Retail Research 1 Management Interaction Note October 26, 2010 HDFCSec Scrip ID Industry CMP Recommended Action Averaging Band Target Time Horizon GODINDEQNR Diversified Rs. 219.15 Gradual buy at CMP and add at dips Rs. 196 – Rs. 205 Rs. 265 1-2 quarters An integrated player in the Agri chain that could benefit from rural growth* *Apart from holding large stakes in Godrej Consumer Products Ltd (GCPL) and Godrej Properties Ltd (GPL) Company Background The Godrej group, a multi-billion dollar conglomerate largely owned by the Godrej family, established Godrej Industries Ltd (GIL). It was called Godrej Soaps until March 2001 where after the consumer products division was demerged to form Godrej Consumer Products Ltd (GCPL) while the residual business was named Godrej Industries. GIL has a diversified business model with presence in chemicals, animal feed, agri inputs, oil palm, packaged foods, consumer products, confectionery items, niche food retail, and real estate management, either directly or through its subsidiaries. Its achievements include being the leader in the oleochemicals and surfactants, animal feed, oil palm plantation, soymilk and processed chicken businesses and being the third largest sugar confectioner in the country. It holds stake in two listed group entities – 23.4% in Godrej Consumer Products Ltd and 69.4% in Godrej Properties Ltd. Godrej Industries Ltd. (GIL) CMP: Rs. 219.15 Existing Integration (not necessarily captively used) Possibility of Integration Oleo Chemicals FMCG products Value added Chemicals Food & Beverages Retail (Natures Basket) Veg Oils Crude Palm Oil Sold Oil Palm fruit bunch Agri Inputs (pesticides, plant growth promoters etc) Sold for other plants/crops Residue Animal Feed Aqua Feed Poultry Feed Cattle Feed Processed Poultry Poultry Other Raw Material
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Management Interaction Note October 26, 2010
HDFCSec Scrip ID Industry CMP
Recommended Action Averaging Band Target Time Horizon
GODINDEQNR Diversified Rs. 219.15 Gradual buy at CMP
and add at dips Rs. 196 – Rs. 205 Rs. 265 1-2 quarters
An integrated player in the Agri chain that could benefit from rural growth*
*Apart from holding large stakes in Godrej Consumer Products Ltd (GCPL) and Godrej Properties Ltd (GPL) Company Background The Godrej group, a multi-billion dollar conglomerate largely owned by the Godrej family, established Godrej Industries Ltd (GIL). It was called Godrej Soaps until March 2001 where after the consumer products division was demerged to form Godrej Consumer Products Ltd (GCPL) while the residual business was named Godrej Industries. GIL has a diversified business model with presence in chemicals, animal feed, agri inputs, oil palm, packaged foods, consumer products, confectionery items, niche food retail, and real estate management, either directly or through its subsidiaries. Its achievements include being the leader in the oleochemicals and surfactants, animal feed, oil palm plantation, soymilk and processed chicken businesses and being the third largest sugar confectioner in the country. It holds stake in two listed group entities – 23.4% in Godrej Consumer Products Ltd and 69.4% in Godrej Properties Ltd.
Godrej Industries Ltd. (GIL) CMP: Rs. 219.15
Existing Integration (not necessarily captively used) Possibility of Integration
Business Structure GIL’s business structure can be described in the following manner: Shareholding Pattern
Particulars No of Shares (In lakhs) % Holding 30/09/2010 30/09/2010 30/06/2010 31/03/2010 31/12/2009 30/09/2009
Promoters 2512.3 79.1 79.1 79.1 79.1 79.1Foreign Institutions & Individuals 84.6 3.9 2.7 2.6 2.7 2.4Indian Institutions 138.0 4.1 4.4 4.3 4.5 4.7Non Promoter Corporate Holding 124.9 3.8 3.9 3.7 3.9 3.7Public & Others 316.4 9.1 10.0 10.3 9.9 10.2Total 3176.3 100.0 100.0 100.0 100.0 100.0 Among institutions, State Bank of India Equity holds 2.51% as on September 30, 2010 down from 4.32% as on September 30, 2009 and IL&FS Trust Company Ltd holds 3.15% as on September 30, 2010 up from 3.14% as on September 30, 2009. FIIs hold 3.61% stake in the company.
Total 816.24 816.37(Source: Company Reports, HDFC Sec Research)
Background – GIL is considered the pioneer and is the leading manufacturer of Oleo Chemicals and Alpha Olefin Sulphonate (AOS). It is a major player in many industrial chemicals in India such as Fatty Alcohols, Fatty Acids, Glycerin (by product) and surfactants such as Sodium Lauryl Sulphate and Sodium Lauryl Ether Sulphate. Close to 60% of the chemicals produced are sold in India while the rest are exported to 62 countries across 6 continents. Fatty acids, fatty alcohols and surfactants contribute ~40%, ~35% and ~20% of the Chemical business revenue respectively. Fatty acids comprise stearic acid, oleic acid and specialty fatty acids. The segment grew 9% in value terms and 8% in volume terms in FY10. Fatty alcohols grew 3% in volume but fall in commodity prices resulted in 11% fall in revenue in FY10. Just-in-time supply to Europe helped improve the cost structure in FY10. Surfactants experienced a 41% value growth in FY10 due to higher amount of forward integration. Glycerin contributed 4% of the division turnover in FY10 but revenues fell 36% from the previous year due to value de-growth. Q1FY11 saw a ~21.7% increase in revenue and ~38% increase in PBIT from the chemical business. International prices and demand have shown recent improvement and the competitive advantage of the company producing higher chain alcohols should shield it from the threat of oversupply in the market. International penetration continues via R&D approvals from multinationals.
Packaging & other 36.92 37.87 (Source: Company Reports, HDFC Sec Research)
Uses – Fatty Acids are commonly used in cosmetics (shaving cream, facial cream etc), rubber processing (tyre) and PVC processing. C16-C18 alcohols are used in cosmetics and industrial applications, C12-C14 in personal care and detergents and C22 in personal care and other specialty products. Glycerin is commonly used in humectants, cosmetics and pharmaceuticals and surfactants are used in detergents, oil drilling, shampoo, cosmetics and toothpaste. The products provided by the company are commonly used in cosmetics, tyres, detergents, pharmaceuticals, cigarettes and toothpaste among the broad variety of their applications. Clientele – Major clients include large FMCG MNCs and specialty chemical manufacturers. More than half the sales are made to OEMs and the remaining through distributors. GIL has distributors in key areas to cater to the needs of the smaller customers on a pan India basis. Industry – • The global oleochemical industry is witnessing a migration of global capacity from developed countries to developing
countries. This rapidly growing oleochemical industry in East and South Asia faces potential trade barriers to end product exports as a result of tariff and non-tariff barriers in importing countries.
• In recent years, global fatty acid consumption has approached 5 million tonnes per annum, fatty alcohol consumption has approached around 2 million tonnes, and glycerin consumption is closer to 1 million tonnes.
• Geographically, consumption is still dominated by the developed countries, whereas output is increasingly dominated by Asia, in particular Southeast Asia.
• Glycerin, though, is an exception, because the large bio-diesel industry has kept Europe as the largest region for glycerin production resulting in the fall in glycerin prices around the world, even as bio diesel production is ramped up.
