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FINANCIAL ANALYSIS
2011
Mitesh Ojha
10BSPHH010409
IBS Hyderabad
11/1/2011
GODREJ INDUSTRIES LIMITED
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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.
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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
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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
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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
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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
Cash ProfitMargin (%)
-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
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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
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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
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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.
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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
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
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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
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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.
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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
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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
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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.