Rs 154 per share. We opine that this is a fair value at the current levels.

Real Estate Business

GIL holds around a 61.46 per cent stake in Godrej Properties (GPL), which has a slightly different business model as compared to other realty companies. It has a total land bank of 78 million square feet, of which 71 million sq. ft. is held through joint development agreements. Rather than purchasing land, the company enters into a joint development agreement with the owners and gives them a share in revenue, profits or area, depending on the terms decided. This sounds like a good strategy, as it mitigates the risk of issues that often arise in land acquisitions and saves on other expenses that typically form part of that process.

Despite a tough economic scenario, the performance of the real estate business has been good in the second quarter of FY2013. In this period, GPL added two new projects, both in Mumbai, with 3.69 million square feet of sale-able area.

Further, through its estate management wing, GIL has entered into an agreement with GPL for joint development of 34.2 acres of land surrounding its registered office at Vikhroli. This project is slated to be completed in three phases in about six years. We believe that the revenue from the same would boost the financials of the company going ahead, though of course, it is still too early to comment on the same.

With interest rates expected to soften from the start of 2013, the demand for real estate is expected to pick up gradually, benefiting the company. Even the realisations are expected to improve, eventually resulting in higher net present value (NPV) of its land reserves. Considering the total land bank and executable projects over the next three years, the NPV of its projects stands at Rs 7550 crore. Even at a discount of 20 per cent, the value of GIL’s stake in GPL comes to around Rs 108-110 per share. Any upward traction in the realisation levels will have a positive impact on the valuation.
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Agri Business

GIL holds around 75.20 per cent of Godrej Agrovet (GAVL), which has a turnover of Rs 2218 crore and a net profit of Rs 81 crore. The company operates in segments like animal feed (contributing around 70 per cent to GAVL’s business), palm plantations (14 per cent) and other agri-inputs and poultry business (contributing to the remaining 16 per cent).

After putting in a strong performance in Q1FY13, where it registered a 22 per cent YoY growth in sales to Rs 744 crore and 11 per cent growth in PBIT to Rs 47 crore, GAVL has notched up a better Q2FY13 performance, with its revenues standing at Rs 899 crore (up 40 per cent) and PBIT at Rs 58 crore (up 29 per cent). All the major segments have reported strong growth, especially the animal feed business, which grew 55 per cent on a YoY basis to report a turnover of Rs 629 core. This was driven by a healthy growth in volumes (up 15 per cent YoY), as well as an improvement in realisations. Similarly, the scenario for palm plantations and agri-inputs too has been pretty good.

The animal feed business is expected to be a major growth driver for GAVL, which is a high volume-low margin business. With new capacity added in the second quarter and another expected to get commissioned by December 2012, we expect volume growth to continue going ahead. India has the largest livestock industry, and this is evolving as an organised sector providing enough growth opportunities going ahead.

H1FY13 has been good for the agri-inputs business too, and with new launches already in the pipeline, growth is expected to continue. In the palm plantations business, around 23000 hectares of land will start yielding fruit in FY14, boosting the performance further. Other segments like agri-inputs and poultry have also seen decent business growth in the past, and we believe that the company would continue with the same.

As far as the valuation of GAVL is concerned, considering a conservative P/E of 10x that agri-companies enjoy, we have arrived at a per share value of Rs 45. We have not provided any valuation to Godrej Nature’s Basket as it is still in a nascent stage.

Financials

GIL’s performance has been pretty good in the past. On a consolidated basis, the company's operating revenue has seen a five year CAGR of 18.72 per cent to Rs 5612 crore, while its Net Profit grew at a stupendous rate of 37.71 per cent to Rs 292 crore until FY12.

For the first half of the FY2013, its top-line grew by 39 per cent to Rs 3735 crore and the bottom-line declined by 28 per cent to Rs 118 crore. This decline in profit was majorly due to a one-time loss from the stake sale of Godrej Hershey Foods & Beverages (GHFBL) in September 2012, in which GIL had held around 43.4 per cent. According to the company’s management, the exit from the joint venture was in line with its approach of focusing on its core businesses to drive sustained and profitable growth.

Outlook

We believe the company has businesses spread across various segments that have a good potential of growth. It has a pan-Indian presence, with a good hold in rural areas with its consumer products segment via GCPL and in urban areas through both GCPL and GPL.

One could look at GIL as a good bet considering that it has a presence in the defensive FMCG sector through its holding in GCPL as well as in the aggressive real estate sector through GPL. An investment in GIL helps investors mitigate risk due to its presence in diversified business segments.

Due to a diversified business model, one has to value the company on a Sum-of-the-Parts (SOTP) basis. Considering the per share prices of its different segments, we arrive at a price of Rs 345-350 per share for GIL, providing investors an appreciation of 11 per cent from the current levels.

The promoters have not pledged any shares, which is a very good sign. Further, Foreign Institutional Investors (FIIs) have also consistently raised their stake in the company, which shows a sense of confidence in the company's future prospects. As of 30th September, 2012, FIIs had a stake of around 9.51 per cent in the company as compared to 4.84 per cent during the similar period last year. It is a consistent dividend- paying company, and for FY2012, the dividend per share stood at Rs 1.75 (which is at 175 per cent of its face value of Rs 1).

We believe that its diversified business model coupled with decent financials and an excellent management will help GIL to grow well going ahead. Invest in this company for good long-term gains for a long-term horizon.