FINANCIAL ANALYSIS

2011
GODREJ INDUSTRIES LIMITED

Mitesh Ojha 10BSPHH010409

IBS Hyderabad
11/1/2011

Godrej Industries Limited is India's leading manufacturer of oleo chemicals and makes more than a hundred chemicals for use in over two dozen industries. It also manufactures edible oils, vanaspati and bakery fats. Besides, it operates in the real estate sector. GIL is a member of the Godrej Group, which was established in 1897 and has since grown into a US$1.875 billion conglomerate. The company was called Godrej Soaps Limited until March 31, 2001. Thereafter, the consumer products division got de-merged into Godrej Consumer Products Limited, and the residual Godrej Soaps became Godrej Industries Limited. This led to the formation of two separate corporate entities: Godrej consumer products and Godrej Industries. Besides its three businesses, Godrej Industries also runs four divisions Corporate Finance, Corporate HR, Corporate Audit and Assurance and Research Development. The Company celebrated its centenary in 1997. In 1897 a young man named Ardeshir Godrej gave up law and turned to lock making. Ardeshir went on to make safes and security equipment of the highest order, and then stunned the world by creating toilet soap from vegetable oil. His brother Pirojsha Godrej carried Ardeshir's dream forward, leading Godrej towards becoming a vibrant, multi-business enterprise.

CROSS SECTIONAL ANALYSIS:

Market Cap P/E Company (Rs. in Cr.) Godrej Inds. Pidilite Inds. Sterling Biotech BASF India 5380 30.8

P/BV

EV/EBIDTA ROCE (%)

RONW (%)

D/E

3.33

11.39

5.8

7.12

0.54

7,316

24.9

8.36

15.14

22.82

34.59

0.45

2,708

14.0

1.16

9.49

4.26

9.12

1.5

2498

27.9

2.97

29.55

14.78

14.78

0.0

Clariant 1,909 Chemicals Guj. Alkalies 921

17.1

5.49

6.73

31.44

31.68

0.01

6.4

0.66

12.37

5.89

6.82

0.23

FINANCIAL RATIOS: Time Series Analysis Mar 2010 Leverage Ratios Debt-Equity Ratio Long Term DebtEquity Ratio Owners fund as % of total source Fixed assets turnover ratio Liquidity Ratios Current Ratio 1.41 1.31 1.17 0.91 0.92 0.85 0.40 64.83 1.36 0.89 0.37 62.76 1.44 1.01 0.44 70.51 1.33 1.72 0.85 45.61 1.24 1.33 0.78 51.57 1.40 Mar 2009 Mar 2008 Mar 2007 Mar 2006

Current ratio (inc. marketable securities) 1.65 Quick ratio Inventory turnover ratio Interest Cover Ratio Profitability Ratios Operating Profit Margin (%) Profit Before Interest And Tax Margin (%) Gross Profit Margin (%) Cash Profit Margin (%) Adjusted Net Profit Margin (%) Return On Capital Employed (%) Return On Net Worth (%) Payout ratios Dividend payout ratio (net profit) Dividend payout ratio (cash profit) Earning retention ratio Cash earnings retention ratio 0.51 6.97 0.78

1.16 0.63 10.89 0.85

1.3 0.82 4.38 2.33

0.91 0.48 5.05 1.27

0.91 0.49 7.46 1.94

4.85 3.40 0.52 -0.78 -2.23 3.55 -4.30

5.14 3.76 0.72 0.68 -0.70 4.63 -1.61

9.44 7.74 6.13 4.65 2.94 12.05 9.17

5.62 3.86 2.57 2.35 0.59 8.14 3.35

6.28 4.48 3.97 3.22 1.42 11.16 8.13

68.65 50.82 559.09 -241.11

250.36 103.59 238.89 -2.11

43.91 35.43 9.25 39.27

44.15 33.60 -32.91 31.65

38.99 29.59 -26.63 37.68

Component ratios Material cost component (% earnings) 66.56 Selling cost Component 6.40 Exports as percent of total sales 36.79

