Godrej Industries Ltd - Mitesh Ojha - 10BSPHH010409

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FINANCIAL ANALYSIS

2011

Mitesh Ojha

10BSPHH010409

IBS Hyderabad

11/1/2011

GODREJ INDUSTRIES LIMITED



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 threebusinesses, 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:

Company

Market

Cap

(Rs. in

Cr.)

P/E P/BV EV/EBIDTA ROCE

(%)

RONW

(%)

D/E

Godrej

Inds.5380 30.8 3.33 11.39

5.87.12 0.54

Pidilite

Inds.7,316 24.9 8.36 15.14

22.8234.59 0.45

SterlingBiotech

2,708 14.0 1.16 9.494.26

9.12 1.5

BASF

India2498 27.9 2.97 29.55

14.7814.78 0.0

Clariant

Chemicals1,909 17.1 5.49 6.73

31.4431.68 0.01

Guj.

Alkalies921 6.4 0.66 12.37

5.896.82 0.23

FINANCIAL RATIOS: Time Series Analysis

Mar

2010Mar 2009 Mar 2008 Mar 2007 Mar 2006

Leverage Ratios

Debt-Equity

Ratio 0.85 0.89 1.01 1.72 1.33

Long Term Debt-Equity Ratio

0.40 0.37 0.44 0.85 0.78

Owners fund as% of total source 64.83 62.76 70.51 45.61 51.57

Fixed assetsturnover ratio 1.36 1.44 1.33 1.24 1.40

Liquidity Ratios

Current Ratio 1.41 1.31 1.17 0.91 0.92



Current ratio (inc.marketablesecurities) 1.65 1.16 1.3 0.91 0.91

Quick ratio 0.51 0.63 0.82 0.48 0.49

Inventoryturnover ratio 6.97 10.89 4.38 5.05 7.46

Interest CoverRatio

0.78 0.85 2.33 1.27 1.94

ProfitabilityRatios

Operating ProfitMargin (%)

4.85 5.14 9.44 5.62 6.28

Profit BeforeInterest And Tax

Margin (%)

3.40 3.76 7.74 3.86 4.48

Gross ProfitMargin (%)

0.52 0.72 6.13 2.57 3.97

Cash ProfitMargin (%)

-0.78 0.68 4.65 2.35 3.22

Adjusted NetProfit Margin (%)

-2.23 -0.70 2.94 0.59 1.42

Return OnCapital Employed(%)

3.55 4.63 12.05 8.14 11.16

Return On NetWorth (%) -4.30 -1.61 9.17 3.35 8.13

Payout ratios

Dividend payoutratio (net profit) 68.65 250.36 43.91 44.15 38.99

Dividend payoutratio (cash profit) 50.82 103.59 35.43 33.60 29.59

Earning retentionratio 559.09 238.89 9.25 -32.91 -26.63

Cash earningsretention ratio -241.11 -2.11 39.27 31.65 37.68

Component ratios

Material costcomponent (%earnings) 66.56 68.38 55.74 72.02 68.48

Selling costComponent 6.40 7.02 6.77 6.08 5.60

Exports aspercent of total

sales 36.79 39.89 41.71 34.02 20.39



Import comp. inraw mat.consumed 48.83 62.91 72.21 47.85 64.89

Long term assets / total Assets 0.76 0.75 0.55 0.65 0.69

Bonus componentin equity capital(%) 30.13 29.93 29.93 32.79 32.79

Leverage

FinancialLeverage 31.23858 35.6 254.529 -0.0092 -

OperatingLeverage 0.81573 -0.73075 0.159 -621.27

-Debtors Velocity(Days) 58 55 43 36 42

CreditorsVelocity (Days) 67 92 78 74 70

Assets UtilisationRatio

Value of Output/TotalAssets 0.44 0.45 0.55 0.59 0.61

Value of Output/GrossBlock 1.42 1.45 1.47 1.49 1.55

Common Size Analysis

2010 2009 2008 2007 2006

Leverage

Ratios

Debt-Equity

Ratio63.90977 66.91729 75.93985 129.3233 100

Long Term

Debt-Equity

Ratio51.28205 47.4359 56.41026 108.9744 100

Owners fund

as % of total

source125.7126 121.6987 136.7268 88.44289 100



Fixed assets

turnover ratio97.14286 102.8571 95 88.57143 100

Liquidity

Ratios

Current Ratio153.2609 142.3913 127.1739 98.91304 100

Current ratio

(inc.

