Agrovet listing additional trigger for Godrej Industries

Strong growth in major subsidiaries, investments are expected to translate into better valuations

Strong prospects of subsidiaries and steady performance of its investment companies are expected to be the much-needed shot in the arm for Godrej Industries’ valuation.

While it has stakes in Godrej Consumer (23.8 per cent) and Godrej Properties (56.7 per cent), and will benefit from their growth, the immediate trigger is the listing of Godrej Agrovet, its 63.7 per cent subsidiary.

Given that Godrej Agrovet is valued at ~8,600-8,800 crore, the value of Godrej Industries’ stake after considering holding company discount would be about ~4,200 crore.

In addition to the IPO (initial public offering) trigger, analysts at Sharekhan expect the company’s core value to improve in the long run, given the steady show of companies, where it has an equity stake as well as its stand-alone business. They believe the stock is a good ‘ buy’ after the recent correction (12 per cent over the fortnight), and expect an upside of 12-15 per cent over the next year.

The stand-alone business comprises chemicals and premium retail chain, Nature’s Basket. Analysts expect the retail business, which had revenues of ~310 crore in FY17, up 15 per cent year-on-year, to see a strong double-digit growth. Nature’s Basket has 26 stores across Pune, Mumbai and Bengaluru, and gets about seven per cent of its revenue from the online site.

The chemicals business is also expected to post good growth on the back of an improvement in the product mix, resulting in a growth in the top line and margins. The chemicals made by the company are used as inputs in the home and personal care, pharmaceuticals and food sectors. While revenue growth in the June quarter has been strong (up 30 per cent year-on-year), led by exports, margins have been impacted due to high raw material costs and muted domestic demand. The management, however, expects the demand to improve.

Despite the impact of demonetisation and the goods and services tax, Godrej Properties continues to post robust sales numbers, led by launches and strong execution. The company’s real estate arm recorded its highest residential sales in the June quarter, with booking revenue pegged at ~1,472 crore. It added four new projects, with a saleable area of 4.9 million square feet.

Analysts say it is organised players like Godrej Properties which stand to gain from the implementation of Rera (Real Estate Regulation Act).

The biggest chunk in the sum-of-the-parts calculation is Godrej Consumer, which accounts for half of the enterprise value of Godrej Industries.

Analysts at Credit Suisse and Sharekhan had recently upgraded the company, a major player in the personal care, hair colour and household insecticide segments. While new product introductions and distribution reach are expected to drive the double- digit revenue at stable margins, international operations are expected to do well on the back of a revival in Indonesia and on an improvement in African operations.