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Quality franchise, holding company discount to taper
Godrej Industries is the flagship company of the Godrej group with holdings in other group companies viz. Godrej Consumer Products (24% stake), Godrej Properties (49% stake) and Godrej Agrovet (58% stake). On a standalone basis, the company operates in the oleo-chemical business with steady state operations and business prospects. The company, in the past (July 2019), sold off its loss making retail franchise i.e. Natures Basket at an enterprise value (EV) of ~Rs 300 crore.
Prevailing holdco discount at 55%, two-year average at ~45%
Godrej Industries derives its primarily value from its holding in other group companies. Its share of holding as of date (November 2019) has a market value of ~| 33,000 crore vs. its prevalent market capitalisation of ~| 15,000 crore, thereby implying a holding company discount of ~55%. In the past two years, we have seen this holding company discount averaging at ~45%, providing us hope of prevalent discounts converging towards their mean.
Valuation & Outlook
We assign a target price of Rs 500 to Godrej Industries valuing its investments in other group companies at 50% holding company discount to their prevalent market capitalisation and valued its base oleo-chemicals business at 1.5x MCap/sales. We have a HOLD recommendation on the stock.
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