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At 62% discount to NAV vs average of 50%

Godrej Industries (GIL) generates major value from its listed subsidiaries and associates viz. Godrej Consumer, Godrej Properties and Godrej Agrovet. As per ISec target prices for Godrej Consumer, Godrej Properties and Godrej Agrovet and 50% holdco discount, GIL’s value works out to Rs654/share. At current market prices of the listed subsidiaries and associates, GIL’s value works out to Rs682/share.

The stock trades at a discount of 62% to combined market value of subsidiaries and associates. We believe the subsidiaries as well as associates of Godrej Industries to be net beneficiaries of revival in economy. We also expect these businesses to benefit with value migration from unorganized to organised sector. We value GIL as per SOTP method at TP of Rs654 (Earlier TP-Rs623).

Considering higher than average discount prevailing on the stock right now, we upgrade the stock to BUY. Standalone business (<10% of GIL’s TP) reported revenue growth of 148.3%, YoY but incurred a loss of Rs363mn in Q1FY22 compared to loss of Rs711mn in Q1FY21.

* Godrej Industries (GIL) – a holding company:

GIL derives major value from its listed subsidiaries and associates, viz. Godrej Consumer, Godrej Properties and Godrej Agrovet. Apart from these companies, GIL is also running its oleo-chemical business (standalone operations). The palm oil trading business is housed under its 100% subsidiary Godrej International.

* Standalone business reported muted performance:

The standalone chemical business revenues grew 148.3% YoY. There is sequential recovery in business with re-opening up of the economy. EBITDA margin increased to 5.1% in Q1FY22 from - 4.1% in Q1FY21. GIL reported loss of Rs363mn vs loss of Rs711mn YoY.

* Trading at discount of 62% to NAV:

The stock is trading at a holding company discount of 62% to the combined market valuation of its listed subsidiaries and associates. The average discount is ~50% since the listing of Godrej Agrovet.

* Upgrade to BUY:

We value GIL at Rs654 as per the SoTP methodology and I-Sec target prices for GIL’s listed subsidiaries and associates, viz. Godrej Consumer, Godrej Properties, and Godrej Agrovet. At current market prices of the listed subsidiaries and associates, GIL’s value per share works out to Rs682. At holding company discounts of 20%, 30% and 40%, GIL’s value per share works out to Rs1,147, Rs992 and Rs837, respectively. We upgrade the stock to BUY. Key risks are steep increase in competitive pressures and raw material prices and changes in group structure which will impact valuations.

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