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4 January 2007 BSE Sensex: 13872 INDIA RESEARCH

Godrej Industries
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Analyst: Nikhil Vora (91-22-6638 3308; nikhilvora@sski.co.in) Suchit Sehgal (91-22-6638 3333; suchitsehgal@sski.co.in)

Rs174
UNRATED
Mkt. Cap: Rs50.8bn; US$1.1bn

We recently met Mr Adi B Godrej, the chairman of Godrej Industries (GIL), to get the latest update on the companys core business of chemicals and its investments and subsidiaries. While various business segments and subsidiaries (Godrej Agrovet, Godrej Consumer Products, Godrej Sera Lee, etc) promise robust growth, we believe the property development arm, Godrej Properties, offers attractive value creation potential. GPL currently has 20m sq. ft of area under development in and around Mumbai as also in Hyderabad, Bangalore and Kolkata for residential, commercial, IT and mall purposes. Based on our SOTP valuation, we arrived at a fair enterprise value of USD 1.3bn and per share value of Rs204 for GIL. In our valuations, we have not factored in a potential upside of development rights of Godrej & Boyce properties in Mumbai.
Corporate structure
Godrej Industres (GIL)

Subsidiaries
Goldmohur Foods and Feed (100%) Golden Feed Products (100%) Girikandra Holiday Homes & Resorts (100%) Godrej Waterside Properties (100%) Godrej Realty Pvt Ltd. (51%)

Joint Ventures

Associates
Swadeshi Detergents Ltd (41.1%) Godrej Upstream Ltd (40.43%) Compass Connections Ltd (20.74%) Pensonalitree Academy Ltd (26%) Creamline Dairy Products (26%) Creamline Nutrients Ltd (26%) Polychem Hygene Laboratories Ltd (26%)

Equity Investments
Godrej Consumer Products (10.9%)

Godrej Agrovet (57.7%) Godrej Properties (82.9%) Ensemble Holdings & Finance (100%) Godrej International (100%) Godrej Beverages & Godrej Global Solutions(48%) Foods (100%) Godrej Beverages & Godrej Hi Care (85.9%) Foods (48%) Godrej HiCare (85.9%)

Godrej SaraLee (20%) Cbay (20%)

Mid East (100%) Godrej Global Solutions (Cyprus) Ltd (100%) Godrej Global Solutions Inc (100%)

Key Valuations (Rs m) Company name


Godrej Sara Lee Ltd Godrej Agrovet Ltd. Godrej Properties Godrej International Ltd. Godrej Global Solutions Ltd. Godrej Beverages and Foods Ltd. Godrej Consumer Products Ltd.

EV
18,000 15,000 40,000 2,942 189 6,000 36,135

% holding
20.00 57.69 82.88 100.00 100.00 48.00 10.90

GIL's share
3,600 8,654 33,152 2,942 189 2,880 3,975

EV/ share
12.33 29.64 113.53 10.08 0.65 9.86 13.61

S.S. Kantilal Ishwarlal Securities Pvt. Ltd. (SSKI) 701-702 Tulsiani Chambers, 7th Floor (East Wing), Nariman Point, Mumbai 400 021. Tel: 9122-5638 3300 Fax: 9122-2204 0282

" For Private Circulation only and Important disclosures appear at the back of this report

SSKI INDIA

The chemicals division growing steadily


GIL is the largest producer of fatty alcohol, fatty acids and AOS and is one of the top three producers of glycerin in India. This chemicals division generates ~80% of the companys overall operating turnover. Despite contributing 80% of GILs operating revenues and 10% of the PAT, the division accounts for less than 8% of the total enterprise value.

Godrej Properties (GPL) aiming high (83% holding by GIL)


The Indian real estate market is worth an estimated USD 22bn and is expected to register over 20% CAGR in the next five years. GIL has a major presence in this market through its subsidiary, GPL (83% stake), which undertakes property development projects. Though GPL currently has about 20m sq. ft of property under development for various residential, commercial and retail projects, the area under development is expected to grow over four times in the next five years, due to the huge land bank lying within the Godrej Group as also prospects of doing JVs with other land bank owners like its subsidiaries, Godrej Agrovet (100 acres of land in Bangalore). The existing projects under development are located in Mumbai, Thane, Kalyan, Pune, Hyderabad, Goa, Banglore and Kolkata and entail a usual gestation period of 3-4 years. While GPL predominantly undertakes development projects in a joint venture with the landowner, in some cases it also buys out the land for development. Joint Ventures: In this type of an arrangement, GPL enters into a joint venture with the owners of the land, wherein consideration is either as a percentage of the profit, the space or the sale proceeds. Buy and Develop: Under this arrangement, GPL purchases the land and then develops it. As a policy, the company does not usually allow the purchase price of the land to exceed 30% of the entire proceeds that it would receive from the project as of today. GPL is also considering the option of entering into a joint venture with its group companies in the future and developing the land owned by them. For example, Godrej Agrovert has close to 100 acres of land close to Bangalore, currently operating as a poultry-breeding farm. GPL is expected to register a net profit of close to Rs400m in FY07 on the 20m sq. ft of land under development compared to a net profit of ~Rs134m in FY06, an increase of 200%. The growth momentum appears sustainable and we expect GPL to clock a net profit of Rs1bn in FY08 and Rs1.5bn in FY09. Interestingly, Mahindra Gesco one of the largest property developers in India has 18m sq. ft of land under development for residential purposes and is expected to register net profit to the tune of Rs290mn for FY07 and is valued at Rs.37bn, which gives us an indication of the huge growth potential in store for GPL. Also, looking at the sheer scale of the projects that GPL is entering into, it may also consider raising funds through its SPVs or/and go in for an initial public offering diluting approximately 15% of its stake.

