17/11/2011 (MoneyControl.com) - ICRA Equity Research Service has come out with its report on Godrej Industries (GIL). The research firm has maintained the fundamental grading of '4+' and valuation grading of 'B' to the company.

Godrej Industries (GIL)’s net sales (on a consolidated basis) rose by 41% YoY to Rs. 1,399 crore and net profit (after minority interest) grew by 24% to Rs 92.8 crore for the quarter ending September 2011 (Q2 FY12). The strong revenue growth was driven by healthy growth across businesses (Godrej Properties: +279% YoY, Oleo-chemical business: +45% YoY and Godrej Agrovet: +28% YoY). Besides, GIL’s consolidated EBIDTA margins improved significantly (+389 bps YoY) to 6.7% in Q2 FY12 on account of healthier profitability in across properties, oleo-chemicals and agri-businesses. Moreover, exceptional income on sale of long term investments (Rs. 46 crore) has resulted in a healthy 6.6% net profit margin for the company in Q2 FY12. Overall, the strong quarterly performance has been in-line with our estimates and hence we maintain GIL’s Fundamental Grading of ‘4+’ indicating “Strong Fundamentals” and Valuation Grading of ‘B’ indicating “Moderately Undervalued” on a relative basis.

Oleo-chemicals – healthy volumes and operating margins aided by high capacity utilizations and increasing contribution from specialty chemicals

GIL’s oleo-chemicals division reported a strong 45% YoY revenue growth to Rs. 340 crore in Q2 FY12, backed by a robust 77% YoY exports growth during the quarter. The EBIT margins for the division reported significant expansion (~360 bps QoQ to 10.6% in Q2 FY12) due to high capacity utilizations and increasing contribution from specialty chemicals (~35%) & export sales (~44%). Although volume growth is expected to moderate going forward due to capacity constraints, we expect the division to report healthy performance for the year supported by strong realizations.

Godrej Properties – focus on de-risking business model amidst turbulent time for real estate developers

GPL reported a robust 279% YoY revenue growth to Rs. 131 crore in Q2 FY12, although QoQ revenue growth remained flat. Besides, EBIDTA margin improved 755 bps QoQ to 23% due to higher share of relatively more profitable residential property segment. GPL has signed an agreement with Godrej & Boyce (G&B) to develop Vikhroli property, wherein GPL will receive 10% share of revenue as development manager fees whereas construction and development expenses will be borne by G&B.

Godrej Agrovet – Strong quarter with robust growth across all segments

GAVL has registered a robust 28% growth in net sales to Rs 641 crore and 80% growth in PBIT to Rs 45 crore in Q2 FY12. While all major segments have reported strong growth, oil plantation business continues to surprise with strong 95% YoY revenue despite softening in crude palm oil prices.

Godrej Consumer – Strong revenue growth supported by inorganic expansions, margins expand with price increases, lower ad spends and integration

synergies GCPL’s consolidated net sales grew by 23% YoY to Rs. 1,186 crore supported by strong growth across domestic (+24% YoY) and international businesses (+19% YoY on like-to-like basis). Besides, EBITDA margins for the company increased 326 bps QoQ to 18.0% in Q2 FY12, as effective price increases offset high raw material costs leading to gross margin expansion and further supported by rationalization in advertising spends and integration synergies derived by the company.

Valuations: GIL’s FY13E earnings multiples are at ~10% discount to broader market indices like CNX Nifty index and at a ~15% premium to CNX Midcap index. However, GIL is an investment company with significant value inherent in its key investments - GCPL, GPL and GAVL - which are present across various business segments. As per our estimates, GIL’s consolidated revenues are estimated to grow at a compounded annual growth rate (CAGR) of 15% during FY11-FY14E, while the consolidated EPS is estimated to grow at a CAGR of 36% during the same period. Considering our strong EPS growth expectations for the next three years, we find Godrej Industries to be still undervalued and retain our valuation grade of ‘B’ assigned to the company on a grading scale of ‘A to E’, which indicates that the company is ‘moderately undervalued’ on a relative basis.