Plants – • Presently, fatty acids, glycerin and surfactants are manufactured at two plants (Vikhroli and Valia) and fatty alcohol is
manufactured only at Valia. • A new oleo chemical plant is under construction at Ambernath at a cost of ~ Rs. 230 cr and is expected to be operational
by FY13. The new plant will not manufacture fatty alcohols and will increase oleo chemical capacity by ~80,000 tonnes. • The company is also in the process of adding manufacturing capacities for specialty fatty acids at Valia. • The uptrend in international prices and demand provide a bright future along with the increasing profitability of specialty
derivative products of fatty acids and alcohols due to change in product mix. Competition – • GIL’s competitors include VVF Ltd and Jocil Ltd, however their magnitudes of operation are not comparable. VVF reported
net income, operating profit and net profit of Rs. 1317.6 cr, Rs. 21.4 cr and -146.7 cr respectively in FY09. Jocil reported net income, operating profit and net profit of Rs. 296.35 cr, Rs. 37.73 cr and Rs. 21.37 cr respectively in FY10 and Rs. 186.02 cr Rs. 20.78 cr and Rs. 9.69 cr respectively in FY09.
• VVF and Jocil’s product profiles include (in addition to fatty acids and its derivative products) personal care products and contract manufacturing for other FMCG companies, which is different from that of GIL’s chemical segment.
• GIL dominates the industry with ~35-40% domestic market share of fatty acids, ~8-10% global market share of fatty alcohols and are the pioneers of surfactants in India. Most of the fatty alcohol produced is exported due to better prices and large global demand.
• GIL’s positioning and presence across a wide range of products and markets forms the backbone of the chemicals business while its focus on specialty acids and alcohols, improving relationships with MNC clients to be their global supplier and improvement in domestic and international demand will lead the growth over the next few years.
Triggers – 1. Recovery in International Chemical prices: Chemical prices, after taking a severe hit through FY09 and H1FY10, are on
their way up. Unit values for all products in FY10 were relatively flat with a negative bias. The continued recovery in prices in FY11 will improve realizations and revenue. One other reason for this is that a lot of plants globally are shutdown due to technical reasons, low prices seen in FY09, fire etc and could take time to resume production.
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2. New plant at Ambernath: The Company is in the process of building a new oleochemical plant at Ambernath, Maharashtra. The ~Rs. 230 cr investment will have a capacity of ~80,000 MT, the split of which will be decided later. The plant should be operational by FY13. Additionally GIL is in the process of adding capacity for specialty fatty acids at Valia, which should be completed within a year. Our valuation of the chemical business does not account for the increase in capacities due to the uncertainty of the time frame and hence any preponement could only add value to the firm.
3. Concentration on specialty derivative alcohols to improve profitability: Fatty alcohols have shown an exciting increase in price internationally, especially for higher derivatives. GIL invests intensively in R&D and now has numerous specialty derivative products under its belt. Focusing on these products will lead to greater realizations and profit margins. Prices of some fatty alcohols have reached record highs on escalating feedstock prices and supply is not catching up with demand. Fatty alcohols are used in a variety of industrial applications including detergents/surfactants, and to form ethoxylators to manufacture alcohol ethoxylates used in a variety of lubricating/cleaning industries. Some of the buyers may consider using synthetic alcohols, as well as other chemical alternatives, such as linear alkyl benzene sulfonic (LABS) acid to replace palm oil-based fatty alcohols in the detergents and surfactants industry but prices of these are also buoyant.
Source: ICIS Pricing
4. Increasing popularity of Fatty Alcohols: High petroleum prices and growing supply of Asian palm oil has driven the replacement of petrochemical-based alcohols with oleochemical-derived ones for several years. Alcohol is a major raw material for surfactant manufacture. Oleo alcohols accounted for 60% of the global detergent alcohols market five years ago however today it is almost 70% and the trend continues with planned investments in oleo alcohol production capacity. Continued long supply of lauryl, cetyl and stearyl alcohols is also driving their increased use in personal care formulations.
Concerns – 1. Highly commoditized business increases volatility in realization and margins: Chemicals, like any other commodity, have
high volatility in prices due to cyclicality. 2. New competition in specialty derivatives could impact margins: Other chemical firms could observe the advantages of
specialty derivatives and start manufacturing some of them to surf the wave of high prices resulting in increased competition for GIL.
3. Declining Glycerin prices: Glycerin prices fell ~33% from Rs. 54,269/MT in FY09 to Rs. 35,003/MT in FY10 and continue to fall in FY11. This resulted in a drop in Glycerin contribution to the company from Rs. 48.3 cr to Rs. 31.9 cr. However, glycerin is a byproduct in GIL chemical manufacturing process and any income from it is supplementary. Since the company does not actively manufacture the product, it does not monitor or hedge against price changes.
(Company Reports, HDFC Sec Research) Estate Management: Background – GIL’s real estate management can broadly be split into rent income and development income. GIL currently operates on land taken on rent from Godrej & Boyce. Close to 3500 acre land bank is owned by Godrej and Boyce Manufacturing Company Ltd (GBMCL) at Vikhroli, a central suburb of Mumbai. ~2000 acres of this massive property is covered with mangroves but the remaining ~1500 acres has tremendous development potential and is currently used as factories/under development/commercial premises/vacant. Over the years we expect GIL to shift it’s manufacturing facilities from Vikhroli to extended suburbs of the city and use the land taken on lease from Godrej & Boyce for further development. This will unlock further value going ahead, but the timing thereof is uncertain. Vikhroli is well connected to all parts of the city and is witnessing heightened activity on both, the commercial and residential fronts. Vikhroli property value is expected to further appreciate with developments such as the airport at Navi Mumbai. The chemical division of GIL, offices of GIL, offices of its subsidiaries are currently located on the land at Vikhroli. On a standalone basis GIL also leases part of the commercial offices built by it on Vikhroli land to major corporations for commercial use. ~0.4 mn sq ft commercial land at Vikhroli has been leased to various companies including CapGemini and Accenture. JV with GPL – • The silver lining in GIL’s Estate Management business is its recent 40:60 joint venture with Godrej Properties Ltd (GPL) to
develop ~36 acres of its enormous Vikhroli land bank. The JV will pay GBMCL nominal rent (as the industrial land is owned by GBMCL) and will sell residential properties and receive rent from the end users of retail/commercial premises.
• The 40:60 LLP will provide GIL with 81.6% of the profits (40% directly through the LLP and 41.6% indirectly through its 69.4% shareholding in GPL) while all capital investment will be done solely by GPL.
• The JV has tentative plans to construct ~3 mn sq ft for commercial, residential and retail & hospitality purposes on its allotted ~36 acres of land. ~50% (~1.5 mn sq ft) will be used for high-end commercial purposes, ~20% (~0.6 mn sq ft) for residential purposes and ~30% (~0.9 mn sq ft) for retail and hospitality purposes. Of the 1.5 mn sq ft commercial space, the company has engaged ~0.3 mn sq ft for the use of Godrej Group companies while the remaining will be leased to third parties.
Wadala property – • GIL has recently renewed its 30-year lease with the Mumbai Port Trust (MPT) for land (~7 acres) that currently is being
used for its Wadala vegetable oils processing unit. • Wadala is a centrally located Mumbai suburb with prime property value in the commercial and residential spaces.
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• GIL is in the process of obtaining state and central approvals to develop this land. Even though this process could take time, we believe it has immense value and will contribute to the estate business generously.
