Godrej Industries Limited – 1Q12

02-Aug-11 Leave a comment

My core holding, Godrej Industries Ltd. (GIL) continues to inch up amidst all this talk about desi rate hikes, debt ceiling, Greco-Roman excesses and Obama’s insomnia. Over the last one year, the stock is up 15.7% compared to the NIFTY. The company announced its 1Q12 results on 30Jul11 covering the following points:

  • The agri business has grown 40% yoy while the other core business of Chemicals is up 28% yoy. Both in revenue terms.
  • A 46.34% growth in consolidated net profit at INR 71.33 crores. The consolidated net sales increased 35.85% at INR 1,307.42 crores for 1Q12.
  • Godrej Properties witnessed revenue growth of 83 per cent despite a difficult quarter for the real estate sector

So to me, the results look very good indeed. In my previous post on GIL (dated 31Oct’10), I’d written about the integration challenges that GIL will face as it goes about acquiring companies. Well, the recent Godrej – Hershey breakup just adds to the fears. I guess global majors may be seeing low barriers to entry in the yummy Indian food sector and therefore itch to go solo. I’m thinking – how expensive would it really be to set up a sales & distribution & marketing infrastructure when denominated in GBP or USD? I don’t know but it may not be a large sum for a global foods major who has decided about getting serious in India. I know I may be trying to justify but typically I do not fall in love with the stocks I own!!

Another update I wanted to share was about the general notion that holding companies are duds because they trade at a massive discount to the market value of the assets that they own. Last month there was a lot of buzz about these holding companies – thankfully the general downward bias of the markets stopped spikes of manic proportions. As of now, I don’t give a rats ass about holding companies other than GIL obviously. Speaking of which I did start wondering about who moved my cheese when I came across this video clip of an interview of Basant Maheshwari on CNBC-TV18!! This is what he had to say about the Godrej gang of shares.

Godrej Industries did very well for 4 – 5 years because investors who wanted to buy Godrej Properties, couldn’t buy Godrej Properties. The only option was to buy Godrej Industries, but now if Godrej Properties is listed and I am bullish on Godrej Properties, I’ll go and buy Godrej Properties. Why will I buy Godrej Industries?

And these are the nuggets of wisdom I picked up from this interview:

  • Embedded values in holding companies always remain valuable!!
  • Investors make money in a cheap stock only when the cheap stock becomes expensive. So it has to bloody well move. There is no point in holding up your capital on a sloth.
  • If you are playing for the valuation gap i.e. the discount factor of the holding company to aggregate market value of its assets, then that’s wrong since the discount will always continue to exist.
  • Key play should be in holding companies which A) consolidate the earnings of their subsidiaries; B) the subsidiaries pay dividend and C) the holding company has a majority holding. C being the cause of point A  really.
  • Buy those kind of holding companies whose subsidiaries are not listed such that the act of taking them public monetises  the discount factor and unlocks value.
  • A holding company that receives discount from its subsidiaries usually does not go into too steep a discount. That is because if the dividend yield of the subsidiary is X% and the holding company is at a Y% discount then the dividend/income yield on the holding company’s portion of investion would be X%/(1 – Y%). The market will flatten this discrepancy by reducing the discount.
  • The reason why discount is justified is because if a holding company decides to monetize its assets and sell of all its holdings, it will still have to pay taxes on the income recieved. Therefore, the logic for discounting holding company’s asset values is correct.
  • Finally, if you are bullish on the holding company you have to be bullish on the underlying assets. If those assets are listed, it always makes sense to buy the underlying assets directly.

Now this has me thinking. Need to investigate and read up more to figure out what to do.

Finally, This is how some people are valuing the company: 9 times multiple for core businesses of GIL + 40% haircut to the market value of GIL’s stake in Godrej Properties and Godrej Consumer Products Limited. Adding all of this up gives a Sum Of The Parts valuation of ~240 – 250. Given CMP of 225 – 230, the company looks fairly priced. From the short term technicals perspective, 240 looks like a good resting place for the stock. From the longer term perspective, which is mine, the play is to ride the business growth and hope for a measured EPS expansion in the quarters to come.

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Sun TV Network

16-May-11 Leave a comment

Keeping Sun TV in my sights. The stock is currently trading at a 1 yr fwd P/E of 17 (“broker consensus”). I have printed these two charts regarding the stock and kept it on my desk so that I do not forget about it. The first is a one year chart which shows us that the stock has really not gone anywhere. The second chart is on a past 3 year plot, which surprisingly paints the same picture. My first reaction is that the stock must have clearly been pricey during that time with P/Es of > 30 I am sure. Anyways, as of today, the 3 yr chart seems to be saying that a line which is near 360 – 365 seems to have been acting like a support line of late and has behaved like a line of resistance during the earlier part of the 3 yr trailing window. The hitch is that the stock is below both the 100 and 200 day SMA lines. Need to think more. But since I have a heavy exposure to the Indian export industry – both in my stock portfolio as well as my profession, I am inclined to give such charts a second, third and perhaps a fourth look!!