68.38 7.02

55.74 6.77

72.02 6.08

68.48 5.60

39.89

41.71

34.02

20.39

Import comp. in raw mat. consumed 48.83 Long term assets / total Assets 0.76 Bonus component in equity capital (%) 30.13 Leverage Financial Leverage Operating Leverage

62.91 0.75

72.21 0.55

47.85 0.65

64.89 0.69

29.93

29.93

32.79

32.79

31.23858

35.6

254.529

-0.0092

0.81573

-0.73075

0.159

-621.27 -

Debtors Velocity (Days) 58 Creditors Velocity (Days) 67 Assets Utilisation Ratio Value Output/Total Assets Value Output/Gross Block of 0.44 of 1.42

55 92

43 78

36 74

42 70

0.45

0.55

0.59

0.61

1.45

1.47

1.49

1.55

Common Size Analysis 2010 Leverage Ratios Debt-Equity Ratio 63.90977 Long Term Debt-Equity Ratio 51.28205 Owners fund as % of total source 125.7126 121.6987 136.7268 88.44289 100 47.4359 56.41026 108.9744 100 66.91729 75.93985 129.3233 100 2009 2008 2007 2006

Fixed assets turnover ratio 97.14286 Liquidity Ratios Current Ratio 153.2609 Current ratio (inc. marketable securities) 181.3187 Quick ratio 104.0816 Inventory turnover ratio 93.43164 Interest Cover Ratio 40.20619 Profitability Ratios Operating Profit Margin (%) 77.2293 Profit Before Interest And Tax Margin (%) 75.89286 Gross Profit Margin (%) 13.09824 Cash Profit Margin (%) -24.2236 Adjusted Net Profit Margin (%) -157.042 Return On Capital Employed (%) 31.81004 41.48746 107.9749 72.93907 100 -49.2958 207.0423 41.5493 100 21.11801 144.4099 72.98137 100 18.13602 154.4081 64.73552 100 83.92857 172.7679 86.16071 100 81.84713 150.3185 89.49045 100 43.81443 120.1031 65.46392 100 145.9786 58.71314 67.69437 100 128.5714 167.3469 97.95918 100 127.4725 142.8571 100 100 142.3913 127.1739 98.91304 100 102.8571 95 88.57143 100

Return On Net Worth (%) -52.8905 Payout ratios Dividend payout ratio (net profit) 176.0708 Dividend payout ratio (cash profit) 171.7472 Earning retention ratio -2099.47 Cash earnings retention ratio -639.889 Component ratios Material cost component (% earnings) 97.19626 Selling cost Component 114.2857 Exports as percent of total sales 180.4316 Import comp. in raw mat. consumed 75.25042 Long term assets / total Assets 110.1449 Bonus component in equity capital (%) 91.88777 91.27783 91.27783 100 100 108.6957 79.71014 94.2029 100 96.94868 111.2806 73.74018 100 195.6351 204.5611 166.8465 100 125.3571 120.8929 108.5714 100 99.85397 81.39603 105.1694 100 -5.59979 104.2197 83.99682 100 -897.071 -34.7353 123.5824 100 350.0845 119.7364 113.5519 100 642.1134 112.6186 113.2342 100 -19.8032 112.7921 41.20541 100

Debtors Velocity (Days) 138.0952 Creditors Velocity (Days) 95.71429 Assets Utilisation Ratio Value of Output/Total Assets 72.13115 Value of Output/Gross Block 91.6129 INDUSTRY DATA Year No.Of Companies Key Ratios Debt-Equity Ratio 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 93.54839 94.83871 96.12903 100 73.77049 90.16393 96.72131 100 131.4286 111.4286 105.7143 100 130.9524 102.381 85.71429 100

13

10

11

11

11

11

12

12

10

1.78

1.19

1.39

1.51

1.56

1.89

2.32

2.17

1.73

Long Term DebtEquity Ratio 1.39 Current Ratio Turnover Ratios Fixed Assets Inventory Debtors Interest Ratio Cover 2.54 1.9 6.66 5.58 1.24