• The processing facility (which currently runs at a loss due to high cost and low capacity utilization) could be relocated or discontinued altogether.
Godrej Properties Ltd (GPL) – GIL holds 69.4% stake in Godrej Properties Ltd since it’s listing in December 2009 for a cost of Rs. 185.3 cr. • On a consolidated basis, GIL’s Estate Management segment includes revenues generated through its 69.4%
shareholding in GPL. GPL is the real estate arm of the Godrej Group established in 1990 in Mumbai. It is one amongst 16 founding projects of the Climate Positive Development Program, a Clinton Climate Initiative (CCI) program that will support the development of large-scale urban projects that demonstrate cities can grow in ways that are “Climate Positive.”
• With projects in 11 cities across the country the planned upcoming development presently stands at ~83.5 mn sq ft. • The company has its presence in Mumbai, Pune, Bangaluru, Kolkata and Hyderabad and is at various stages of
development at Mangalore, Chennai, Ahmedabad, Chandigarh, Kochi and Greater Noida. GPL usually enters into JDAs with landowners or Godrej Group companies to acquire development rights in exchange for revenue/profits. It then enters into outsourcing arrangements with top-of-the-line service providers such as L&T and Gammon, ensuring quality and timeliness.
• GPL’s current project pipeline consists of ~79% residential and 21% commercial development projects. Residential projects include Godrej Woodman Estate (Bangaluru), Godrej Avalon (Mangalore), Godrej Pine (Thane), Godrej Riverside (Kalyan), Godrej Edenwoods (Thane), Godrej Prakriti (Kolkata) and Godrej Garden City (Ahmedabad). The recent JV with Front Home Development for a 9-acre plot in Gurgaon’s sector 80 with salable area of 1.05 mn sq ft has forayed GPL’s entry into the National Capital Region (NCR). Commercial projects include Godrej Waterside (Kolkata), Godrej Eternia (Chandigarh), Godrej Coliseum (Mumbai), Godrej Eternia (Pune) and Godrej Genesis (Kolkata).
Industry – The domestic real estate market in India is estimated at $15 bn with Mumbai, NCR, Pune, Hyderabad, Bangaluru, Kolkata and Chennai accounting for over 65% of the pan-India demand over 2010-2012 with aggregate demand of ~550 mn sq ft. The residential, commercial, retail and hospitality segments account for 60%, 23%, 9% and 8% of the aggregate demand.
Pan-India Demand Projection
0
50
100
150
200
250
CY10E CY11E CY12E
(mn
sq ft
)
Commercial Residential Retail Hospitality
Demand Projection for 7 Major Cities
0
50
100
150
200
CY10E CY11E CY12E
(mn
sq ft
)
Commercial Residential Retail Hospitality
Source: Cushman & Wakefield Triggers – 1. Easy access to land: GBMCL, the holding company for GIL, has ~3500 acres of land in Vikhroli (Mumbai). Even though all
related party transactions are done at arms length, the industrial land can be taken on lease at fairly cheap prices by GIL. Currently 36 acres of land taken on lease from GBML by GIL is being considered for development in JV with Godrej Properties. The vast land has enormous potential for development in the residential, commercial and retail & hospitality segments. Moreover, GIL has its own land or direct leases such as that with the MPT for the Wadala facility. GPL too has a land bank of ~82 mn sq ft and being a group company can obtain and develop the GBMCL land with greater ease.
2. 40:60 JV with GPL to generate significant cash flows: The GIL-GPL 40:60 JV at Vikhroli to develop ~36 acres will benefit GIL in 2 ways, first, it will get 40% of the profits through the JV and second, it will earn indirect profits from its 69.4% holding in GPL. Totally GIL will earn ~81.6% of the profits of the development. We expect returns to start from FY13. Assigning more land for commercial purposes increases the expected revenue.
3. GPL’s MOU with Godrej Agrovet Ltd (GAVL) to positively influence GIL: GPL and GAVL have signed a MoU to develop ~100 acres of land near Bangalore. The land, currently owned by GAVL, will be transformed to a plush residential property. With a stake in both, GAVL and GPL, GIL is a derived beneficiary of the deal.
4. GPL trigger – GPL is the flagship property development company of the Godrej group and is the natural choice to undertake development activity on lands owned/leased by the group. Revenue visibility is enormous, group reputation
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helps in sales and risk is limited. The dexterous JDA model approach by GPL proves to be very efficient as risk is distributed among the financial investors. Its JVs with GIL, HDFC PMS (49% in Godrej Estate Developers Pvt Ltd and Godrej Sea View Properties Pvt Ltd), etc show the firm’s interest in reducing financial exposure. There is an upside potential possible on account of its shareholding in GPL. The current market price of GPL (Rs. 722.55) is based on known/announced development projects and does not take into account future probable announcements.
5. Resurgence of the real estate industry: Recent demand in the residential segment has outrun the supply. The housing shortage was recorded at 19.8 mn units in 2005 making housing the largest segment of the real estate industry in India. Improving economy, rapid urbanization, rising disposable income, increasing size of middle class, nuclearization, availability of housing loans, government incentives and sense of ownership are a few factors influencing the high residential demand. Banking, financial services and insurance (BFSI) and IT companies account for majority of the commercial space demand. These industries are on an upmove and require further space to expand operations. Rising disposable income is the key factor influencing the increase in retail land demand. ~330 malls are expected to be constructed in the next 2-3 years in tier I and tier II cities amounting to ~100 mn sq ft. Organized retail has grown significantly over the past decade and is expected to grow further.
Growth in Organized Retail
0
50000
100000
150000
200000
250000
FY08 FY10 (E) FY13 (E)
(Rs
Cr)
0%
2%
4%
6%
8%
Organized Retail % of total retail
Source: Industry, HDFC Sec Research Concerns – 1. Cyclical nature of Real Estate: The real estate industry is highly sensitive to the economy of the country. During booms
prices skyrocket due to the availability of funds amongst buyers and low interest rates offered by banks. In periods of recession prices plummet due to conservation of funds for greater priorities. The Indian economy has outperformed the global economy in the past year and a positive outlook of the future has increased real estate investment, so much so that oversupply could now be a hindrance in realizations. This cyclical nature of the industry not only affects GPL and the development contracts of GIL but also the rent received as lower valued land demands lower rent.
2. Dependence on third party companies/contractors: GPL follows the JDA model for most of its projects making it dependable on an outside source. The company also outsources its construction work on a contract exposing it to time, quality and cost risk.
3. Vikhroli land development to slowly diminish rent income earned by GIL currently: The development JV for Vikhroli will require relocation of numerous businesses that currently rent office space from GIL. The development will also cause property value in the area to rise, increasing rent, thereby forcing current tenants to move to cheaper locations instead of renewing their leases. This could impact the rent income of GIL, but the revenues from the JV will more than compensate this.
4. Regulations/approvals/oversupply: Delays/denial in approvals/adverse change in regulations could impact revenues and profits. All the development at Vikhroli could also lead to oversupply in the area resulting in drop of realizations/difficulty to market beyond a point.
