GODREJ INDUSTRIES LIMITED

Transcription

1 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Fundamental Assessment ICRA EQUITY RESEARCH SERVICE GODREJ INDUSTRIES LIMITED Q2, FY12 Results Update Industry: Diversified November 14, 2011 Strong operating performance across business segments On a consolidated basis, GIL s net sales rose by 41% YoY to Rs. 1,399 crore and net profit (after minority interest) grew by 24% to Rs 92.8 crore for the quarter ending September 2011 (Q2 FY12). The strong revenue growth was driven by healthy growth across businesses (Godrej Properties: +279% YoY, Oleo-chemical business: +45% YoY and Godrej Agrovet: +28% YoY). Besides, GIL s consolidated EBIDTA margins improved significantly (+389 bps YoY) to 6.7% in Q2 FY12 on account of healthier profitability in across properties, oleo-chemicals and agri-businesses. Moreover, exceptional income on sale of long term investments (Rs. 46 crore) has resulted in a healthy 6.6% net profit margin for the company in Q2 FY12. Overall, the strong quarterly performance has been in-line with our estimates and hence we maintain GIL s Fundamental Grading of 4+ indicating Strong Fundamentals and Valuation Grading of B indicating Moderately Undervalued on a relative basis. Oleo-chemicals healthy volumes and operating margins aided by high capacity utilizations and increasing contribution from specialty chemicals GIL s oleo-chemicals division reported a strong 45% YoY revenue growth to Rs. 340 crore in Q2 FY12, backed by a robust 77% YoY exports growth during the quarter. The EBIT margins for the division reported significant expansion (~360 bps QoQ to 10.6% in Q2 FY12) due to high capacity utilizations and increasing contribution from specialty chemicals (~35%) & export sales (~44%). Although volume growth is expected to moderate going forward due to capacity constraints, we expect the division to report healthy performance for the year supported by strong realizations. Godrej Properties focus on de-risking business model amidst turbulent time for real estate developers GPL reported a robust 279% YoY revenue growth to Rs. 131 crore in Q2 FY12, although QoQ revenue growth remained flat. Besides, EBIDTA margin improved 755 bps QoQ to 23% due to higher share of relatively more profitable residential property segment. GPL has signed an agreement with Godrej & Boyce (G&B) to develop Vikhroli property, wherein GPL will receive 10% share of revenue as development manager fees whereas construction and development expenses will be borne by G&B. Godrej Agrovet Strong quarter with robust growth across all segments GAVL has registered a robust 28% growth in net sales to Rs 641 crore and 80% growth in PBIT to Rs 45 crore in Q2 FY12. While all major segments have reported strong growth, oil plantation business continues to surprise with strong 95% YoY revenue despite softening in crude palm oil prices. Godrej Consumer Strong revenue growth supported by inorganic expansions, margins expand with price increases, lower ad spends and integration synergies GCPL s consolidated net sales grew by 23% YoY to Rs. 1,186 crore supported by strong growth across domestic (+24% YoY) and international businesses (+19% YoY on liketo-like basis). Besides, EBITDA margins for the company increased 326 bps QoQ to 18.0% in Q2 FY12, as effective price increases offset high raw material costs leading to gross margin expansion and further supported by rationalization in advertising spends and integration synergies derived by the company. ICRA Online Grading Matrix Valuation Assessment A B C D E /B Fundamental Grading of 4+ indicates strong fundamentals Valuation Grading of B indicates moderately undervalued on a relative basis Key Stock Statistics* Bloomberg Code GDSP IN Current Market Price (Rs.) Shares Outstanding (crore) 31.8 Market Cap (Rs. crore) Week High (Rs.) Week Low (Rs.) Free Float (%) 20.9% Beta Month Avg Daily Volumes (Rs Cr) Source: Bloomberg *As on 14 th Nov, 2011 Shareholding Pattern (30 th September, 2011) FIIs 5% Godrej Family 20% Others 13% DIIs 3% Source: Company Share Price Movement (18 months) Godrej & Boyce 59% Exhibit 1: GIL s key financial indicators (Consolidated) FY10A FY11A FY12E FY13E FY14E Operating Income (Rs. crore) EBITDA Margin (%) 2.0% 6.0% 8.6% 12.6% 16.3% PAT Margin (%) 3.5% 7.8% 12.0% 15.8% 19.3% EPS (Rs.) EPS Growth (%) 81.0% 44.4% 26.1% 47.9% 36.1% P/E (x) P/BV (x) RoE 9.4% 11.4% 13.1% 18.6% 22.3% RoCE 10.9% 10.8% 14.7% 20.4% 26.0% EV/EBITDA Source: Company, ICRA Online estimates Godrej Industries Ltd Source: Bloomberg Nifty index (RHS) 1

