Godrej Industries Ltd Research Report By Way2Wealth

Company Background And Business Model

Godrej Industries is a holding company for some of the major Godrej Group companies. With interests in consumer goods, real estate, agriculture and gourmet retail through their subsidiary and associate companies, the company is spread across 18 countries.

Their standalone primary business is of Chemicals; and ranks among India’s leading manufacturers of oleo chemicals and surfactants. GIL exports to over 80 countries in North and South America, Asia, Europe, Australia and Africa.

Investment Argument

 Chemical business strong footed on demand from user industries – GIL is one of India’s leading oleo chemicals players and manufacture and market over 100 chemicals for use in more than 24 applications. The user industries are all consumer facing and less cyclical is demand. Its product profile is as follows:

o Fatty alcohols – The Company is a leading manufacturer of long chain fatty alcohols which caters oil fields, paper and personal care industries.

o Fatty Acids – GIL pioneered the manufacturing of the world’s first vegetable oil based soap using Fatty Acids in 1918. Today, they manufacture a range of C16 and C18 Fatty Acids that have diverse applications in textiles, rubber, polymers, foods and feeds, and personal care products. Over the last decade, they have diversified their portfolio to include high purity specialty Fatty Acid derived from mustard oil.

o Surfactants – GIL is the pioneer in manufacturing and developing applications of Alpha Olefin Sulphonate (AOS). The unique properties of AOS are effective in a variety of applications in industries ranging from home and personal care to polymers, oil fields and construction chemicals. Over the last decade, they have also started producing Fatty Alcohol based Surfactants that are used extensively in the home and personal care industry.

o Glycerin – This is a versatile chemical and is used in a variety of applications including food and personal care products among others.

o Speciality Chemicals – Over the last decade, the company has diversified its product portfolio to include value added specialty products.

In Q3FY18, revenues increased by 21% to `448 crs compared to Q3FY17. PBIT for the quarter increased by 46% to `35 crs. as compared to Q3FY17. Exports increased by 28% to `142 crs in Q3. For 9MFY18, revenues registered a growth of 20% at `1221 crs. while PBIT increased by 12% to `65 crs.

 Godrej Consumer Products (23.8%) is an emerging market FMCG leader with presence in the household care segment & personal care segment. The company has vast operations spread across India, Latin America & Africa. Consolidated net sales grew by 8.9% in Q3FY18 to `2604crs assuming GST in the base quarter sales.

India business recorded comparable sales growth of 17% led by 18% volume growth. International business reported comparable growth of 5%on a constant currency basis. Management said that all its distribution channels are back to normal and rural demand recovered stronger than urban.

After posting strong numbers in Q3 & 9MFY18 the company was optimistic in pickup in consumer demand. As market conditions improve, the company is set to increase the pace of new product launches to build on the growth momentum. The investments in brand strengthening & increasing market reach will bode well for the company in the long run.

We believe the company is on a strong innovation path and expect the past launches as well as cross pollination of brands and distribution expansion will add to the topline growth for next few years.

That all its distribution channels are back to normal and rural demand recovered stronger than urban and this trend will continue in coming quarters. International business profitability levers are – portfolio mix, premiumisation, cost reduction programs, better deployment of marketing expenses, &better management of overheads (fixed costs).

 Godrej Properties (56.7%) is one of the fastest growing real estate companies in India. The company works on an asset light business model. The company has been clocking ~1200 crs. sales every quarter since the last three quarters.

The company witnessed a 76%YoY growth in value of sales bookings – total booking value stood`1220crore in Q3. Residential sales were at historical highs in 9M. 9MFY18 sales at Godrej BKC stood at `697crore leading to remaining inventory of only ~51,000 sq.ft. The company added three new projects with saleable area of ~5.25 million sq.ft. in January 2018.

 Godrej Agrovet (58%) which was recently listed has varied operations spread across animal feeds, palm oil, crop protection and dairy. GVAL got listed on 17th October 2017. Through the issue GIL realised a profit of `267 crs. on a standalone basis. Prospects for the agri business are strong as it climbs the protein value chain over the next decade.

Consolidated revenues for Q3FY18 stood at`1,221 crs. registering a growth of 7%.For the Quarter and Nine Months period ended December 31,2017 revenue growth was subdued due to lower commodity prices. PAT growth was at 7% for the Q3FY18.

o Animal Feed segment reported strong volume growth of 10% in Q3FY18 as compared to corresponding quarter of previous year.
o Vegetable oil segment revenue registered a growth of 22% in Q3 and 24% in 9MFY18 on the back of strong fresh fruit bunch volume growth by 24% in 9MFY18.

o Crop protection segment revenue has registered a growth of 4% in Q3FY18 despite the adverse impact in revenue on account of GST. The segment result showed a robust growth of 33%.

o Dairy segment revenue has registered a growth of 16% in Q3FY18, despite the adverse impact in revenue on account of GST. The segment result showed a robust growth of 44%.

 Godrej Nature’s Basket (100%) is a retail outlet catering to gourmet packaged food offering from across the world. Q3FY18 sales was at `81.7crore, a like to like growth of 8.5%.Online business clocked sale of `4.1 crore in Q3FY18, a growth of 17%; and contributes 5% to the overall sales.The Company continued to undertake expansion of outlets. Gifting sales saw a boost with a Like-to-Like growth of 30% in Q3FY18.

Valuations

GIL is a holding company for all major Godrej Group Companies. In the recent price correction and at relevant stakes in the subsidiaries and associates we believe the holding discount has widened from its earlier average of 15-23% to 45-50%. We believe this gap will narrow down given the strong growth prospects of the subsidiaries in the next 2 years and hence we are POSITIVE on the stock.