(Source: Company Reports, HDFC Sec Research) Finance & Investments: The Company earns healthy dividend and realizes robust capital gains every year from its investments. GIL is the holding company for numerous successful businesses including but not limited to Godrej Agrovet Ltd, Godrej Properties Ltd and Godrej Consumer Products Ltd. GIL acquired 100% stake in Nature’s Basket, the company’s retail grocery store and sold its entire stake in Compass BPO Ltd in FY10. The company also holds 100% stake in Godrej International Ltd and Ensemble Holdings and Finance Ltd. Godrej Hygiene Care Ltd (GHCL), formerly a 100% subsidiary of GIL was merged with GCPL in FY10. Mergers, acquisitions and restructuring are an ongoing process through GIL and its subsidiaries. With its active investment moderation and optimum efficiency utilization by restructuring and regrouping its companies, GIL increases the value of its investments every year. Some large Standalone Investments Face Value FY09 FY10 CMP Current Value Quantity Value Quantity Value (26/10/10) Trade Investments Rs. Cr Rs. Cr Rs. Rs. Cr Wadala Commodities Ltd (8% redeemable cumulative preference, 2012 10.0 440000 4.5 440000 4.5Other Investments Equity Shares: Quoted: Godrej Consumer Products Ltd 1.0 55369989 492.2 72444620 513.7 404.7 2931.8
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Unquoted: Avesthagen Ltd (likely to get listed soon) 10.0 195577 11.4 202203 12.4 Godrej Hershey Ltd 10.0 32587046 177.4 32587046 177.4 Common Stock/Membership Units: Quoted: Cbay Systems Holdings Ltd., BVI $0.1 8182148 38.1 8182148 38.1 140 GBX 80.2*Investment in Subsidiaries Equity Shares: Quoted: Godrej Properties Ltd 10.0 48495209 185.3 48495209 185.3 722.6 3504.0Unquoted: Ensemble Holdings & Finance Ltd 10.0 3774160 13.2 3774160 13.2 Godrej Agrovet Ltd 10.0 9112956 163.2 9112956 163.2 Godrej International Ltd 1.0 GBP 2355000 16.5 2355000 16.5 Natures Basket Ltd 10.0 0 0.0 7050000 5.0 *Taking 1 GBP = Rs. 70.0 (Source: Company Reports, HDFC Sec Research) Godrej Consumer Products Ltd (GCPL) GIL holds 23.4% stake in Godrej Consumer Products Ltd at a cost of Rs. 513.7 cr. Background – GCPL (an associate of GIL) is one of the largest players in the Indian FMCG market with a huge portfolio of products in the form of personal, hair, and household & fabric care segments manufactured at state-of-the-art facilities at Malanpur (Madhya Pradesh), Guwahati (Assam) and Thana (Himachal Pradesh), Katha (Himachal Pradesh) and Sikkim. Its major brands include include Cinthol, No. 1, Expert and Ezee, common names in many Indian households. With the acquisition of Keyline Brands in the United Kingdom, Rapidol and Kinky Group, South Africa and Godrej Global Mideast FZE GCPL now owns international brands and trademarks in Europe, Australia, Canada, Africa and the Middle East. With its recent acquisition of the remaining 51% of Godrej Sara Lee (now known as Godrej Household Products Ltd (GHPL)), the Godrej group is now the largest homegrown Home and Personal Care business India and second largest Household Insecticides business in Asia. GHPL manufactures popular brands such as Good Knight, HIT, Jet, Ambipur, Brylcreem and Kiwi with dominant presence in the air care, shoe care and male hair care markets. Godrej Hygiene Care Ltd and GHPL are wholly owned subsidiaries of GCPL. The company has entered agreements to acquire 100% stakes in the Issue Group (leaders in hair color market in Peru, Uruguay, Paraguay, Argentina and emerging in Brazil) and Argenos SA (an Argentine hair care company). 29% of the consolidated business comes from international operations.
Sales Mix (Standalone)
Soaps65%
Hair Colour22%
Liquid Detergents4%
Toiletries7%
By-products2%
Source: Company Reports, HDFC Sec Research Triggers – 1. Soaps continue to remain the largest contributor to the domestic business: The segment has reported a CAGR growth of
20.2% over FY07-FY10, thus outperforming the industry growth. With the launch of variants under the segment at attractive price points, the company has been able to improve the category’s market share consistently from 9.1% in FY07 to 10.3% in FY10.
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Soaps Market Share Trend
9.1%
9.7%
9.4%
10.3%
8.4%8.6%8.8%9.0%9.2%9.4%9.6%9.8%
10.0%10.2%10.4%
FY07 FY08 FY09 FY10
Year End
Mar
ket S
hare
(%)
Industry vs GCPL brands Value Growth
15.2
9.6
18.5
9.0
21.0 19.3
25.0
17.0
05
1015202530
FY07 FY08 FY09 FY10Year End
Perc
enta
ge (%
)
Industry GCPL Brands
Source: Company Reports, HDFC Sec Research Source: Company Reports, HDFC Sec Research 2. Hair Color segment to perform well with new launches and aggressive advertising: GCPL’s Hair Colour segment accounts
for 22% of the standalone net sales and commands market share of 33.8% (in FY10). The hair colour segment has grown at a CAGR of 15% over FY07-FY10. GCPL has put aggressive thrust on revitalizing this portfolio. Powder hair dye accounts for a major portion of segment’s total sales. GCPL’s strategy in this segment is to focus more on the powder versions.
Hair Color Market Share Trend
35.2%
33.5%
33.9%
32.5%
33.0%
33.5%
34.0%
34.5%
35.0%
35.5%
FY08 FY09 FY10
Year End
Mar
ket S
hare
(%)
Industry vs GCPL brands Value Growth
13.3
19.4
14.012.5 13.0
19.1
0
5
10
15
20
25
FY08 FY09 FY10Year End
Perc
enta
ge (%
)
Industry GCPL Brands
Source: Company Reports, HDFC Sec Research Source: Company Reports, HDFC Sec Research 3. Enhancing global presence through strategic acquisitions: Over the last 5 years, GCPL has established a strong global
presence through inorganic route. The company has made six acquisitions since FY05. Despite recession and tough operating conditions, international business grew 21% in FY10 (in value terms). In October 2005, GCPL acquired 100% stake in Keyline Brands Ltd, UK for ~Rs. 1 bn. In September 2006, GCPL acquired South African Hair Colour business of Rapidol for ~Rs 500 mn (100% acquisition). In April 2008, GCPL acquired 100% stake in Kinky Group, engaged in business of Hair Care and Hair extensions, for $34 mn. With an aim to establish its presence in the Gulf region, in October 2007, GCPL acquired 100% stake in Godrej Global Mid East (GGME) for Rs. 58 mn. In April 2010, GCPL announced the acquisition of 100% stake in Megasari Group of Indonesia, including its distribution arm, for Rs. 12 bn. In March 2010, GCPL announced 100% acquisition of Nigerian personal care company Tura. On May 23, 2010, GCPL announced that it has entered into an agreement to acquire a 100% stake in Laboratoria Cuenca, Consell SA, Issue Uruguay and Issue Brazil (Collectively referred to as ‘Issue Group’).
4. Expanding rural distribution: GCPL has been expanding its presence in the rural & semi urban markets significantly. The company’s strategy of increasing advertising in regional media, presence across the price spectrum and introducing new low-price-unit (LPU) products to tap rural demand is doing well. In FY10, Rural India contributed 25% of GCPL’s sales & its contribution to its growth in sales (domestic business) was 45%. The Superstockist Sales increased by 30% in FY10, while the number of Superstockist & Substockist increased by 58.2% & 44.6% over FY09 to 262 & 5161 respectively.