Atrologically, my ruling planet is indeed the Sun. Lets see.

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Godrej Industries Limited – 2Q11

31-Oct-10 Leave a comment

A deluge of work kept me away from the keys momentarily. As I had said in some of my previous posts, I am massively long Godrej Industries Limited. While the stock has moved up quite a bit since my first post on it dated 11Jul’10 it did give back some 13% of its gains during the previous 45 days or so. I am perfectly happy with the situation. The position is net up 34% (weighted average) for me over the past 5 months that I’ve been holding it. I guess I was lucky to have bought into it at a good time and from here on I am content for it to give me a slow and steady compounding. In fact the purchase logic was based on the diversification that GIL gives – given it’s 69.4% and 23.4% holding in Godrej Properties Limited (GPL) and Godrej Consumer Products Limited (GCPL) respectively (and other group companies). Of course, there is the native chemicals business of GIL as well . While holding companies will never trade at a sum predicated by the value of their assets, the beta reduces as compared to a direct exposure to GPL. In the case of holding companies, the sum of parts is always less than the whole.

The quartely results of GIL were announced on 27Oct’10. The net profit on a QoQ basis increased by 12.5%; their chemicals and agri business is looking up and other regulation stuff. Nothing much to write home about the results – along expected lines of the company and the analysts. There was an expressed fear about inflaton eating into the profits of GCPL but that did not happen. The possible hardering of the interest rates could eat into the margins of consumer durables industry though which is generally believed to be a rate sensitive sector like auto. That remains to be seen.

I keep tracking the news stories about GIL fairly regularly. The company has certainly kept the news wires busy in the past months. I don’t know why but I end up investing in companies which use Bollywood and regional film personalities to peddle their products. A lot of names have been coming up in my alerts on GIL – the likes of Raveena Tandon, Soha Ali Khan, Vijayalaxmi, Malaika Arora Khan, Vidya Balan, Mugdha Godse et al. The other company whose products are endorsed by stars is Gitanjali Gems, which is now up a further 10% since my last post on it dated 25Oct’10. Cool. Here are some other important news stories that I caught re Godrej Industries:

- The new Godrej Appliances ad tries to shift the customers’ focus from refrigerators to other white goods. The company sells one fridge every 30 seconds in India so they’re correct in spending ad money on stuff other than fridges. The other good thing about the ad is that it does not feature Preity Zinta – which is a good change, according to me! She hung around during the launch of Godrej Eon and how – red tee, shiny asbestos type of pants and a lasso type of belt. I did a quick check on the share price movement on that day (28Jul10): lo and behold, the price actually rose 1%. Doesn’t make sense. She looked old and fat. Should I write in to their investor relations?

- Godrej Agrovet is exploring acquisitions in micro irrigation (competition for my other position in Jain Irrigation?). The prime minister shook a lot of hands in Malaysia recently – maybe that bodes well for Godrej Agrovet’s palm oil business?

- I keep the Godrej hand sanitiser (Protekt) at my work place. It’s good. This market (currently at 25 – 30 crores only) is growing at 50% per annum and is in its infancy. GCPL is eyeing a quarter of this pie.

- GPL expects it’s revenues to rise 50% this fiscal. There have been a few assorted stories saying that realty stocks will fall since the RBI has come out with tougher norms for bank lending to the housing sector. I don’t subscribe to that view. Point being, first time home buyers can always borrow the additional 5% – 10% from family while older home buyers should have the necessary funds. In any case, 1) GPL wants to increasingly focus on affordable housing in cities like Nagpur and Kanpur – where the demand should continue to remain high and 2) some banks were anyways calculating the % of finance at 85% of property value+ stamp duty. There is a tremendous ambition in smaller towns to go upscale and improve the quality of lives – and GPL should benefit. There is another company called Ashiana Housing Limited – which looks reasonably priced and is also following the joint venture model of GPL. Need to check on that story. But later.

- They’re looking to merge GCPL with Godrej Household Products Ltd (GHPL). GCPL is keen on acquiring FMCG firms, particularly in hair colouring, household insecticide and personal wash segments in Asia, Africa and South America. Good luck on that. The proces of consolidation will show whether GCPL can truly make itself over into a true multinational with a common footprint across multiple countries rather than merely being a company with a motley collection of stakes in various companies across the occident and the dark continent.

- Close to 80% of construction of GPL will be for residential purposes. Thankfully, we need not worry about SEZs and other commerical sales, which are highly correlated to business environment. The good thing about GPL (had mentioned in previous posts) is that it just wants to focus on its core area of expertise – getting the projects, the JVs with land owners, marketing and sales and using its brand pull to get in the home buyers.

- While the focus is on affordable housing in the 25 lakh bracket, GPL also has its game right in the mecca of big property in this country: Bombay. The story about it’s gigantic plot of land in Vikhroli is old hat. What’s new is the JV with Bombay Footwear to develop 1.5 lakh sq ft in Chembur and a MoU with Jet Airways to deliver 1 million sq ft of office space in Bandra Kurla Complex.