marketable

securities)181.3187 127.4725 142.8571 100 100

Quick ratio104.0816 128.5714 167.3469 97.95918 100

Inventory

turnover ratio93.43164 145.9786 58.71314 67.69437 100

Interest Cover

Ratio40.20619 43.81443 120.1031 65.46392 100

Profitability

Ratios

Operating

Profit Margin

(%)77.2293 81.84713 150.3185 89.49045 100

Profit Before

Interest And

Tax Margin

(%)75.89286 83.92857 172.7679 86.16071 100

Gross Profit

Margin (%)13.09824 18.13602 154.4081 64.73552 100


-24.2236 21.11801 144.4099 72.98137 100

Adjusted Net

Profit Margin

(%)-157.042 -49.2958 207.0423 41.5493 100

Return On

Capital

Employed

(%) 31.81004 41.48746 107.9749 72.93907 100



Return On

Net Worth

(%)-52.8905 -19.8032 112.7921 41.20541 100

Payout ratios

Dividend

payout ratio

(net profit)176.0708 642.1134 112.6186 113.2342 100

Dividend

payout ratio

(cash profit)171.7472 350.0845 119.7364 113.5519 100

Earning

retention ratio-2099.47 -897.071 -34.7353 123.5824 100

Cash earnings

retention ratio-639.889 -5.59979 104.2197 83.99682 100

Component

ratios

Material cost

component

(% earnings)97.19626 99.85397 81.39603 105.1694 100

Selling cost

Component114.2857 125.3571 120.8929 108.5714 100

Exports as

percent of

total sales180.4316 195.6351 204.5611 166.8465 100

Import comp.

in raw mat.

consumed75.25042 96.94868 111.2806 73.74018 100

Long term

assets / total

Assets110.1449 108.6957 79.71014 94.2029 100

Bonus

component in

equity capital

(%)

