DEMERGERS

January 27, 2009

TERM PAPER DEMERGERS

Table of Contents

Acknowledgement…………………………………… …………2 Demerger: Ways demerger……………………………3

of

Pros and Cons Demerger…………………………………4

of

Godrej Soaps LTD………………………………………………..5 Case Introduction……………………………………………… ..6 Financial Overview………………………………………………79 Ratio Analysis……………………………………………………. .9-11 Post Demerger………………………………………………….12 -13 Conclusion……………………………………………… …………..14 ALLAINCE BUSINESS SCHOOL, BANGALORE

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Bibliography…………………………………………… ……………15

ALLAINCE BUSINESS SCHOOL, BANGALORE

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Acknowledgment We the team members of Team no-6 are highly obliged to our Cost and Managerial Accounting Professor, Dr. Ramkesh Gupta for his valuable insights into the topic chosen for the term paper by the group. It was with his guidance and ability to boost our confidence that made this term paper possible. We are also highly indebted to Dr (Prof.) Seshana and Dr (Prof.) Mendes for their valuable suggestions and insights into the related topic. We would also like to thank the Computer Lab Coordinator and his assistant for being available and providing us with their technical support. We hereby take this opportunity to thank almighty for being with us in the thick and thin and guiding us to a path that leads to success and glory.

Team No-6


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DEMERGERS: Dividing to multiply Demerger is the converse of a merger or acquisition. It describes a form of restructure in which shareholders or unit holders in the parent company gain direct ownership in a subsidiary (the ‘demerged entity’). Underlying ownership of the companies and/or trusts that formed part of the group does not change. The company or trust that ceases to own the entity is known as the ‘demerging entity’. If the parent company holds a majority stake in the demerged entity, the resulting company is referred to as the subsidiary.

Ways of demergers Ownership interest- in this method the equities of the demerged companies equities and shares are disposed off the head entity.

Ownership interests in the demerged entity are cancelled and new interests in that entity are issued by the head entity. The demerged entity issues enough new interests to owners of the head entity to bring about an effective transfer.

Demerger is usually done when costs and benefits of integration are higher than the benefits that firms should divest in one or more of its units.

Value creation through demerger

Dismantling of conglomerates - it involves removal of sick unit or product lines in declining stage. Organizational improvements - this reduces the hierarchy and then in turn the informational loss. Capital market improvement : it helps the organization remain more focused and concentrate one same kind of product line. Corporate governance improves. Bond holder expropriation : the shareholders of the company feel more safe to invest in a company with same kind of product line ALLAINCE BUSINESS SCHOOL, BANGALORE

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Pros & Cons of Demerger: 1) Government Aspect. These are the ones which can be achieved in the current structure but it would be better in a demerged structure. 2) Current structure: •

•

•

Demergers help in focusing on the core values of the business instead of getting distracted because of various different unrelated product categories. The de-merger of a highly promising business from others may help focus stock market attention on the business. But it can also make the individual stocks more vulnerable to swings in fortune in their chosen area of business. Many spin-offs appear to be motivated by the prospect of better valuations for the individual businesses. But stock valuations are influenced by too many extraneous factors. It helps create greater shareholder wealth. So, a demerger does not immediately lead to better stock market valuations once


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GODREJ Soaps Ltd. The Godrej Group was established in 1897 and has since grown into a US$1.875 billion conglomerate with a workforce of 18,000. Inseparable from daily life in India, the Godrej name has been built on a spirit of innovation that has made it one of the country's most remarkable industrial corporations. The corporation had its beginning in India's freedom struggle. Its founder, Ardeshir Godrej, was a staunch nationalist and believed that the country's economic degradation was even worse than its political subjugation, and that freedom could not be won unless it became self-reliant. Beginning with security equipment and soaps, the group diversified into a wide variety of consumer goods and services, all constructed on the strength of the Godrej brand. Godrej Soaps Limited is a member of the Godrej Group, which was established in 1897 and has since grown into a US$1.875 billion conglomerate.