Godrej Agrovet (GAVL) Asset Rich! (57% holding by GIL)


Among the different businesses in GAVLs portfolio, the ones offering scale are its poultry feed business and the new value added retail chains Aadhar and Natures Basket. Natures Basket is into retailing of local and exotic fresh farm produce similar to the retail chain of Reliance (Reliance Fresh) and is expected to have 40 operational outlets by FY08. Aadhar, on the other hand, offers agricultural products like fertilizers and animal feeds to farmers and is trying to capture the rural market of India, similar to ITC (Chaupal Sagar) and DCM Sriram (Haryali Bazar), which is the next market with a high growth potential. GAVL added seven new outlets of Aadhar in the previous year, taking the total tally to 23. It has plans to have 70 operational outlets by FY08. GAVL reported a turnover of Rs6bn in 2006 and is expected to clock revenues of Rs7bn for FY07. GAL is also a asset heavy company with assets of 100acres of land in Bangalore, which is up for development. We believe the value of the property could be in the region of Rs10bn with potential development rights with Godrej Properties.

SSKI INDIA

Godrej Consumer Products (GCPL) gaining meaningful proportions (11% holding by GIL)
GCPL is a major player in the Indian FMCG industry with a presence in toilet soaps, hair colour, liquid detergents and other toiletries. Second in toilet soaps business with a market share of 9.5% and a market leader in the rapidly growing hair colour market with a 42.2% share, GCPL is sitting pretty on a huge opportunity. While we like GCPLs willingness to scout for overseas inorganic growth opportunities (Rapidol), it is facing intense competition from international brands like LOreal in the fashion colour segment in the domestic market. GCPL reported a profit after tax of Rs1.21bn for FY06 and is expected to show a PAT of Rs1.5bn for FY07 a yoy growth of almost 25%.

Godrej Beverage and Food (GBFL) riding on growing consumerism (48% holding by GIL)
GIL has transferred its foods division (except for its Wadala factory in Mumbai) at a consideration of Rs700m to its 48% subsidiary Godrej Beverage and Food (previously Godrej Tea). GIL also purchased Nutrine during the course of the year for Rs.2.7bn to mark its entry into the Rs15bn chocolate and confectionaries market in India, which took the entire GBFL product portfolio to Tea, Confectionery, Soya Milk (Sofit) and Vegetable Oil (Sunshakti). GBFL reported a turnover of Rs4bn and a PAT of Rs300m in FY06. With increasing consumerism of packaged foods in India, we expect this business to show significant upscale in the coming period.

Godrej Sara Lee (20% holding by GIL)


Being the largest manufacturer of home insecticides in the domestic market with brands such as Goodnight, Jet, Hit and Banish, Godrej Sara-Lee reported revenues of Rs6bn for FY06 with a profit after tax of Rs650m and a 15%yoy growth rate for the past few years.

Godrej Hi-Care on a strong wicket


Godrej Hi-Care, a pest management service business, is undertaking major quality initiatives to enhance service delivery to customers and aggressive expansion plans in the domestic and the global market. Godrej Hi-Care reported a turnover of Rs200m and a profit after tax of Rs10m in FY06 and growing at a CAGR of 50%.
Valuations SOTP gives per share value of Rs204 Company name
GIL Operations Holding companies Godrej Sara Lee Ltd Godrej Agrovet Ltd. Godrej Properties Godrej International Ltd. Godrej Global Solutions Ltd. Godrej Beverages and Foods Ltd. Godrej Consumer Products Ltd. Compass connections Gharda Chemicals Swadeshi Detergents Ltd. Avestha Gengraine Technologies Pvt. Ltd. Boston Analytics LLC C-Bay Systems Ltd. Ensemble holdings and Finance Ltd. Unquoted Investments Total Investments Less: Debt Add: cash Equity value No of Shares Value per share (Rs) EV/ Sales 3x EV/ Sales 1.5x EV/ EBITDA 20x EV/ Sales 1x EV/ Sales 2x Sales 1.5x Market cap Book Value Book Value Book Value Book Value Book Value Book Value Book Value Book Value 18,000 15,000 40,000 2,942 189 6,000 36,135 20.00 57.69 82.88 100.00 100.00 48.00 10.90 3,600 8,654 33,152 2,942 189 2,880 3,975 12 1 19 52 26 406 132 30 63,748 5,172 911 59,487 292 204