91.88777 91.27783 91.27783 100 100



Debtors

Velocity

(Days)138.0952 130.9524 102.381 85.71429 100

Creditors

Velocity

(Days)95.71429 131.4286 111.4286 105.7143 100

Assets

Utilisation

Ratio

Value of

Output/Total

Assets

72.13115 73.77049 90.16393 96.72131 100Value of

Output/Gross

Block 91.6129 93.54839 94.83871 96.12903 100

INDUSTRY DATA

Year 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

No.Of Companies 13 9 10 11 11 11 11 12 12 10

Key Ratios

Debt-Equity

Ratio 1.78 1 1.19 1.39 1.51 1.56 1.89 2.32 2.17 1.73

Long Term Debt-

Equity Ratio 1.39 0.59 0.79 1.04 1.16 1.19 1.46 1.86 1.71 1.31

Current Ratio 1.24 1.26 1.35 1.36 1.3 1.23 1.18 1.16 1.19 1.23

Turnover Ratios

Fixed Assets 1.9 1.8 2.09 1.88 1.96 1.74 1.46 1.4 1.21 1.43

Inventory 6.66 5.93 6.36 5.89 6.43 5.61 4.81 5.1 4.04 3.68

Debtors 5.58 4.7 5.05 4.85 5.45 6.09 6.07 5.57 4.99 5.51

Interest Cover

Ratio 2.54 2.7 3.75 3.36 3.26 3.28 3.2 1.58 0.87 0.93



PBIDTM (%) 10.49 14.58 13.82 12.81 10.84 12.49 13.37 10.99 10.3 10.5

PBITM (%) 7.81 11.8 11.33 9.99 8.23 9.47 9.95 7.1 5.69 6.34

PBDTM (%) 7.41 10.2 10.8 9.83 8.32 9.6 10.26 6.49 3.79 3.72

CPM (%) 5.92 8.73 9.53 8.53 6.76 8.15 8.63 4.71 2.14 2.81

APATM (%) 3.24 5.96 7.04 5.72 4.15 5.13 5.21 0.82 -2.46 -1.35

ROCE (%) 12.42 13.44 16.44 14.44 13.05 13.75 12.72 9.41 6.87 8.4

RONW (%) 12.89 13.6 23.48 20.52 15.41 16.58 15.55 3.19

-

10.61 -5.73

Ratio Analysis:

A tool used by individuals to conduct a quantitative analysis of information in a company'sfinancial statements. Ratios are calculated from current year numbers and are then comparedto previous years, other companies, the industry, or even the economy to judge theperformance 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 2010 2009 2008 2007 2006

Current Ratio 1.41 1.31 1.17 0.91 0.92

Current ratio (inc.marketablesecurities) 1.65 1.16 1.3 0.91 0.91

Quick ratio 0.51 0.63 0.82 0.48 0.49

Inventoryturnover ratio 6.97 10.89 4.38 5.05 7.46

Interest CoverRatio

0.78 0.85 2.33 1.27 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 bettercompared 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 2010 2009 2008 2007 2006

Debt-EquityRatio

0.85 0.89 1.01 1.72 1.33

Long Term Debt-Equity Ratio

0.40 0.37 0.44 0.85 0.78

Owners fund as

% of total source 64.83 62.76 70.51 45.61 51.57

Fixed assetsturnover ratio 1.36 1.44 1.33 1.24 1.40

We can see from the ratios data that Godrej’s 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 togenerate 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.

ProfitabilityRatios

2010 2009 2008 2007 2006

Operating Profit

Margin (%)

4.85 5.14 9.44 5.62 6.28

Profit BeforeInterest And TaxMargin (%)

3.40 3.76 7.74 3.86 4.48

Gross ProfitMargin (%)

0.52 0.72 6.13 2.57 3.97


-0.78 0.68 4.65 2.35 3.22

Adjusted NetProfit Margin (%) -2.23 -0.70 2.94 0.59 1.42



Return OnCapital Employed(%)

3.55 4.63 12.05 8.14 11.16

Return On NetWorth (%)

-4.30 -1.61 9.17 3.35 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 dividendpayments. More mature companies tend to have a higher payout ratio.

Payout ratios 2010 2009 2008 2007 2006

Dividend payoutratio (net profit) 68.65 250.36 43.91 44.15 38.99

Dividend payoutratio (cash profit) 50.82 103.59 35.43 33.60 29.59

Earning retentionratio 559.09 238.89 9.25 -32.91 -26.63

Cash earningsretention ratio -241.11 -2.11 39.27 31.65 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 2010 2009 2008 2007 2006

Material costcomponent (%earnings) 66.56 68.38 55.74 72.02 68.48

Selling costComponent 6.40 7.02 6.77 6.08 5.60

Exports as

percent of totalsales 36.79 39.89 41.71 Y 20.39



Import comp. inraw mat.consumed 48.83 62.91 72.21 47.85 64.89

Long term assets

/ total Assets 0.76 0.75 0.55 0.65 0.69Bonus componentin equity capital(%) 30.13 29.93 29.93 32.79 32.79

Working Capital Management 2006 2007 2008 2009 2010

Average Raw Material Holding 52.05 56.38 106.56 17.99 36.77

Average Finished Goods Held 17.89 18.80 18.90 11.70 13.08

Number of Days In WorkingCapital

9.22 49.20 216.85 83.11 54.99

2010 2009 2008 2007 2006

Debtors Velocity(Days) 58 55 43 36 42

Creditors

Velocity (Days) 67 92 78 74 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 company’s 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.