2 (GIL) Consolidated On a consolidated basis, GIL s net sales rose by 41% YoY to 1,399 crore and net profit (after minority interest) grew by 24% to Rs 92.8 crore for the quarter ending September 2011 (Q2 FY12). The strong revenue growth was driven by healthy growth across segments (Godrej Properties: +279% YoY, Oleo-chemical business: +45% YoY and Godrej Agrovet: +28% YoY). Besides, GIL s consolidated EBIDTA margins improved significantly (+389 bps YoY) to 6.7% in Q2 FY12 on account of healthier profitability in across properties, oleo-chemicals and agri-businesses. Moreover, exceptional income on sale of long term investments (Rs. 46 crore) has resulted in a healthy 6.6% net profit margin for the company in Q2 FY12. GIL: Segment-wise Revenue Distribution GIL: Segment-wise PBIT Distribution Finance and Investments 3% Beverages and Foods 3% Estate and Property Development 10% Source: Company Others 12% Veg Oils 21% 0% Chemicals 23% Animal Feeds 28% Others, 14% Finance and Investments, 27% Beverages and Foods, - 2% Chemicals, 20% Estate and Property Development, 21% Animal Feeds, 10% Veg Oils, 10% Table 1: GIL Q2 FY12 Results (Consolidated) Rs. crore Q2 FY12 Q2 FY11 YoY% Q1 FY12 QoQ% Net Sales % % Other Related Income % % Operating Income % % EBITDA % % Depreciation % % Interest % % Other Income % % PBT % % PAT (After MI) % % Number of Shares (crore) EPS CEPS EBITDA Margin 6.69% 2.80% 5.41% PAT Margin 6.57% 7.57% 5.45% Source: Company Results; ICRA Online Estimates 2

