Stock trading at discount of 49% to value of subsidiaries; ‘Buy’ stays with TP of Rs 776.
Godrej Industries (GIL) has sold its retail arm to Spencer’s Retail for cash consideration of `3 bn. We believe it is a value-accretive divestment as GIL has sold Nature’s Basket before further erosion of balance sheet and brand strength. We expect GIL to use the cash proceeds to repay debt. The FCF of GIL funds losses of Nature’s Basket but now we expect higher dividend payouts.
As per I-Sec target prices for Godrej Consumer, Godrej Properties and Godrej Agrovet, GIL’s value works out to `776. At current prices of listed subsidiaries and associates, GIL’s value works out to `749. The stock trades at a discount of 49% to combined market value of subsidiaries and associates vs our assumption of 20% holding company discount (considering dividend distribution tax). We maintain our Buy rating on GIL with a target price of `776.
Nature’s basket was a leaking boat: Nature’s basket has generated losses for the past 10 years. The accumulated losses are `3.5 bn. We note, Godrej Industries had reduced the number of stores and tweaked the format in FY17-18. It also increased focus on online retail but losses continued.
Maintain Buy: We value GIL at `776 as per the SoTP methodology and I-Sec target prices for GIL’s listed subsidiaries and associates. At current market prices of the listed subsidiaries and associates, GIL’s value per share works out to `749. At holding company discounts of 30%, 40% and 50%, GIL’s value per share works out to `660, `571 and `482, respectively. Even with historical average discount of 43%, GIL’s TP will be `544, indicating upside of 20%.