Leverage2010 2009 2008 2007 2006

FinancialLeverage 31.23858 35.6 254.529 -0.0092 -

OperatingLeverage 0.81573 -0.73075 0.159 -621.27

-

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



Assets UtilisationRatio 2010 2009 2008 2007 2006

Value of Output/Total

Assets 0.44 0.45 0.55 0.59 0.61Value of Output/GrossBlock 1.42 1.45 1.47 1.49 1.55

Godrej is not utilizing its assets properly as values for the ratios are decreasing continuously.

2010 2009 2008 2007 2006

Net WorkingCapital ( Incl. Def.

Tax) 124.4 187.44 436.5 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 doesn’t follow many of

the assumptions of any the models. So formulas used to find price are not applicable to

Godrej.

Expected return of share Re = Rf + β (Rm – Rf)

Here, Beta of Godrej Industries Ltd (Sept – 2006 to AUG – 2010) is 1.741377Risk 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:

Security Beta Rate of return

Risk Free 0 6.53

Stock Market 1 10

Godrej Industries 1.741377 12.573

YEAR DIVIDEND(%)

DIVIDEND(in Rs.)

Mar 2007 100.00 1



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 hassince grown into a US$1.875 billion conglomerate.

LEADING IN CHEMICAL DIVISON: Godrej Industries Limited is India's leadingmanufacturer of oleo chemicals and makes more than a hundred chemicals for use in overtwo dozen industries.

QUALITY: GIL has built a strong manufacturing base capable of delivering internationalquality products at competitive prices.

EXPORT: The Company’s products are exported to 40 countries in North and SouthAmerica, Asia, Europe, Australia and Africa, and it leads the Indian market in the productionof fatty acids, fatty alcohols and AOS.

HIGHER RAW MATERIAL COSTS IMPACT PAT: Net sales (consolidated) for the fullyear (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 Leeis being merged with GODREJ SARA LEE Godrej Consumer Products (GCPL) at a 1:1 swapratio. This would consolidate the FMCG businesses under GCPL. Further GIL's holding in

GCPL would increase to 25%.

y = 0.3197ln(x) + 0.996

0

0.5

1

1.5

2

1 2 3 4 5

DividendDividend

Log.…

Mar 2008 125.00 1.25

Mar 2009 125.00 1.25

Mar 2010 150.00 1.50



GODREJ PROPERTIES RESULTS IN-LINE: Godrej Properties reported revenues of Rs2.5bn (excluding other income), Godrej project at Mahalaxmi in Mumbai and Bangaloreprojects. 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 pricesand currencies, curtailment of natural gas supplies to factories and sluggish businessenvironment impacted the division on the cost and margin fronts.

Godrej Consumer Products Limited has launched soap for the first time with a combinationof strawberry, walnut and milk cream in a new variant of 'Godrej No.1' -'Strawberry andWalnut'.India ranks 12th in the world for the production of chemicals by volume & it contribute about3% 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 13-14% 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 morethan 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 2006-07, with sales rocketed by 22% in value terms in 2007 & it is estimated that the industrywould grow by 12% in 2007-08.

Factor like per capita income have nearly doubled since the last few years from USD 450 in2002-03 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 launched251 new products (233 variants & 28 brands) against 191 in the same period last year, whichhas 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 themost appealing investment areas for domestic as well as for foreign investor, as boomingeconomy, 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 housingdemand especially in urban & suburban areas.

In real estate sector housing accounting for 80% is the biggest component and is growing at35%. 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 marketestimated at USD 12bn (FY05), is expected to post a 33% CAGR to exceed USD 50 bn bythe year 2010.

Any Investor or Stakeholder looking on the above facts/analysis can decide his/herpreference for dealings or shareholdings with Godrej Industries Limited.

Godrej Industries Ltd - Mitesh Ojha - 10BSPHH010409

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