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Parameters FY10 Superstockist Sales Rs. 288 cr 30% Growth No. of Superstockists - March 10 261 96 - Inc over Mar 09 No. of Substockists - March 10 5161 1593 – Inc over Mar 09
Salience as % of Sales
Rural25%
Urban75%
Contribution to % growth in Sales
Rural45%
Urban55%
Source: Company Reports, HDFC Sec Research Source: Company Reports, HDFC Sec Research
The company has plans to double its small-town coverage from 4,000 to 8,000 in three years and village coverage from 15,000 at present to 50,000. The company has ramped up the distribution of its products like hair colours, shaving cream, talcum powders and soaps through saloons (to 50,000 barbers). These measures are expected to drive the volumes across its product segments, create brand awareness and improve market share across its product categories.
Concerns – 1. High Competition: GCPL faces competition from other established FMCG players like HUL (in Soaps & Shampoos),
Marico (in Hair Care) & Bayer Crop Science (in Household insecticides). In the household category (post the acquisition of GSLL & Megasari), the company also faces competition from MNC players like S C Johnson & Reckitt Benckiser. The competition in the soaps segment is increasing due to No 1 soaps player HUL’s right pricing of Breeze, which is a low- end soap brand. Though GCPL has managed to improve soaps market share over the last two years, intensifying competition could result in aggressive price war and could impact GCPL’s ability to gain market share in this segment. Further, the entry of players such as L’oreal and Schwarzkopf have put pressure on GCPL’s hair colour business, which has resulted in the decline in segment’s share at the top end of the market. In the premium cream hair color category GCPL’s major brands are Godrej Renew & Color soft. Entry of more foreign players could spoil the situation. To remain in the competition, GCPL will have to continuously launch new products / variants across the product category to suit the consumer preferences.
2. Forex Risk: Over the last five years, GCPL’s international exposure has increased significantly with the acquisitions of Keyline (UK) in FY06, Rapidol (South Africa) in FY07, Godrej Global Mid East in FY08, Kinky Group (South Africa) in FY09, Tura (Nigeria) in March 2010 and Magasari (Indonesia) in April 2010. These have increased the forex risk of the company significantly.
3. Raw Material: Increase in the prices of key raw materials like Vegetable Oil (main input for soaps) and chemicals, perfumes, colours (input for Hair Colour and other toiletries) could impact the margins and reduce earnings growth if GCPL finds it difficult to pass on input cost increases completely to its consumers, especially in a scenario of high inflation.
4. Slowdown in consumer spending (rural and/or urban) due to stagnant /falling incomes could impact volume/realisation growth.
Godrej Hershey Food and Beverages Ltd (GHL) Background – Formed in 2007, a joint venture between The Hershey Company (USA) and GIL, GHL operates in multiple categories such as confectionery, beverages and health drinks. In 2006, the Godrej group acquired 100% stake in Nutrine Confectionary Company Pvt Ltd with brands like Mahalacto, KokoNaka, Nutrine Eclairs, Superstar, Aasai & HoneyFab. Nutrine is the leader in Confectionery with over 20% market share. With a plant at Chittoor (Andhra Pradesh) for Nutrine and one at Mandideep (Madhya Pradesh) for its other products, the company produces innovative products with smart packaging to appeal to the customer. The beverage portfolio consists of Jumpin (fruit drinks), Xs (juices and nectars), and Sofit (soy milk). The Hershey Chocolate syrup was added to the list in 2008 adding India to Hershey’s eagle-view global presence. GHL is the exclusive manufacturer/marketer of Hershey products in India however currently Hershey’s Chocolate Syrup is the only Hershey product launched in the country.
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The Hershey Company (THC) was started as a small subsidiary of Milton Hershey’s Lancaster Caramel Company. THC is the largest producer of quality chocolate in North America and a global leader in chocolate and sugar confectionery. Its popular brands include Hershey’s, Reese’s, Hershey’s Kisses, Kit Kat, Twizzlers, Ice Breakers and Hershey’s Bliss. While GIL holds 43.4% stake in GHL, THC holds 51% and Mr. A Mahendran (Director – Godrej Hershey and Godrej Household Products & Managing Director – Godrej Consumer Products Ltd) holds the rest. Triggers – 1. Possible launch of other Hershey products: THC is the leading global chocolate and sugar confectioner and considers
India a promising market in the future. Despite stiff competition from Cadbury, Nestle and Amul, the company could excel in the country given the brand recall and superiority perception. THC is currently researching the Indian market and hopes to launch its chocolates in the coming 1-2 years. Hershey could earn significant premium compared to local players for its brand image. The launch of its other products will be the turning point in Hershey’s journey in India.
2. Significant market share: Nutrine brands such as Mahalacto, KokoNaka, Nutrine Eclairs, Superstar, Asai and HoneyFab have penetrated the market to secure comfortable positions in the strong, perennial, competitive and price dependent market. Nutrine’s 20% market share gives it a smooth sail in an otherwise stormy ocean. Sofit is the market leader in the nascent soymilk market and will continue growing with the increasing number of health conscious people.
Concerns – 1. Loss making entity: GHL has been a loss making enterprise since its inception. The company had sales of Rs. 177.27 cr
and Rs. 160.64 cr in FY09 and FY10 respectively with a loss before interest and taxes of Rs. 3 cr and Rs. 15.62 cr in FY09 and FY10 respectively. The company could take time to come into breakeven levels. The launch/success of Hershey chocolates could be a key determinant of this.
2. Advertising/brand building could lead to significant costs: One of the largest expenses for the company is that of brand building. The Indian consumer is unfamiliar with the Hershey brand and its products. Chocolate syrup is a new product in the market and faces resilient competition from chocolate powders commonly used in milk such as Bournvita, Horlicks and Complan. To embed the advantages/differences of the Hershey syrup significant advertising and marketing is required. If Hershey chocolates are introduced in the Indian market further outlays of cash might be needed to advertise them. Even though we expect the chocolates to significantly improve the company’s operating profits, the initial years could actually be worse on account of brand building.
3. Highly dependent on sugar and milk prices: All GHL products are either dependant on sugar or milk. Even Sofit (soymilk) and Hershey Chocolate Syrup are dependant on milk prices because the former is a substitute (increase in milk prices could increase the demand for soymilk) while the latter is a complement (increase in milk prices could decrease the demand for chocolate syrup). Losses increased five fold in FY10 largely due to the high prices of sugar and milk.
S30 Sugar Prices-Mumbai
0500
1,0001,5002,0002,5003,0003,5004,0004,500
Aug-
00
Aug-
01
Aug-
02
Aug-
03
Aug-
04
Aug-
05
Aug-
06
Aug-
07
Aug-
08
Aug-
09
Aug-
10
(Rs.
/Qui
ntal
)
M30 Sugar Prices
0500
1,0001,5002,0002,5003,0003,5004,0004,500
Aug-
00
Aug-
01
Aug-
02
Aug-
03
Aug-
04
Aug-
05
Aug-
06
Aug-
07
Aug-
08
Aug-
09
Aug-
10
(Rs.
/Qui
ntal
)
Mumbai Delhi
Source: Company Reports, HDFC Sec Research Source: Company Reports, HDFC Sec Research 4. High dependence on low margin oil business: The edible oil industry is a competitive low margin business. GIL’s branded
Godrej Cooklite Oil earns slightly higher margins than unbranded oils however the competition is still stiff. High dependence on this business hurts the company’s overall margins.