0.59 1.26

0.79 1.35

1.04 1.36

1.16 1.3

1.19 1.23

1.46 1.18

1.86 1.16

1.71 1.19

1.31 1.23

1.8 5.93 4.7

2.09 6.36 5.05

1.88 5.89 4.85

1.96 6.43 5.45

1.74 5.61 6.09

1.46 4.81 6.07

1.4 5.1 5.57

1.21 4.04 4.99

1.43 3.68 5.51

2.7

3.75

3.36

3.26

3.28

3.2

1.58

0.87

0.93

PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) ROCE (%)

10.49 14.58 7.81 7.41 5.92 3.24 11.8 10.2 8.73 5.96

13.82 11.33 10.8 9.53 7.04 16.44

12.81 9.99 9.83 8.53 5.72 14.44

10.84 8.23 8.32 6.76 4.15 13.05

12.49 9.47 9.6 8.15 5.13 13.75

13.37 9.95 10.26 8.63 5.21 12.72

10.99 7.1 6.49 4.71 0.82 9.41

10.3 5.69 3.79 2.14 -2.46 6.87 10.61

10.5 6.34 3.72 2.81 -1.35 8.4

12.42 13.44

RONW (%)

12.89 13.6

23.48

20.52

15.41

16.58

15.55

3.19

-5.73

Ratio Analysis: A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Liquidity Ratios: A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts Liquidity Ratios Current Ratio 2010 1.41 2009 1.31 2008 1.17 2007 0.91 2006 0.92

Current ratio (inc. marketable securities) 1.65 Quick ratio Inventory turnover ratio Interest Ratio Cover 0.51 6.97 0.78

1.16 0.63 10.89 0.85

1.3 0.82 4.38 2.33

0.91 0.48 5.05 1.27

0.91 0.49 7.46 1.94

As we can clearly see from the data the values for Liquidity ratios is constantly increasing Godrej is more liquid and thus able to pay debts in short run more easily. It is also better compared to industry average.

Leverage Ratios: A ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses Leverage Ratios Debt-Equity Ratio 2010 0.85 2009 0.89 0.37 2008 1.01 0.44 2007 1.72 0.85 2006 1.33 0.78

Long Term Debt0.40 Equity Ratio Owners fund as % of total source 64.83 Fixed assets turnover ratio 1.36

62.76 1.44

70.51 1.33

45.61 1.24

51.57 1.40

We can see from the ratios data that Godrejs D/E ratio is decreasing continuously (except 2007), as there is decrease in debt taken by company. Thus we can say that Godrej is trying to fulfill all its capital requirements by internal sources. Long term debt also has decreased, but increased in 2010. Also these ratios are increasing for industry. Profitability ratio: A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Profitability Ratios 2010 2009 5.14 3.76 0.72 0.68 -0.70 2008 9.44 7.74 6.13 4.65 2.94 2007 5.62 3.86 2.57 2.35 0.59 2006 6.28 4.48 3.97 3.22 1.42

Operating Profit 4.85 Margin (%) Profit Before Interest And Tax 3.40 Margin (%) Gross Profit 0.52 Margin (%) Cash Profit -0.78 Margin (%) Adjusted Net -2.23 Profit Margin (%)

Return On Capital Employed 3.55 (%) Return On Net -4.30 Worth (%)

4.63 -1.61

12.05 9.17

8.14 3.35

11.16 8.13

The operating profit margin gives the business owner a lot of important information about the firm's profitability, particularly with regard to cost control. It shows how much cash is thrown off after most of the expenses are met. A high operating profit margin means that the company has good cost control and/or that sales are increasing faster than costs, which is the optimal situation for the company. Operating profit margin for Godrej has been increasing till 2008, and then started decreasing, which is sign for company to control on costs. Payout Ratios: The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. Payout ratios 2010 2009 2008 2007 2006

Dividend payout ratio (net profit) 68.65 Dividend payout ratio (cash profit) 50.82 Earning retention ratio 559.09 Cash earnings retention ratio -241.11