3 Oleo-chemicals Business: GIL s oleo-chemicals division reported a strong 45% YoY growth to Rs. 340 crore in Q2 FY 2012, backed by a robust 77% YoY exports growth during the quarter. Specialty Chemicals (up 50% YoY) continues to drive growth and now contributes 35% of total revenues for the oleo-chemical business of the company. The EBIT margins for the division reported significant expansion (10.6% in Q2 FY12 Vs. 9.2% in Q1 FY12) due to high capacity utilizations and increasing contribution from specialty chemicals (~35%) & export sales (~44%). Revenue Distribution by category (Q2 FY12) Surfactants 16% Others -1% Revenue Distribution by Geography (Q2 FY12) Glycerin 4% Fatty Acids 37% Domestic 56% Exports 44% Fatty Alcohols 43% Source: Company For six months ending September 2011, the division has reported a healthy performance with 62% growth in exports revenues, 37% growth in overall revenues and 77% growth in PBIT. Although volume growth is expected to moderate going forward due to capacity constraints, we expect the division to report healthy performance for the year supported by strong realizations. Godrej Properties Limited (GPL) Godrej Properties Limited (GPL, GIL s stake 69.5%), the real estate arm of Godrej group, is one of the leading real estate companies in India with presence across 12 cities and relatively lower capital intensive business model. Unlike many other real estate companies in India, GPL follows a different business model for land acquisition, wherein instead of traditional land banking model, the company enters into Joint Development Agreements (JDAs) with land owners and acquires development rights in exchange for a pre-determined share in revenues, profits or area generated from the projects. Q2, FY12 Results GPL s reported 279% YoY revenue growth in Q2 FY12 to Rs 131 crore, on the back of revenue contribution from several new projects; however, QoQ revenue remained flat. On revenue front, residential project in Ahmedabad (Rs 61 crore) continues to be the major revenue contributor followed by Genesis (Rs 26 crore) in Gurgaon, Prakriti (Rs 23 crore) and Genesis (Rs 11 crore) in Kolkata. Relatively better revenue contribution from high margin residential project result in EBIDTA margin expansion by 755 bps to 22.98%. On YoY basis, net profits declined by 69% on account of lower other income. In Q2 FY12, GPL registered strong growth in booking, reporting 250% growth to Rs 214 crore as against Rs 61 crore in Q2 FY11. On QoQ basis, while underlying area sold has remained more or less same (0.57msf in Q1 FY12 as against 0.56 msf in Q1 FY12), booking amount has decline by 9% to Rs 214 crore on account of lower contribution from commercial properties. 3

4 Project Completion (%) Area (msf) ICRA Equity Research Service There is steady progress in execution across all major projects of GPL, with GGC-I, Prakriti-I, Crest and Eternia completed more than 50%. GPL s execution ramp-up in Q2 FY12 80% 70% 60% 50% 40% 30% 20% 10% 0% 44% 42% Frontier I Frontier II 71% Garden City I % Garden City II % Garden City III 73% 45% % 62% Prakriti I Prakriti II Crest Eternia Q4 FY11 Q1 FY12 Q2 FY12 Area Source: Company Vikhroli deal with Godrej & Boyce limits potential upside GPL has entered into an agreement with Godrej & Boyce (G&B) wherein GPL will receive 10% share of revenue as development manager fees and it will be responsible for conceptualization, design, sales & marketing of all future project at Vikhroli. All investment for construction and design will be borne by G&B, whereas sales & marketing expenses (<2% of revenue) will be incurred by GPL. While new arrangement will de-risk the business model and provides clarity on cash flows, the potential upside is limited as compared to previous agreements with Godrej group. Repositioning of Godrej Garden City (Ahmedabad) and Godrej Oasis (Hyderabad) project; focus on residential property development Godrej Garden City (Ahmedabad): On account of change in Gujarat government s policy, GGC project is now brought under Residential Township Policy (RTP) as against earlier Gujarat Integrated Township Policy (GITP). Due to change in policy, total developable area has declined from 40.4 msf to 24.0 msf, which will directly affect NAV of the project. However, relatively higher share of residential area (90% in RTP as against 65% in GITP) will result in faster turnaround of capital as substantial portion of revenue from residential property development is received upfront. Also, given better profitability in residential property and sluggish demand potential for commercial property in Tier II city, the repositioning of project could be value accretive for the company over longer term duration. Oasis (Hyderabad): Sensing oversupply in commercial property and relatively better demand prospect for residential property market, GPL has revised the development potential for Hyderabad land from 9.6 msf to 7.2 msf. Earlier, the company was planning to develop commercial property in entire area however with revision in plan; residential property will be developed over 4.9msf and commercial property over 2.3 msf. Deal with Jet Airway: GPL has signed JDA with Jet Airway to develop commercial property at Jet s 2.4 acre (~1msf) land at Bandra Kurla Complex (Mumbai). GPL will transfer Rs 500 crore debt obligation from Jet on its books, and the profit (post financing cost) will be shared 50:50 between both the partners. 4