Reasons for demerger 1) Godrej Industries, which housed the soaps and hair care businesses

of the Godrej group, suffered from an anemic price-earnings multiple (PEM) of around six times its earnings in 1999, at a time when the market was willing to value a rupee of earnings for focused FMCG companies at over 25 times. 2) A balance sheet loaded with heavy debts and a complex product profile did not help Godrej soaps to kind the valuation its with peers in the FMCG(Fast Moving Consumer Goods ) sector commanded in FY00 the contribution chemical division to the overall revenue of the company was substantial 42% while consumer product business was off 55%. This significant high contribution from chemical division company prevented from being treated as an FMCG company. ALLAINCE BUSINESS SCHOOL, BANGALORE

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3) The demerger was to create a new company focused on the FMCG

sector and which will enhance shareholder value . ROCE and RONW ratio of this company, GCP L was expected to be brought to the level other competitor FMCG companies in India. 4) From an investment perspective, any benefits from Godrej's clutch of FMCG brands were more than offset by the lackluster prospects for its remaining businesses — a mix of industrial chemicals, medical diagnostics, edible oil trading and financial services. But the de-merger of Godrej's Consumer Products business, was supposed to help in securing a much higher valuation for the consumer products business and put this business on a growth trajectory. The spin-off was transparently structured to favor Godrej Consumer Products. 5) The contribution to the sales revenue was only 46% by the consumer goods sector of Godrej which failed to give it a FMCG sector status.

CASE INTRODUCTION Godrej soaps limited demerged into two separate entities. With effect from April 1, 2001, the consumer products division has been demerged into Godrej consumer products ltd ., which will be a focused fast moving consumer goods company. Godrej industries ltd retained the business comprising of industrial chemicals, medical diagnostic equipments, and investments in group companies. The demerger took place in the ratio of 60:40, in favor of Godrej Industries.

Key Factors: 

Consumer business was part of the conglomerate, with core profitability of the consumer segment not being unlocked.



Godrej Industries focus on AOS and Fatty Alcohol along with investments in Godrej Sara Lee and Godrej Agrovet was not appreciated by the market.



Consequently, GCPL was de-merged from Godrej Soaps Limited (renamed as Godrej Industries Limited). GCPL’s focus is the FMCG sector with emphasis on personal & household care.


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Methodology for De-merger: The demerger has taken place in the ratio of 60:40 , in favor of Godrej Industries. Godrej Soaps paid-up capital stands at Rs 600m. After the demerger Godrej Industries (GDI) p aid up capital was of Rs 360 m and the Consumer Products Company was 240 m as paid up capital . Post-demerger, shareholders of the original GSL has two sets of shares -Rs 6 face value share of Godrej Industries Ltd, the residual company of GSL, and Rs 4 face value share in the new company, Godrej Consumer Products Ltd (GCPL). Pre-Merger the face value of a GSL share is Rs 10.

FINANCIAL OVERVIEW Godrej Industries Ltd: Industry :Chemicals Organic - Large (Rs in Crs) Particulars` Equity Paid Up Networth Capital Employed Gross Block Net Working Capital ( Incl. Def. Tax) Current Assets ( Incl. Def. Tax) Current Liabilities and Provisions Total Assets/Liabilities Gross Sales

03/20 08 31.98 1041. 71 1477. 38 541.5 1 436.5 1 815.7 6 379.2 5 1845. 95 785

03/20 04 29.19

03/20 02 36.98 209.5 3

469.1 456.9 4

03/20 03 29.19 209.3 8 431.8 5 462.0 7

-22.32 256.8 5 279.1 7 746.1 8 764.8

-5.22 270.4 2 275.6 4 703.2 6 698

86.4 289.2 8 202.8 8

258.6


494.6 448.3 7

688.7 548.2

03/20 01 59.79 295.2 6 557.7 4 492 80.76 295.7 214.9 4 764.3 2 869.9 8

January 27, 2009


Net Sales

Other Income Value Of Output Cost of Production Selling Cost PBIDT PBDT PBIT PBT PAT