Assumptions
EV/ Sales 1x

EV

% holding

GIL Share
7,678

SSKI INDIA

Analyst
Pathik Gandotra Shirish Rane Nikhil Vora Ramnath S Nitin Agarwal Ganesh Duvvuri Varatharajan S Chirag Shah Bhoomika Nair Shiladitya Dasgupta Avishek Datta Bhushan Gajaria Shreyash Devalkar Hiren Dasani Ashish Shah Salil Desai Jayendran Rajappa Suchit Sehgal Uday Joshi Dharmendra Sahu

Sector/Industry/Coverage
Head of Research: Banking, Strategy Cement, Construction, Power FMCG, Media, Retailing, Mid Caps Automobiles, Auto ancillaries Pharmaceuticals IT Services, Telecom Oil & Gas, Engineering Textiles, Metals Construction, Power Mid Caps Oil & Gas, Engineering FMCG, Retailing, Media IT Services, Telecom Banking Automobiles, Auto ancillaries Cement Mid Caps Mid Caps Technical Analyst Database Manager

E-mail
pathik@sski.co.in shirish@sski.co.in nikhilvora@sski.co.in ramnaths@sski.co.in nitinagarwal@sski.co.in ganesh@sski.co.in varatharajan@sski.co.in chiragshah@sski.co.in bhoomika@sski.co.in shiladitya@sski.co.in avishek@sski.co.in bhushangajaria@sski.co.in shreyashdevalkar@sski.co.in hiren@sski.co.in ashishshah@sski.co.in salil@sski.co.in jayendran@sski.co.in suchitsehgal@sski.co.in udayjoshi@sski.co.in dharmendra@sski.co.in

Tel. +91-22-6638 3300


91-22-6638 3304 91-22-6638 3313 91-22-6638 3308 91-22-6638 3380 91-22-6638 3395 91-22-6638 3358 91-22-6638 3307 91-22-6638 3306 91-22-6638 3337 91-22-6638 3365 91-22-6638 3217 91-22-6638 3367 91-22-6638 3311 91-22-6638 3325 91-22-6638 3371 91-22-6638 3373 91-22-6638 3327 91-22-6638 3333 91-22-6638 3392 91-22-6638 3382

Equity Sales/Dealing
Naishadh Paleja GV Alankara Vishal Purohit Nikhil Gholani Sanjay Panicker V Navin Roy Rohan Soares Rishi Kohli Pawan Sharma Dipesh Shah Manohar Wadhwa

Designation
CEO Head of Dealing VP - Sales VP - Sales VP - Sales AVP - Sales AVP Sales VP Derivatives AVP Derivatives AVP Derivatives AVP Derivatives

E-mail
naishadh@sski.co.in alankara@sski.co.in vishalp@sski.co.in nikhilgholani@sski.co.in sanjaypanicker@sski.co.in navin@sski.co.in rohan@sski.co.in rishikohli@sski.co.in pawansharma@sski.co.in dipeshshah@sski.co.in manohar@sski.co.in

Tel. +91-22-6638 3300


91-22-6638 3211 91-22-6638 3201-210 91-22-6638 3212 91-22-6638 3363 91-22-6638 3368 91-22-6638 3370 91-22-6638 3310 91-22-6638 3321/403 91-22-6638 3403 91-22-6638 3403 91-22-6638 3403

Disclaimer
This document has been prepared by S S Kantilal Ishwarlal Securities Private Limited (SSKI). SSKI and its subsidiaries and associated companies are full-service, integrated investment banking, investment management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavor to update the information herein on reasonable basis, SSKI, its subsidiaries and associated companies, their directors and employees (SSKI and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SSKI and affiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone betaken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved). The investment discussed or views expressed may not be suitable for all investors. Affiliates of SSKI may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SSKI and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. SSKI & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related securities. SSKI and affiliates may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SSKI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Any comments or statements made herein are those of the analyst and do not necessarily reflect those of SSKI and affiliates. This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. SSKI will not treat recipients as customers by virtue of their receiving this report.

Explanation of Ratings:
1. Outperformer: More than 10% to Index 2. Neutral: Within 0-10% to Index 3. Underperformer: Less than 10% to Index

Disclosure of interest: 1. SSKI and its affiliates have not received compensation from the company covered herein in the past twelve months for Issue Management, Capital Structure, Mergers & Acquisitions, Buyback of shares and Other corporate advisory services. 2. Affiliates of SSKI are currently not having any mandate from the subject company. 3. SSKI and its affiliates do not hold paid up capital of the company. 4. The Equity Analyst and his/her relatives/dependents hold no shares of the company covered as on the date of publication of research on the subject company. Copyright in this document vests exclusively with SSKI