5 Godrej Consumer Products Limited Godrej Consumer Products Limited (GCPL, GIL s stake 22.0%), a leading FMCG company in India, is the largest player in the domestic household insecticides & hair colour categories and the second largest player in the toilet soaps category. It has market leading brands, particularly in the economy and mid segments. Besides, GCPL has undertaken several overseas acquisitions to gain access to personal care, hair care and home care markets, mainly in Asia, Africa and Latin America. Q2, FY12 Results In Q2 FY12, GCPL s consolidated net sales grew by 23% YoY to Rs. 1,186 crore supported by strong growth across domestic (+24% YoY) and international businesses (+19% YoY on like-to-like basis). Besides, EBITDA margins for the company increased 326 bps QoQ to 18.0% in Q2 FY12, as effective price increases offset high raw material costs leading to gross margin expansion and further supported by rationalization in advertising spends and integration synergies derived by the company. However, consolidated PAT (after minority interest) declined 2.6% YoY to Rs crore in Q2 FY12, mainly on account of Rs crore mark to market forex losses on import payables (~Rs. 8.5 crore) and revaluation of foreign currency loans on overseas subsidiaries (~Rs. 8.0 crore). Domestic Business GCPL s domestic business witnessed healthy 24% YoY revenue growth to Rs 758 crore in Q2 FY12. The soaps category reported a strong ~32% revenue growth with volume growth of ~19% (against flat category volume growth) and ~11% increase in realizations (due to full impact of price recent increases). The strong top-line performance can be attributed to successful new variants and intensifying marketing and promotion focus. Besides, the gross margins for the category expanded due to better realizations and sequential drop in oil prices. Household insecticide category continued its strong performance with 29% revenue growth (more than twice the category growth rate) primarily driven by higher volumes. The company enjoys leadership positions across all formats of electrics, coils and aerosols and continues to gain market share due to focus on innovation and distribution synergies from GCPL-GHPL merger. The hair colours category launched Expert Care (herbal based formulation) and Expert Advanced (Progel formulation) during the quarter and reported relatively modest 15% revenue growth for the quarter. International Business International business too reported robust revenue growth (+24% YoY, +19% YoY organic) to Rs. 419 crore in Q2 FY12, with healthy growth across geographies (Indonesia: +27% YoY, Africa: +47% YoY, Latin America: +13% YoY, UK: +10% YoY). The African business completed acquisition of South African and Nigerian businesses of the Darling Group in Sep 2011 (Mozambique operations where acquired in Oct 2011). The EBITDA margins for the international business improved significantly by ~450 bps YoY to ~15.8% in Q2 FY12. Indonesia Business (Megasari contributing ~55% of international business) reported a strong 27% revenue growth aided by distribution expansion and healthy performance of the recently launched products like HIT magic paper, Stella bathroom, Stella car air fresheners and Mitu milk bath. The EBITDA margins increased 180 bps yoy driven by favourable category sales mix change, new product performance and prudent cost management. 5

6 Godrej Agrovet Limited (GAVL) GAVL (GIL s stake 75.2%) primarily deals in animal feeds, agri-inputs and poultry and also has interest in other businesses like oil palm plantations. In Q2 FY12, GAVL also forayed into seed business through its new arm Godrej Seeds & Genetics Limited. Q2, FY12 Results In Q2 FY12, GAVL registering robust 28% growth in sales to Rs 641 crore and 80% growth in PBIT to Rs 45 crore. The revenue growth was driven by performance from all segments mainly Animal Feed business (32% YoY growth), Oil Palm business (95% YoY growth) and Agri Input business (15% YoY growth). ACI Godrej continues to perform well and has reported 73% YoY revenue growth in Q2 FY12. The strong growth in Q2 FY12 was supported by 43% growth in feed volume along with healthy growth in realization of Day Old Chicks (DOCs). JV is in process of expanding its breeding farm and adding capacity for fish feed and broiler feed business, as a result of which it is expected to report robust growth in the near to medium term. Animal Feed Business: In Q2 FY12, Animal feed business which is the largest revenue driver for GAVL reported volume growth of 11% which when coupled with improved realization on the back new product launched resulted in strong YoY revenue growth of 32%. Volume growth was largely constrained by delay in new feed mill capacities, which the company is trying to rectify. Agri Input Business: GAVL s agri input business primarily deals in agricultural inputs such as herbicides and various other kinds of crop yield enhancing materials, and has a leadership position in plant growth regulators and soil conditioners in the domestic market. In Q2 FY12, GAVL s agri input business reported revenue of Rs 75crore, registering a healthy 15% YoY growth. During the quarter, on YoY basis, Hitweed registered volume growth of 29% whereas HBR sales volume grew by 47%. Oil Plantation Business: Revenue from oil plantation business registered strong growth of 95% despite softening of crude palm oil prices (CPO) as fresh fruit bunch (FFB) volumes from maturing plantation propels growth. 6

