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Godrej Soaps: Making the right moves but…

Sep 26, 2000

Godrej Soaps, the consumer products to chemicals company has been in the news lately. The company whose valuations are one of the lowest on the bourses (P/e 3.5 times FY00 earnings) is in the throes of a restructuring. The reasons for its poor valuations are not hard to find. Though Godrej Soaps has some well-known brands in its portfolio including Cinthol, Good Knight and Jet, investors are wary of this company because of the management’s traditional unfocussed approach to the business. The company also has a lot of investments in other Godrej group companies and a huge debt burden (Rs 3.4 bn in FY00). The company has been restructuring its operations. It recently divested 22.5% of its stake in Godrej Sara Lee joint venture to its holding company, Godrej Boyce for a consideration of Rs 509 m. This not only helped it reduce a part of its huge debt burden but also aided it to report a stupendous 300% jump in net profits.

That’s not all. Godrej Soaps still has around 26.5% stake in the Sara Lee JV. The company plans to offer 25% to the public. The company has indicated that it will utilise the proceeds from this public offering for reducing its debt further. This will again add to the company’s operating efficiencies and margins.

The company’s consumer products division has shown encouraging growth in FY00. In FY99, edible oils (commodity) accounted for 33% of turnover, chemicals 27% and consumer products 29%. Cut to FY00, the company moved out of the edible oils. This proved to be a good move. The sales mix in FY00 was: 49% consumer products, 37% chemicals and the remaining 14% taken up by contract manufacturing and edible oils.

Attaining the right mix

Taking into consideration the high returns offered by the consumer products division (around 36% return on capital) the management not only decided to buy out more brands to add to its portfolio (Ezee, Trilo and Key) but has also decided to demerge its consumer products and chemicals divisions into two separate companies in the next six months. The management hopes to unlock the potential valuations of the consumer products division and make it more comparable to other leading FMCG companies like HLL and Nirma. The demerger will also reduce the debt burden for the consumer products division to around Rs 1.5 bn.

All these steps seem very positive for growth in the FMCG business. But concerns still remain on cross holding between group companies. Godrej Soaps is looking at increasing its stake in group companies Godrej Foods and Godrej Photo-me. It is also looking at property development business. So for Godrej Boyce, the holding company all this might be good, but for the Godrej Soaps’ retail shareholders this constant deviation from core businesses is definitely is cause for concern.

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