250.36 103.59 238.89 -2.11

43.91 35.43 9.25 39.27

44.15 33.60 -32.91 31.65

38.99 29.59 -26.63 37.68

Dividend Payout ratio for Godrej is increasing, thus company is distributing more profits to shareholders. Also Earnings retention ratio has also been increasing thus making us believe that even as dividends are increasing, company profits are moving at a better pace. Component ratios Material component earnings) cost (% 66.56 68.38 7.02 55.74 6.77 72.02 6.08 68.48 5.60 2010 2009 2008 2007 2006

Selling cost Component 6.40 Exports as percent of total sales 36.79

39.89

41.71

20.39

Import comp. in raw mat. consumed 48.83 Long term assets / total Assets 0.76 Bonus component in equity capital (%) 30.13

62.91 0.75

72.21 0.55

47.85 0.65

64.89 0.69

29.93

29.93

32.79

32.79

Working Capital Management Average Raw Material Holding Average Finished Goods Held

2006 52.05 17.89

2007 56.38 18.80 49.20

2008 106.56 18.90 216.85

2009 17.99 11.70 83.11

2010 36.77 13.08 54.99

Number of Days In Working 9.22 Capital

2010 Debtors Velocity (Days) 58 Creditors Velocity (Days) 67

2009 55 92

2008 43 78

2007 36 74

2006 42 70

Average Raw material holding is decreasing continuously, increased in 2010, due to expansion of company. Average Finished Goods held, is decreasing continuously. But no. of days in working capital is increasing pointing out companys expansion policies. It also shows that company has liberal credit policies thus leading to more sales. Leverage: The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. Leverage Financial Leverage Operating Leverage 2010 31.23858 2009 35.6 2008 254.529 2007 -0.0092 2006 -

0.81573

-0.73075

0.159

-621.27 -

Asset Utilisation ratios indicate of how efficiently the firm utilizes its assets.

Assets Utilisation Ratio 2010 Value Output/Total Assets Value Output/Gross Block of 0.44 of 1.42

2009

2008

2007

2006

0.45

0.55

0.59

0.61

1.45

1.47

1.49

1.55

Godrej is not utilizing its assets properly as values for the ratios are decreasing continuously. 2010 Net Working Capital ( Incl. Def. Tax) 124.4 2009 2008 2007 2006

187.44

436.5

89.58

19.02

Net Working Capital for the firm is continuously reducing thus making us believe that company is trying to reduce working capital usage, also seen in reduction in working capital days. Any Dividend Models covered in course cannot be applied as Godrej doesnt follow many of the assumptions of any the models. So formulas used to find price are not applicable to Godrej. Security Risk Free Stock Market Godrej Industries Beta 0 1 1.741377 Rate of return 6.53 10 12.573

Expected return of share Re = Rf + (Rm Rf) Here, Beta of Godrej Industries Ltd (Sept 2006 to AUG 2010) is 1.741377 Risk free rate Rf = 6.53% Expected market return Rm = 10% Expected Return of Godrej Industries for a year is 6.53% + 1.741377 (10% 6.53%) = 12.573% (CAPM) (ASSUMPTION: Government 364 days T-bills rate as on 11-Jan-2011 is risk free rate) DIVIDEND DISCOUNT MODEL: YEAR DIVIDEND DIVIDEND (%) (in Rs.) Mar 2007 100.00 1

Mar 2008 Mar 2009 Mar 2010

125.00 125.00 150.00

1.25 1.25 1.50

Dividend
2 1.5 1 0.5 0 1 2 3 4 5

Dividend Log.