7 Valuations: GIL s FY13E earnings multiples are at ~10% discount to broader market indices like CNX Nifty index and at a ~15% premium to CNX Midcap index. However, GIL is an investment company with significant value inherent in its key investments - GCPL, GPL and GAVL - which are present across various business segments. As per our estimates, GIL s consolidated revenues are estimated to grow at a compounded annual growth rate (CAGR) of 15% during FY11- FY14E, while the consolidated EPS is estimated to grow at a CAGR of 36% during the same period. Considering our strong EPS growth expectations for the next three years, we find Godrej Industries to be still undervalued and retain our valuation grade of B assigned to the company on a grading scale of A to E, which indicates that the company is moderately undervalued on a relative basis. Table 2: GIL s Relative Valuations ICRA Estimates Godrej Industries Nifty Index* CNX 500 Index* CNX Midcap Index* FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E Price/Earnings EV/EBITDA Price /Sales Price /Book Value Price/Cash Flow Source: Bloomberg, ICRA Online Estimates * Bloomberg Consensus Estimates as on 14 th November,

8 : Company Profile GIL, part of the Godrej Group of companies, is a conglomerate with interests and leadership position in diverse business. The manufacturing facilities of GIL are located at Vikhroli (Mumbai) and Valia (Gujarat) for its chemicals business and at Wadala (Mumbai) for its edible oils business. GIL also generates income from its commercial premises in Vikhroli given on leave & license basis to various corporate. Over the years, GIL has evolved as a holding company for the Godrej Group with a large investment portfolio, comprising investments in subsidiaries, associates and joint ventures like Godrej Consumer Products (22.0% stake), Godrej Agrovet (75.2% stake), Godrej Properties (69.5% stake), Godrej Hershey (43.4% stake) and Godrej International (100% stake), which provide a steady source of dividend income and a strong upside potential given their presence in fast growing business segments. Grading Positives: 1) Significant value inherent to its investment portfolio 2) Risk mitigation through presence in diverse business segments 3) Leave & license and dividend income protect cash flows from the cyclicality associated with the chemicals business 4) Successful integration of recently acquired companies could result in significant synergy benefits for Godrej Consumer Products 5) Robust growth envisaged for Godrej properties aided by its low capital-intensive model and strong brand image 6) Strong growth potential in the oil palm plantation and agri-inputs segments of Godrej Agrovet Grading Sensitivities: 1) Cyclicality in the chemicals business, which may results in volatility in realisation and margins 2) Input cost inflation may not be neutralised by price increase in the FMCG business 3) Execution & market risks inherent to the real estate business; Income can be erratic/ difficult to predict 4) Dividend income, a steady source of cash flows in the past, may be affected by expansion plans of group companies. Corporate Structure: Oleo Chemicals, Estate Mgmt, Veg oils, Finance & Investment Godrej Properties Limited (69.5%) Godrej Agrovet Limited (75.2%) Godrej Consumer Products Limited (22.0%) Other Holdings Property development through various SPVs Animal Feed, Agri input, Poultry and Palm Oil Plantation FMCG Soaps, Hair Colour, household insecticides Major Subsidiaries Godrej Oil Palm 90% Cauvery Oil Pam 90% Golden Feeds Products 100% Godrej Gokarna Palm oil Ltd 97.3% Godrej Seeds & Genetics Ltd 100% JVs Godrej Tyson Foods 49% ACI Godrej Agrovet 50% Major Subsidiaries Megasari 100% Keyline 100% Rapidol 100% Kinky 100% Issue 100% Argencos 100% Tura 100% Godrej Hershey 43.4% Nature s Basket 100% Godrej International 100% 8