(Source: Company Reports, HDFC Sec Research) Godrej Agrovet Ltd (GAVL) Background – GAVL was incorporated in 1971 with a focus on the agricultural sector developing close relationships with farmers to supply animal feed, oil palm plantations, agrochemicals and poultry. The company has 45 manufacturing facilities across India and 10,000 rural distributors, dealers and agents with a presence in 21 states. GAVL reported 13% and 130% growth in revenue and PBIT in Q1FY11 and 8% and 63% growth in revenue and profit in FY10. Animal Feed: Background – GAVL is the largest animal feed company in the country producing about 730,000 tonnes of feed every year for dairy cattle, poultry and aquaculture. The feed has great nutritional value, thereby increasing the output from the animal, making it more profitable for the farmer. Maize, corn, rice bran, de-oiled rice bran, extractions and fishmeal are the chief raw materials. Poultry feeds comprise the largest portion of the sales followed by cattle and lastly aqua however, aqua feed sales are the most profitable followed by poultry and lastly cattle. The animal feed business and Bangladesh JV grew by 9% and 53% respectively in Q1FY11. The Animal Feed business grew 16% and 31% in revenue and profit in FY10. GAVL has a market share of over 20% (organized) with 5-6% (including unorganized) penetration in the cattle feed sector. JVs and subsidiaries – The Company has also entered Bangladesh through its JV with the ACI (Advanced Chemical Industries) group to sell poultry and poultry feed, where it is rapidly gaining market share. Godrej Gold Coin Aquafeed, a 49:51 JV, is expected to improve performance sharply in FY11 and be profitable in FY12. Golden Feed Products Ltd, a wholly owned
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16
subsidiary of GAVL, is in the animal feed business too but has negligible operations (Sales of Rs. 0.04 cr and PAT of Rs. 0.02 cr in FY10). Plants and Capex – Animal feed plants are located across India making distribution relatively easy. Approximately 40 of the plants are third party producers with whom GAVL has processing arrangements wherein GAVL personnel supervise activity on a daily basis. GAVL is currently working on new product development of super-premium broiler, layer feed concentrate, and broiler feed concentrate. ACI Godrej (the Bangladesh JV) is undergoing a distribution expansion at Chittagong for broiler feed and is launching floating fish feed in Q2 to capture the tilapia market. There could be a capex of ~Rs. 20 cr in FY11 and Rs. 30-50 cr in FY12 to add new plants in currently sparse locations such as Bihar and the Eastern states apart from filling gaps in the north and west. Competitors – Key competitors include PT Japfa Comfeed Indonesia, Venky’s (India) Ltd, Amrit Feeds Ltd, Foods India Ltd and SKM Animal Feed. Production & Turnover– Standalone FY09 FY10 MT MT Installed Capacity 359974 350000Production 383496 233991Capacity Utilization 106.5% 66.9%Third Party Production 442283 494193Quantity Sold 726724 727790Value (Rs. Cr) 974.0 1111.1Unit Value (Rs.) 13402 15267
(Source: Company Reports, HDFC Sec Research) Triggers – 1. Deep market penetration: GAVL is the leader in the animal feed industry in India with over 20% market share in the
organized sector and ~5-6% market share in the cattle feed business including the unorganized sector. 2. Relatively stable business with low but consistent profit: Profit margins are observed to remain fairly stable over the years.
Any jump/fall in volume/price does not significantly hinder margins making the business very reliable. Further raw material costs hikes can relatively easily be passed over.
3. Pan India presence: GAVL has ~45 plants around the country making every region easy to access. The management has planned further plants in sparse regions to add to the presence across the country.
4. Robust demand growth assured:- Livestock rearing (including cattle) is becoming more profitable due to increase in the prices of milk, poultry products etc. Hence demand growth seems to be reasonably assured.
Concerns – 1. Seasonality: Aqua and poultry feed businesses are seasonal. Aqua has two seasons of harvest while poultry has
downswing during religious times (Shravan and Diwali) and summer season see major drops in chicken sales. 2. Volatile raw material prices: Maize and corn prices are volatile and depend on the monsoons, the crop and demand.
However, this volatility in raw material prices can be passed on the consumers reducing the risk of the company. Segment Result –
Note: Figures in the above two tables represent share of GAVL in the JVs (Source: Company Reports, HDFC Sec Research) Agri Inputs: Background – GAVL is a niche player in innovative agrochemicals, with strong market share in plant growth promoters, soil conditioners, and cotton herbicides. The agrochemicals business focuses on innovative and environmentally sensitive products. The products can be classified into 3 groups – plant growth promoters and regulators, organic manure mixture and pesticides. Promoters, manure and pesticides comprise ~50%, ~17% and ~33% of the revenue respectively. The business grew by 19% and 22% in revenue and profitability in FY10 primarily led by HBR (Homobrassinolide) compounds, Hitweed, Vikas soil conditioners and Zymegold. HBR has several products including bountea (for tea), combine (for grape) and double (for vegetables). Hitweed is an inthouse developed weedicide (used mainly for cotton) and is gaining popularity quite fast. 12 new products are expected to be launched by FY12. Plants – The Company has 1 plant at Jammu primarily engaged in manufacturing promoters while other products are outsourced. Competitors – Some competitors include Rallis India and PI Industries. Production & Turnover –
(Source: Company Reports, HDFC Sec Research) Triggers – 1. Highly profitable business: The agri inputs business has relatively high profit margins. FY09 and FY10 show consistently
good performance, which is expected to improve going forward. 2. India is an agricultural country at large: India is the second largest country in terms of agricultural output. Agriculture
accounts for over 15% of the country’s GDP and over 50% of the workforce. Even though the sector faces a steady decline of its share in the GDP, it plays a very important role in the socio-economic development of the country.
3. New Products: Hitweed and HBR have gained tremendous popularity and will lead the growth in FY11. Several new products are expected in FY12, the success of which will further boost the growth.
Concerns – 1. Volatile raw material prices: Various chemicals are used to make agri inputs. Due to the constant volatility in commodity
prices, raw material prices fluctuate often. 2. Stiff Competition: The fertilizer, pesticide, growth promoter and weedicide businesses face severe competition from the
organized and unorganized sector. Rallis India is the largest competitor with pan India distribution and deep market penetration.
