Godrej Industries Equity Research

Date of Research – 27 January 2016

Price – Rs. 338.50

About the Company

Founded in 1897, Godrej Industries Limited (“Godrej Ind” or the “Company“) is part of the Godrej group and operates in the business of ‘Oleochemicals’ (chemicals derived from plant and animal fats, used in biodiesel production, detergents etc.), surfactants, finance & investments and real estate management. The Company has interests in property development, oil palm plantation, animal feeds and agro-products, poultry, personal care and household care, through its subsidiaries and associate companies.

Godrej Ind operates two plants, one at Valia in the state of Gujarat and a second at Vikhroli in suburban Mumbai. The Company is setting up one new manufacturing facility at Ambernath which is expected to be operational in Q3 FY 2013-14. The Company’s products are exported to 40 countries in North and South America, Asia, Europe, Australia and Africa. The Company was formerly known as Godrej Soaps Limited and changed its name to Godrej Industries Limited in April 2001.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations6,964.327,917.939,230.51 10,753.15 8,482.53 
Expenses6,586.947,460.238,748.89 10,122.36 7,843.90  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)377.38457.70481.62 630.79 638.63
Depreciation59.4570.4493.23 130.21 148.14  
Finance Costs110.34145.71191.29 273.19 399.52  
Other income52.82155.79129.28 177.10 175.84  
Exceptional items(165.41)(69.38)(192.41) (236.06) (22.76) 
PBT425.82466.72518.79 640.55 289.57  
Tax134.21171.20136.55 186.90 167.41  
Extraordinary items– – – 
PAT (before Minority Interest and share of Associates)291.61295.52382.24 453.65 122.16  
Profit/ (loss) attributable to Minority Interest76.24143.00186.35 234.52 201.63  
Share of profit / (loss) of Associates(175.81)(173.85)(206.58) (265.30) (336.66) 
Consolidated Profit / (Loss) for the year391.18326.37402.47 484.43 257.19  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio5.425.785.22 5.87 7.53 
Net Profit Margin Ratio4.193.734.14 4.22 1.44 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital31.7633.5233.1233.59 33.60 
Reserves & Surplus– 2,335.253,071.762,700.953,193.66 3,448.54 
Net worth (shareholders funds)2,367.013,105.282,734.073,227.25 3,482.14 
Minority Interest622.41757.431,051.901,148.53 1,486.22 
Long term borrowings– 1,187.68939.191,160.441,728.16 1,686.70 
Current liabilities– 4,108.894,610.076,150.207,309.20 8,878.78 
Other long term liabilities and provisions19.5815.3014.4916.53 50.78 
Deferred Tax Liabilities– 56.6670.1986.5672.96 116.06 
Total Liabilities8,362.239,497.4611,197.6613,502.63 15,700.68 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets864.561,380.991,671.512,094.70 2,623.43 
Noncurrent Investments969.881,187.441,553.642,004.13 2,301.40 
Current assets5,978.106,261.887,288.728,564.90 9,772.38 
Long term advances and other noncurrent assets3.71245.88237.64317.33 439.49 
Deferred Tax Assets3.534.262.154.48 – 
Goodwill on consolidation (net)542.45417.01444.00517.09 563.98 
Total assets8,362.239,497.4611,197.6613,502.63  15,700.68 

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE10.967.869.257.89 9.48 
ROE / RONW12.3212.6011.9411.84 13.03 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)6,964.327,917.939,230.51 10,753.15 8,482.53 
Growth (%)24.09 %13.69 %16.58 % 16.50 % (21.12 %) 
PAT (Rs. Cr.)391.18326.37382.24 453.65 122.16  
Growth (%)34.14 %(16.57 %)17.12 % 18.68 % (73.07 %) 
Earnings Per Share – Basic (Rs. )11.989.7312.00 14.42 7.13 
Earning Per Share – Diluted (Rs. )11.969.7211.98 14.41 7.12 
Price to Earnings24.6730.3923.97 24.60 89.90 

Dividend History

The Company has maintained an average dividend yield of 0.80 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Godrej Ind’s average current ratio over the last 5 financial years has been 1.38 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Godrej Ind’s average long term debt to equity ratio over the last 5 financial years has been 0.28 times which indicates that the Company operates with low level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Godrej Ind’s average interest coverage ratio over the last 5 financial years has been 2.23 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Godrej Ind reported a promoter holding of 74.77 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 16.71 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.