Temasek buy fresh fodder for Godrej Industries' investors
Dec 18, 2012 (Menafn - Mint - McClatchy-Tribune Information Services via COMTEX) --Godrej Industries Ltd's decision to sell 19.99% in unit Godrej Agrovet Ltd (GAVL) to Temasek is a positive for its investors. At the price of Rs.572 crore for the one-fifth stake, the value of the subsidiary amounts to Rs.2,288 crore.
That is more than 10 times the amount (Rs.163 crore for a 75% stake) which Godrej industries has invested in the agri-business unit. It also paves the way for a listing of the unit in the future, something which has happened previously in the case of Godrej Properties Ltd, another subsidiary, and will unlock value for investors.
In any case, private equity investors look to exit their holdings down the line at a significant multiple and thus, shareholders can look forward to more action and positive news flow from the company.
Godrej Industries' consolidated accounts show that the animal feed and vegetable oils segments -- the two main businesses of GAVL -- contribute 51% of its revenue. However, it contributes only a quarter of profit before tax to the company. These are low-margin businesses and the main challenge for the company would be increasing the profitability, especially in segments such as vegetable oil. In the September quarter, although this division reported a 91% increase in revenue, its profit before tax fell 24%.
According to a statement from the company, Temasek's "investment will be a combination of primary and secondary investment, with the primary investment intended to support GAVL's future expansion plans".
If the secondary investment is intended as Godrej Industries selling a part of its stake in GAVL to Temasek, the inflow of capital would allow the holding company to invest in other, perhaps more profitable, businesses as well.
That would help, especially since the cash reserves of the company have come down to Rs.279 crore at the end of September from Rs.464 crore six months ago. Else, it could help Godrej Industries retire some of its debt which has remained stable at around Rs.2,500 crore.
In any case, that would likely provide a further fillip to the stock price. Despite some adverse events such as the company having to book a loss at its joint venture with Hershey, the Godrej Industries stock has climbed in recent times. It has gained 81% this year, compared with a 25% gain in the broader markets. While its valuation, at 24 times the next 12 months' forward earnings, seems rich, the unlocking of value in the subsidiary could lead to an upward re-rating.
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