Godrej Group: Holding the Gems

Clifford Alvares, Business World, 26 April 2017

In March 2017, Godrej Industries raised its stake in one of its fast-growing subsidiaries, Godrej Agrovet, by purchasing an additional 2.87 per cent stake. With this purchase, Godrej Industries increased its stake in the unlisted subsidiary to 63.68 per cent. The result? The Godrej Industries' stock cheered the acquisition and gained nearly 5.5 per cent.

When it was first carved out of the soaps business back in 2001, Godrej Industries just housed the chemicals business and stakes in GCPL. But over the years, through strategic acquisitions and new divisions, the business has steadily consolidated and expanded into agri-division and Godrej Properties.

Under Adi Godrej's guidance, Godrej Industries has made dozens of acquisitions and formed several joint ventures through its subsidiaries. Now, it acts not only as a standalone business firm but also as a holding company for the group.

Godrej Industries has everything covered in the Godrej empire either directly or indirectly through stakes in various subsidiaries. The business has interests in chemicals directly. But it's also an industrial conglomerate. It holds stakes in the flagship Godrej Consumers (23.6 per cent), Godrej Properties (56.7 per cent), Nature's Basket (100 per cent) and Godrej Agrovet (63.8 per cent), where it recently bumped up its stake.

When analysts see these holdings, their natural tendency is to value these businesses on a per-share basis, accounting for the holding company discount. As the business houses major stakes in some of the fast-growing companies, the analysts have pegged a separate valuation to these companies.

The sum-of-the-parts valuation of all these businesses is quite substantial, and comes close to around Rs 530 in the books of Godrej Industries.

But there's another reason why the market tends to like Godrej Industries, and that is because it's an indirect play on the fast-growing agri-chemicals and agri-products businesses.

Godrej Agrovet, for instance, has built a stream of businesses that have been increasing their footprint in the country. A few years ago, it invested in the fast-growing milk segment and dairy production business by buying a stake in Creamline Dairies, recently it acquired a further stake to take its share to 51 per cent.

In August 2015, Godrej Agrovet acquired a 45 per cent stake in Astec Lifesciences, which is into plant nutrients and herbicides. Looking at the potential of the business, Agrovet later decided to make Astec a full-fledged subsidiary and acquired a further stake to take its total shareholding to 53 per cent. Astec's business portfolio, comprising fungicides and herbicides for the Indian and global markets, compliments the agri division of Godrej Agrovet. It gives access to new markets, and also adds new molecules and creates synergistic benefits.

In order to boost the 'Make in India' programme, Godrej Agrovet has also ventured into palm oil production. India imports 12MT of edible oil for consumption purposes out of its total demand of 20MT. Agrovet steps in as one of the largest palm oil developers with over 62,000 hectares planted for palm oil production, of which 35,000 is under production and the rest will see fruition in the next three to four years. Over the years, it will help the country in saving precious foreign currency.

To grow in the animal feed business, Agrovet forayed into manufacturing through a joint venture with one of Bangladesh's largest conglomerates ACI. Agrovet's steady focus on manufacturing and introducing new products in various segments has put it among the top three players in all the three segments of animal feed, poultry feed, and aqua feed. Much of these businesses have huge potential to grow because the feed market is still underpenetrated.

But not only have these strategic businesses and acquisitions made Godrej Agrovet a fast-growing company, it has also helped the company to deliver high returns on equity. The company is expectedly earning around 30 per cent return on equity on its businesses, as per some reports.

And then, the stakes in GCPL and Godrej Properties make the Godrej Indutries story as a holding company much stronger. GCPL's transformational journey from a soaps manufacturer to an emerging market's consumption theme business is well-chronicled. And Godrej Industries stake in this business is worth approximately Rs 12,500 crore.

Godrej Properties is emerging as a real estate play on the rising consumption theme once again and on the changing regulatory environment in the real estate space.

For Godrej Industries, the various stakes in the fast-growing niche businesses is what gives it strength. Just a few years ago, the company's stock was valued at around Rs 250 in the market; it is now trading at twice the price, as the company has been growing steadily for the last six-seven years.