(Source: Company Reports, HDFC Sec Research) Palm Oil: Background – GAVL’s subsidiaries Godrej Oil Palm Ltd (90% shareholding) and Cauvery Palm Oil Ltd (90% shareholding) and its JV, Godrej IJM Palm Oil Ltd (in collaboration with a Malaysian plantation company, IJM) (48.2% shareholding), comprise its Oil Palm business segment. Godrej Oil Palm is the only company with significant operations however over the coming years Cauvery Palm Oil and Godrej IJM will start contributing in a larger way. GAVL is the market leader in oil palm plantation with over 35,000 hectares of cultivation (~13,000 hectares of which already bears fruit) and over 200,000 hectares of permissible land. The Palm Oil business is looking even more attractive due to the recent rise in crude palm oil prices and the recent allocation of oil palm territory by the Gujarat Government will increase the company’s growth prospects. GAVL gets its palm oil price outlook and forecast from Mr. Dorab Mistry, a renowned vegetable oil specialist and director of Godrej International Ltd. The Oil Palm business has a long payback period primarily due to the 3 year stagnation between planting and cultivation. However, once past the 3 year hurdle, the plant bears good fruit year after year for ~30 years. It is a highly profitable business with all applicable agricultural risks such as drought, flood and infestation. Most of GAVL’s plantations are in Andhra Pradesh followed by Goa, Karnataka and Tamil Nadu. The Andhra Pradesh government, based on crude palm oil spot prices and average oil yield per tonne of fresh fruit bunches, sets fruit bunch prices every quarter to shield the farmers. This results in relatively stable profit margins, ceteris paribus. The Oil Palm Act regulates the industry in each state and provides a brief outline for farmers, crushers and refiners. The pricing mechanism framed by the government provides a fair equilibrium between the farmers and crushers. The nature of the fruit requires processing within 24 hours for optimal output and quality. Hence the crushing mills have to be in vicinity of the plantations. The conversion cost is ~ Rs. 350 per tonne. Palm trees take three years to start fruiting from the time of planting. Educating/Convincing farmers is a difficult process however, once convinced and converted to palm plantations, it is difficult to shift back out, making revenues fairly visible. Farmers only convert part of their land to palm at a time from the fear of losing income for 3 years. Each year a small portion is planted and a certain portion starts fruiting. Hence a gradual increase in acreage is seen every year. Palm Oil Background – Palm oil is one of the few highly saturated vegetable fats and is semi-solid at room temperature. It is a common cooking ingredient in the tropical belt of Africa, Southeast Asia and parts of Brazil. Its increasing use in the
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commercial food industry in other parts of the world is buoyed by its lower cost and the high oxidative stability (saturation) of the refined product when used for frying. Plants – Between the 3 companies there are 3 crushing mills, one each in Andhra Pradesh (~40 tonne capacity), Goa (~10 tonne capacity) and Tamil Nadu (~10-20 tonne capacity). Palm Oil Value Chain – Industry – According to Hamburg-based Oil World trade journal, in 2008, global production of oils and fats stood at 160 million tonnes. Palm oil and palm kernel oil were jointly the largest contributor, accounting for 48 million tonnes or 30% of the total output. Soybean oil came in second with 37 million tonnes (23%). About 38% of the oils and fats produced in the world were shipped across oceans. Of the 60.3 million tonnes of oils and fats exported around the world, palm oil and palm kernel oil make up close to 60%; Malaysia, with 45% of the market share, dominates the palm oil trade. India is one of the largest edible oil consumers in the world and the largest importer of the same followed closely by China.
Edible Oil Imports
0
200000
400000
600000
800000
1000000
Jan- 08
Jul-0
8
Jan- 09
Jul-0
9
Jan- 10
(Ton
nes)
Edible Oil Import Value
050000
100000150000200000250000300000
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
(Rs.
Lak
h)
01000020000300004000050000
(Rs.
per
tonn
e)Value - LHS Unit Value - RHS
Source: Capitaline, HDFC Sec Research Source: Capitaline, HDFC Sec Research
Source: USDA FAS data, HDFC Sec Research
Fresh Fruit Bunches
Crude Palm Oil
Residue (seed, empty fruit bunch)
Seed / Kernel
Empty fruit bunches
Palm Kernel Oil / Palm Kernel Cake
Animal Feed
Used in Cogen plant
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A hectare of oil palm in India can yield between 2.8 to 3.5 tonnes of crude palm oil a year, so going by this assumption, GAVL has the potential to produce between 28,500 – 32,500 tonnes of crude palm oil (CPO) in FY11 (vs 14,900 tonne in FY10) and up to 55,000 to 65,000 tonnes of crude palm oil in FY12 generating revenues of Rs. ~100 cr and Rs.200 cr in FY11 and FY12 respectively. Being a commodity, crude palm oil prices are very volatile and evaluating the business based on revenues would be arduous.
RBD Palm Olein Price-Kakinada
300350400450500550600650
Jan-
05
May
-05
Sep
-05
Jan-
06
May
-06
Sep
-06
Jan-
07
May
-07
Sep
-07
Jan-
08
May
-08
Sep
-08
Jan-
09
May
-09
Sep
-09
Jan-
10
May
-10
Sep
-10
(Rs.
/10
kg)
Source: CSS, HDFC Sec Research
Triggers – 1. Promising Future: GAVL, through its subsidiaries, is the leading palm oil producer in the country with 35,000 hectares of
land cultivated (of which ~13,000 hectares yields fruit) and 200,000 hectares of allotted land. With the remaining ~22,000 hectares bearing fruit over the next 2 years palm oil production will increase significantly. India imports majority of its edible oil due to the major demand and lack of local supply at comparable prices. Margins are high and demand is perennial resulting in a foolproof business, per se. The business is expected to grow multiple fold till all allotted land is cultivated and bears fruit.
2. Improving CPO prices: As seen in the “RBD Palm Olein Price-Kakinada” graph, CPO prices improved from the lows of 2009. Crude palm oil futures were up for the 7th consecutive week resulting in the longest rally since May 2009.
3. Though GAVL is not the owner of the land, it has sole rights to purchase the produce of the land once cultivated with Palm oil: The cushioning in the relation with the farmers is the fact that they are not permitted by law to sell their fruit to another processor. Once the government allots specific land to Godrej Oil Palm or Cauvery Palm Oil, if the farmer chooses to grow palm oil plantations, he is obliged to sell it to Godrej/Cauvery.
4. It’s a volume game – As the prices of FFB of palm are fixed as per formula, the conversion margins for GAVL is more or less fixed per tonne. The more the quantity of fruit processed, the higher absolute margins can the company earn. With new cultivated land being added each year, the absolute margins could typically go up year after year.
Concerns – 1. Processing Unit must be in close proximity to the plantation: The palm fruit bunches must be processed within 24 hours to
obtain maximum oil of good quality. This forces the company to set up a processing unit within close proximity of the plantation.
2. Convincing the farmer: Convincing the farmer to grow palm oil plantations is the responsibility of GAVL. Land allotted by the government is not necessarily a palm oil plantation and neither is the farmer obliged to change it to one. The responsibility of explaining the advantages of palm oil plantations (such as high yield, good realization, constant revenue for 30 years etc) is borne by the company.
3. Commoditized business causes volatility: Like chemicals, CPO is a commodity and trading and speculation cause fluctuation in the price. This fluctuation can sometimes lead to lower realizations. However the formula fixed by the Govt typically assures a fixed margin per tonne of oil processed.
4. Other agricultural concerns: Palm oil plantations face all the agricultural constraints that other plantations face such as drought, flood and infestation. Less rains result in lower yield. Adequate water and fertilizers are the two needs for Palm cultivation.
5. Regulation in fruit bunch prices: Regulated fruit bunch prices cause a natural flaw to a free economy. While the government is safeguarding the farmers’ interest, the lack of free pricing model caps the upside potential for crushers.
6. Possibility of increased Government regulation: If the government involvement in Palm oil business grows over the years to the levels seen in sugarcane cultivation, it could result in heightened uncertainty in the business prospects.