9 Annexure I: P&L Estimates (Consolidated) Rs. Crores FY10A FY11A FY12E FY13E FY14E Net sales 3, , , , ,559.3 Other related income Total net revenue 3, , , , ,636.6 EBITDA ,083.0 Depreciation EBIT Other Income Interest Expenses PBT ,141.5 Tax Expense Minority Interest PAT Number of shares (in Cr) EPS DPS CEPS Annexure II: Balance Sheet Estimates (Consolidated) Rs. Crores FY10A FY11A FY12E FY13E FY14E Net worth 1, , , , ,093.6 Total Debt 1, , , , ,207.9 Deferred Tax Liability Trade Creditors Other Current Liabilities and Provisions Total liabilities 4, , , , ,405.6 Net fixed assets , , , ,438.6 Capital Work in Progress Other Long-Term Investments 1, , , ,059.2 Cash and Bank Balances Receivables Inventories 1, , , , ,374.9 Loans & Advances Other Current Assets ,107.9 Total Assets 4, , , , ,

10 Annexure III: Cash Flow Estimates (Consolidated) Rs. Crores FY10A FY11A FY12E FY13E FY14E PAT Depreciation Change in net working capital (147.9) (426.7) (233.3) (258.2) (262.7) Cash flow from operating activities (78.2) Investments (311.4) (20.0) (20.0) (20.0) Capital expenditures (48.6) (237.4) (260.4) (171.5) (113.5) Cash flow from investing activities (360.0) (99.1) (280.4) (191.5) (133.5) Equity Raised / (Buyback) Loans Raised / (Repaid) (92.3) (8.1) (194.2) (362.2) Others (Including Extra-ordinaries) Dividend (49.5) (60.9) (115.6) (111.0) (164.1) Cash Flow from Financing activities (48.3) (176.9) (526.0) Cumulative cash flow (125.7) 0.0 (88.8) Opening Cash Balance Closing Cash Balance Annexure IV: Key Financial Ratios (Consolidated) Rs. Crores FY10A FY11A FY12E FY13E FY14E Growth indicators Sales Growth 1.6% 27.1% 18.3% 13.7% 12.4% EBITDA Growth -37.6% 286.7% 68.9% 67.8% 45.0% EPS Growth 81.0% 44.4% 26.1% 47.9% 36.1% Cash EPS Growth 59.0% 37.5% 25.2% 43.6% 33.0% Profitability indicators EBITDA Margin 2.0% 6.0% 8.6% 12.6% 16.3% EBIT Margin 3.5% 7.8% 12.0% 15.8% 19.3% PAT Margin 4.9% 5.7% 6.3% 9.2% 11.9% RoE 9.4% 11.4% 13.1% 18.6% 22.3% ROCE 10.9% 10.8% 14.7% 20.4% 26.0% Liquidity ratios Debtor (days) Creditors (days) Inventory (days) Net working Capital/Sales 40.8% 41.6% 39.6% 39.2% 38.9% Capitalization Ratios Total Debt/ Equity Interest coverage Total Debt/EBITDA Valuation Ratios Price/Sales Price/Earnings Price/Book Value EV/EBITDA

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