Godrej split: What it means for the group's listed companies
Summary
- Historically, after the split of any group company, the valuations of holding companies have typically increased
- An important aspect of the split in the Godrej group companies is a large land parcel at Vikhroli
- Investors should also keep an eye on the resultant open offers in Astec Lifesciences and Godrej Capital
The Godrej family’s decision to split the 127-year-old conglomerate could potentially unlock the valuations of its holding companies—of Godrej Industries Ltd and Godrej Capital, in particular—but investors would do well to wait for the fineprint to manifest.
The restructuring of the group, announced late Tuesday, will result in two entities: Godrej Enterprises Group and Godrej Industries Group.
While Godrej & Boyce Mfg. Co. Ltd will be owned by the families of siblings Jamshyd Godrej and Smita Crishna, operating within the Godrej Enterprises Group, the families of brothers Nadir and Adir Godrej will inherit five listed companies—Godrej Industries Ltd, Godrej Properties Ltd, Godrej Agrovet Ltd, Godrej Consumer Products Ltd, and Astec Lifesciences—under Godrej Industries Group.
As at the end of March, Godrej Industries held a 23.7% stake in Godrej Consumer Products, 47.3% in Godrej Properties, and 64.88% in Godrej Agrovet. Godrej Agrovet, in turn, owns a 64.76% stake in Astec Lifesciences as a promoter. The combined valuation of these five listed companies is ₹2.4 trillion.
Historically, valuations of group companies have typically increased following such a split, given the clear alignment of powers and a transparent shareholding pattern, said Sachin Jain, head of investments at family office Sukvi Ventures.
With ownership well-defined, the direction of business becomes clearer, board resolutions can be passed unanimously, and stakeholders know which vision to pursue, he added.
Also read: Godrej family's division strategy: A model for amicable business succession
“Personally, I have been steadily accumulating shares of family-owned holding companies like Tata Investment Corporation, Bengal and Assam Company, Tube Investments, Mahindra and Mahindra, Godrej Industries, and Bombay Burmah Trading Corporation. These firms consistently trade at a discount of 50-70% compared to the value of the companies they hold," Jain said.
He explained that buying stakes in holding companies offers the potential for value-unlocking if they decide to demerge their investments or reduce or sell stakes in their subsidiaries.
He, however, acknowledged the risk that a demerger may take long or not occur at all. Nonetheless, he said that as the market value of the investments rises, the value of the holding companies would also increase.
A point in case is Godrej Industries, which holds stakes in the other four listed companies; it's currently trading at a discount of more than 50%.
A sizeable parcel
All said, the Godrej family is one of the largest landowners in Mumbai, with about 3,400 acres under its belt, including a single land parcel of 3,000 acres at Vikhroli.
Godrej & Boyce, which is the owner-developer, and Godrej Properties, which is the development manager, have agreed to maintain their memorandums of understanding for developing this land parcel.
While the MoUs are expected to be honored, the split has the potential to affect the value of Godrej Properties, according to Rupesh Sankhe, an analyst at Elara Securities (India).
He suggested keeping an eye on whether the unlisted land bank, under another promoter, chooses to go public separately in the future, as this could significantly impact the role of minority shareholders.
Also read: Godrej group could see birth of another property developer
“Which group will control how much land post the split will be something that the capital markets will await. If Adi Godrej’s group gets a majority of the land parcel, it will boost the value of Godrej Properties," said Jain of Sukvi Ventures.
An open offer
The Godrej family arrived at an amicable split after a settlement was signed between the two factions after talks for at least two years so “the split may be largely neutral for stock prices of the listed entities except to the extent open offers are triggered due to the split," said Dhiraj Relli, managing director and chief executive, HDFC Securities Ltd.
Due to the realignment resulting from the family settlement agreement, an open offer will be extended to the public shareholders of Astec Lifesciences.
Since the listed stocks did not have an overhang of this split, Relli believes no major move can be expected in their stock prices. Instead, he expects their performance to be driven mainly by their quarterly results.
Over the past year, shares of Godrej Industries, Godrej Properties, Godrej Agrovet, and Godrej Consumer Products have risen in the range of 24-113%, whereas that of Astec Lifesciences has dropped by about 4%.
A capital factor
Another aspect investors should monitor is Godrej Capital, the holding entity for Godrej Housing Finance and non-banking lender Godrej Finance.
“Godrej Industries has been focused on increasing stakes in the entity since quite some time now, and post the allocations, the group will seek to unlock significant value through the listing of Godrej Capital," said Nirav Karkera, head of research at investment platform Fisdom.
Even so, some market experts believe an immediate listing of Godrej Capital might be challenging as the company is yet to become profitable. They expect that once that happens and the company becomes self-sufficient for its capital needs, Godrej Industries may reduce its stake in Godrej Capital and pursue a stock market listing.
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