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Segment Result – (All Values in Rs. Cr)
Oil Palm FY09 FY10 Q1FY11
Revenues External Sales 75.0 64.0 23.0Intersegment Sales 0.0 0.0 0.0Total Revenue 75.0 64.0 23.0Results EBITDA 12.0 13.0 Not Available EBITDA % 16.0% 20.3% N/APBIT 11.0 11.0 Not Available PBIT% 14.7% 17.2% N/A
(Source: Company Reports, HDFC Sec Research)
(All Values in Rs. Cr)
Godrej IJM Palm Oil FY09 FY10 % Holding 48.2% 48.2%Assets 7.4 6.7Liabilities 7.4 6.7Income 1.7 1.1Expense 2.1 1.7PAT -0.3 -0.5Note: Figures in the above table represents share of GAVL in the JVs (Source: Company Reports, HDFC Sec Research) Integrated Poultry: Background – GAVL has introduced fresh, chilled chicken to Indian consumer over the past decade, and now has a 45% market share in processed poultry. GAVL sells live poultry while the 49:51 JV with Tyson foods sells packaged and processed chicken. Its “Real Good” chicken brand is one of the best-known fresh poultry products in India, with a consumer loyalty about 80%. “Yummiez” makes ready-to-eat snacks primarily of chicken and “Real Good” makes processed uncooked chicken”. Godrej Tyson has relaunched its branding process for “Real Good” with new packaging and return schemes. Close to 97% of the Indian poultry industry consists of live sales. The market is slowly experiencing a shift toward processed chicken where institutional buyers currently dominate. The body temperature of a chicken is usually 25-27°C. In the chilling process, it is brought down to 8-10°C after the feathers are removed. This has a shelf life of three days if kept in the refrigerator. Frozen chicken is where the temperature is reduced to 4°C kept in a blast freezer before being sent to the retail outlets. The frozen chicken can last a year. In a live chicken, the yield is only 65 per cent and the rest is waste. The waste is crushed and used in pet feed. Triggers – 1. Comfortable split between fresh poultry sales by GAVL and processed poultry sales by Godrej Tyson: Godrej Tyson
accounts for Rs. 77.3 cr and Rs. 91.0 cr while sales of live poultry accounted for Rs. 173 cr and Rs. 232 cr segment sales in FY09 and FY10 respectively. Fresh poultry sales have small margins but are profitable.
2. Nuclearization of families and increasing force of working women: Nuclear families lead to modern beliefs and working women, which increases processed chicken sales as a matter of convenience. Other frozen foods from Yummiez gain popularity too for convenient cooking.
3. Increasing awareness of people: The Indian masses are slowly learning the advantages of chilled chicken. The chicken has a greater life and the buyer does not pay for the waste.
Concerns – 1. Religious beliefs: Meat is considered an omen among many religions in India resulting in a smaller clientele. Even though
newer generations are more liberal in their thoughts, this restricts sales among many. 2. The scale of the business of the Tyson JV is still small and educating/converting consumers is taking time and money
Godrej Tyson FY09 FY10 % Holding 49% 49%Assets 58.0 57.5Liabilities 58.0 57.5Income 77.3 91.0Expense 85.2 95.1PAT -8.0 -4.1Note: Figures in the above table represents share of GAVL in the JVs (Source: Company Reports, HDFC Sec Research) Nature’s Basket Background – Godrej Nature’s Basket is one of India’s finest Gourmet retailers. It brings together authentic world food, beverages, choicest ingredients and premium and niche food products to satisfy demanding and discerning palates via its 10 stores in premium residential catchments. Nature’s Basket is earning higher realizations on cue of its better waste management system. The 10 new products offered in the past 6 months provide for 10% of the revenue. Triggers – 1. Entry in India’s thriving retail market: The Indian retail market is thriving due to the improvement in economy, increase in
disposable incomes, rise in per capita spending and easy accessibility to markets. Nature’s Basket entered the retail market at a good time, which is reflected in the fact that it has broken even at the store level at all Mumbai stores.
2. Successful new products: The new products introduced in FY10 were very successful, generating ~10% of the revenue. With unique niche products gaining share, we expect sales to improve going forward.
Concerns – 1. Stiff Competition: Nature’s Basket faces tremendous competition from the unorganised sector like local grocery stores and
vegetable & fruit vendors. Professional grocery stores are a relatively new concept in India and the consumer is unaware of the advantages of buying from these. However Nature’s Basket’s niche food products such as the authentic world foods and beverages gives it an edge over the unorganised sector.
2. Business running at losses: Nature’s Basket has broken even at the shop level in all its Mumbai stores but at the corporate level the company is still running at losses.
Vegetable Oils Background – The Vegetable Oils processing unit at Wadala (Mumbai) and trading activities of Godrej International Ltd (an international oil trading subsidiary) comprise the Vegetable Oils segment. The Wadala unit is running at losses even as it processes oil for Godrej Hershey and outsiders. The lease of this property was recently renewed and GIL awaits approval from the Mumbai Port Trust (MPT) for change of use to develop the land, which could unlock enormous value for the company. Godrej International, on the other hand, is a profitable entity but due to the nature of the trade, its profit margins are low (operating margin of ~1.3% in FY10). The Vegetable Oils business has not been included in our valuation as it runs at minimal profit/loss every year and has no significant impact on the value of the company. Triggers – 1. Hidden value of Wadala Property: GIL is in the process of getting government approvals to develop the Wadala property
that is currently leased from the MPT to run its veg oils processing unit. If approved, the ~7 acre property will unlock tremendous value as Wadala is centrally located and residential and commercial demand is high. We have not taken this property into consideration in our Estate Management valuation, as the timing is uncertain.
Concerns – 1. Trading Risk: Trading is a risky endeavor, especially in oils. Godrej International had turnover of Rs. 585.8 cr and Rs.
540.0 cr in FY09 and FY10 respectively with operating profits of Rs. 7.1 cr and Rs. 6.9 cr. The risk borne by the company is high compared to the income due to the volatile market prices.
2. Wadala processing unit running at a loss: The Wadala unit is running at a loss due to underutilization of capacity and old high costs.
In line with international oil palm plantation companies 37.7
Integrated Poultry EV/Sales 260.0 0.3 Discounted to peer valuations of 0.5-0.6 1.6
Natures Basket Market Cap/Sales 42.0 0.7 Discounted to peer valuations based on size 0.9
Cbay Systems CMP 2.5
Other Investments BV 9.0
Total 265.0*Valued on basis of land holding of all 3 companies without reducing share of partners/minority shareholders, which is assumed to be negligible. Conclusion We think that GIL is well placed to exploit the benefits of its growing presence in chemicals, animal feeds, integrated poultry, palm oil, agri inputs space. Each of its businesses has individual triggers in place and is currently doing well. This apart, its large holding in group companies and JV in the realty segment offer added upsides. Its palm oil venture (an annuity business growing year after year) could bring valuation upsides once more land is planted on a regular basis (after convincing farmers) and planted land starts fruiting over the next few years. However apart from the individual risks of the businesses, a large part of its valuation is dependent on the market price of GCPL and GPL. Hence sustained downward moves in these prices could impact the share price of GIL. We think that GIL could be bought at the CMP and added on dips to the Rs.196-205 band for a target of the SOTP of Rs. 265 over the next 1-2 quarters. Financials Annual Profit & Loss Account:
(Source: Capitaline, HDFC Sec Research) Analyst: Kushal Sanghrajka ([email protected]) RETAIL RESEARCH Fax: (022) 30753435 Corporate Office: HDFC Securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 30753435 Website: www.hdfcsec.com Email: [email protected] Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, Institutional Clients