Mutual funds have been on a selling spree while the Foreign Institutional Investors lap up our desi shares. GIL however has been on the buy list of the fund houses like DSP, Edelweiss, HDFC and Religare. I am ready to load up more on my already massively long, passively managed position but it needs to dip down (on unrelated news). Till such time I will have to keep suffering Preity Zinta I guess. Cheers.

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Gitanjali Gems Limited

25-Oct-10 Leave a comment

The light is shattered into gold on every cloud, my darling, and it scatters gems in profusion.

Mirth spreads from leaf to leaf, my darling, and gladness without measure.

The heaven’s river has drowned its banks and the flood of joy is abroad

 - from Rabindranath Tagore’s anthology of poems called Gitanjali 

I had picked up Gitanjali Gems on 29Apr’10 and have been holding it since then. The point of my purchase is shown as the green star on the chart alongside. The timing looks awesome but I don’t really care – I’ve gone through the motions quite a few number of times by now. What I am really focused on and trying to discover is a personal method that helps me to know the right time to sell. If I can reach that stage of ‘enlightenment’ by my next birthday, I would have really matured as an investor – in my opinion. Coming back to Gitanjali Gems, it has been an awesome climb, right? In all of 6 months! So is it time to say bye to bling bling? I don’t think so. Why? I like it! Reason enough? It better be!

Take a look at its website and you’d be forgiven to think that u’d landed at some Bollywood portal given that Neha Dhupia, Salman Khan, Katrina Kaif and Kareena Kapoor glitter through in huge 4” by 8.5″ sized banner frames!  At least in my browser window. As if personifying Nakshatra, D’damas, Gili and Asmi. And that’s the point – the company has been so successful in transforming these product names into integrated brands with massive recall. There’s Sangini and Vivaaha as well. Shahrukh Khan is also hidden somewhere in the inner pages of the website – try that ‘treasure hunt’ search if you have nothing else to do and are fully invested in this company.

The CMP of 285 currently discounts it’s trailing 12 month earnings 12 times. It was 5 times when I had purchased it. The company is selling for INR 2,400 crores which is about 530 million USD. Given that it has ambitions of becoming a global brand, that number does not look out of whack, especially when you consider that the mcap/sales ratio of it’s sterling competitor, Titan Industries is 3.3 as compared to 0.71 for Gitanjali. Moreover, Titan Industries’ Tanishq is more into gold as opposed to diamonds. And how does that matter? The shine of diamonds is more than the glow of gold – i.e. margins in diamond retail is more than gold jewelley. Gold has appreciated 17% (in INR terms) in the past one year while diamonds have become dearer by 25%. But since Gitanjali has stake in Tanzania’s bloody mines the raw material price spike will not hurt as much. I think going forward more and more people will start comparing Titan to Gitaljali (if they are not doing so already) and perhaps that will make some difference. The labour required to cut is more than the effort needed to goldsmith. Not high at all, I’d guess. Speaking of global ambitions, the company has recently acquired an Italian jewellery and design firm,

It spent INR 25 crores servicing its debt in 1Q11 which is approximately 2.5% of what it sold. In that sense, the big question mark is the retail foray. Why get into making malls and infrastructure when diamonds are forever? Will they add more leverage to their balance sheet? My hunch is that the Italian Job and/or the SEZ fling will increase the interest costs for the company – let’s see.

I think I will hold on given that this position of mine has perked up 144% in double quick time, so even if it corrects I’ll be cool. The technicals are shooting up full steam ahead and the share has seen a near parabolic climb recently. So some steam will definitely get let out. My investment logic was never based on such crappy observations that Indians are getting urbanized and therefore they’ll shun traditional gold ornaments and stud themselves with diamonds. The market leader in branded diamond jewellery was available at a market cap of INR 980 crores only. So while it was not some Grahamian deep discount discovery but there indeed was lot of money on the table to pick up. Now, however, it looks like a traditional and boring growth story. But even a slow and steady rise of 15% per annum will make it a 3 bagger for me in 18 months or so! The anticipated deluge of US hot money notwithstanding. If that target is reached much sooner, then I’ll jump out. But wait. Is this not a retail stock? And don’t retail companies, especially ones with a glittering track record and market leaders in their segment get high multiples? If we assume an EPS of 30 for close of next financial year, it’s forward P/E comes to 9.5 only. Plebian, male names sell at such high forward P/Es. When will India and Indians give equal opportunity to females, I wonder. Look at the table below to see what I mean. Gitanjali means an offering/anthology of songs. Would it have made any difference to its valuation if Mehul Choksi would have called his company Upanishad Jewels? ( = anthology of teachings from Vedic Hinduism) Or maybe his choosing the name Gitanjali might have been quite a prescient flash then? I don’t know what these boring boys are doing with jewels and diamonds – let’s leave them for pretty girls like Gitanjali and focus on making money instead.

And please do not ask me why I did not buy this stock when it was INR 34 (Mar 2009) if I am really as smart as I pretend to be.

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