y = 0.3197ln(x) + 0.996

Face Value of Share: Rs. 1.00 Dividend Growth Rate = 14.47% Expected Dividend Next year = Rs. 1.509 Expected Market Return = 0.15 Estimated Stock price = Dividend Next Year/ (Expected Market Return Dividend Growth Rate) Thus, Estimated Stock Price = Rs 285.56 The component cost of capital is as follows: COST OF EQUITY: Ke = 12.573% (As per CAPM Model Explained above) COST OF DEBT: Kd = I(1-t) = 10.5% (t=30%)(I = 15%) Therefore, WACC for GIL as per Par Value is 11.85% and as per Market Value it is 12.45% SECTORAL STRUCTURE AND GODREJ GROWTH: GIL is a member of the Godrej Group, which was established in 1897 and has since grown into a US$1.875 billion conglomerate. LEADING IN CHEMICAL DIVISON: Godrej Industries Limited is India's leading manufacturer of oleo chemicals and makes more than a hundred chemicals for use in over two dozen industries. QUALITY: GIL has built a strong manufacturing base capable of delivering international quality products at competitive prices. EXPORT: The Companys products are exported to 40 countries in North and South America, Asia, Europe, Australia and Africa, and it leads the Indian market in the production of fatty acids, fatty alcohols and AOS. HIGHER RAW MATERIAL COSTS IMPACT PAT: Net sales (consolidated) for the full year (FY09) grew 16.3% YoY to Rs34.2bn However, PAT plunged 33.6% to Rs1.1bn (vs. estimate of Rs1.8bn) mainly due to increased raw material costs. STAKE MERGED WITH GCPL; SOTP VALUE REVISED: GIL's stake in Godrej Sara Lee is being merged with GODREJ SARA LEE Godrej Consumer Products (GCPL) at a 1:1 swap ratio. This would consolidate the FMCG businesses under GCPL. Further GIL's holding in GCPL would increase to 25%.

GODREJ PROPERTIES RESULTS IN-LINE: Godrej Properties reported revenues of Rs 2.5bn (excluding other income), Godrej project at Mahalaxmi in Mumbai and Bangalore projects. PAT stood at Rs750mn vs. our estimate of Rs583mn. CHEMICALS DIVISION DAMPENS RESULTS: The slump in the chemicals business, which contributes 22% to top line, impacted overall results. Fluctuations in commodity prices and currencies, curtailment of natural gas supplies to factories and sluggish business environment impacted the division on the cost and margin fronts. Godrej Consumer Products Limited has launched soap for the first time with a combination of strawberry, walnut and milk cream in a new variant of 'Godrej No.1' -'Strawberry and Walnut'. India ranks 12th in the world for the production of chemicals by volume & it contribute about 3% to the nation's GDP. The chemical industry has a turnover of ~USD 30 bn which accounts for ~ 14% in the general Industrial Index Production & 17.6% in the manufacturing sector. It contributes 1314% of total exports & 8-9% of the total imports of the country. India's FMCG sector is the 4th largest sector in the economy, with a total market size of more than USD 17.36 bn & is set it increase from USD 11.6 bn in 2003 to USD 33.4 bn in 2015. Consumer durable industry has recorded growth rates of 8.5% in 2005- 06 to 11.5% in 200607, with sales rocketed by 22% in value terms in 2007 & it is estimated that the industry would grow by 12% in 2007-08. Factor like per capita income have nearly doubled since the last few years from USD 450 in 2002-03 to ~ USD 800 in 2006-07, which has boosted the growth of the FMCG companies. The country saw a record high in the calendar year 2007, with the first 10 months launched 251 new products (233 variants & 28 brands) against 191 in the same period last year, which has acted as a key driver for this 700 bn industry. Indian Real Estate Sector which is soaring at a rate of 30% plus, has emerged as one of the most appealing investment areas for domestic as well as for foreign investor, as booming economy, favourable demographics & liberalized FDI are the key trigger point for it. Rising income levels of growing class, low interest rates, modern attitudes to home ownership & a change in the attitude among the young working populations boosted housing demand especially in urban & suburban areas. In real estate sector housing accounting for 80% is the biggest component and is growing at 35%. Balance consists of commercial segments office, shopping malls, hotels and hospitals. The domestic real estate market is in a high growth phase backed by rising income standards, easier access to housing loans and buoyant economic growth. The addressable market estimated at USD 12bn (FY05), is expected to post a 33% CAGR to exceed USD 50 bn by the year 2010. Any Investor or Stakeholder looking on the above facts/analysis can decide his/her preference for dealings or shareholdings with Godrej Industries Limited.