CP Revenue earnings in forex Revenue expenses in forex Capital earnings in forex Capital expenses in forex Book Value (Unit Curr) Market Capitalisation CEPS (annualised) (Unit Curr) EPS (annualised) (Unit Curr) Dividend (annualised%) Payout (%) Cash Flow From Operating Activities

713.6 3 128.3 7 708.2 3 590.8 7

46.28 173.7 9 135.5 1 148.3 2 110.0 4 108.8 1 134.2 8 302.2 7 346.0 9 0 0.09 32.57 8294. 01 3.99 3.19 125 39.18

9 712.7 7

650.0 8

5 508.9 1

3 776.4 1

36.33 708.9 7 606.0 4

36.86 665.2 8 568.5 2

51.5 502.8 9 426.2 5

27.95

21.95

98.69

24.92 101.8 5

96.09

23.43 761.8 8 529.2 9 121.8 6 108.5 7

85.32

80.19

62.15

69.46

77.19

79.74

74.55

83.26

63.82

58.08

40.61

44.15

35.11

32.68

29.88

40.65

86.61

54.79

133.4 225.4 5 0 0.19 53.16 221.3 6 17.42 13 50 23.07

97.46 195.7 4 0 0.51 43.04

51.42 104.9 2 145.2 5 0 0.41 34

65.96 110.8 3 149.2 5 0 0.18 49.38 363.7 7 10.73 6.49 30 46.21 169.1 2

75.72

Cash Flow From Investing Activities

50.3 262.6 2

70.06 11.01 6.46 33.33 30.96 137.5 4

97.23 8.34 4.85 10 12.38

-59.94

-27.3

12.58

Cash Flow From Financing Activities

481.2 4

-28.97

-106.9

-78.66

66.45

-19.31 137.9 3

Godrej Industries Ltd. (GIL) (formerly Godrej Soaps Ltd {GSL} has reported strong results for the year to year basis. There ALLAINCE BUSINESS SCHOOL, BANGALORE

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was a more than 30% growth in sales. The companies PAT also increased from 29.88cr for the year 01-02 to 32.68cr in 02-03.

Godrej Consumer Products Ltd: Industry: Personal Care - Indian YEAR Equity Paid Up Net worth Capital Employed Gross Block Net Working Capital ( Incl. Def. Tax) Current Assets ( Incl. Def. Tax) Current Liabilities and Provisions ( Incl. Def. Tax) Total Assets/Liabilities

Gross Sales Net Sales Other Income Value Of Output Cost of Production Selling Cost PBIDT PBDT PBIT PBT PAT CP Revenue earnings in forex Revenue expenses in forex

03/2 008 22.58 150.5 285.0 9 265.5 6

03/20 04 22.74 42.36

03/20 03 23.06 45.55

03/20 03/200 02 1 23.65 0.01 53.17 0.01

66.58 169.8 2

63.4 149.0 2

75.66 145.6 9

0.31

-21.55 263.7 3 285.2 8

-37.42

-28.43

-20.32

0.1

85.52 122.9 4 189.5 2

82.58

0.1

102.9 178.5 6 520.4 7

0

312.4

76.61 105.0 4 168.4 4 533.0 2 476.0 2 2.05 478.7 8 295.8 6

76.02

81.39

84.65

0

88.55

82.14

77.61

0

85.99

79.05

72.61

0

79.15

73.15

68.22

0

76.59

70.06

63.22

0

64.84

53.56

41.97

0

74.24 7.84 75.41

62.55 7.06 55

51.36 6.8 37.68

0 0 0

567.5 918.0 5 887.1 9 10.26 901.1 8

551.1 135.7 9 195.3 2 184.9 4 179.6 2 169.2 4 148.1 2 163.8 2 14.89 184.6

548.6 491.6 6 2.26 500.6


0

0.1

0

464.9 2.13 453.6 9 279.5 1

0 0 0 0

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2 0 0 6.67 3199. 15 6.56 5.86 400 70.08 156.9 7

Capital earnings in forex Capital expenses in forex Book Value (Unit Curr) Market Capitalisation CEPS (annualised) (Unit Curr) EPS (annualised) (Unit Curr) Dividend (annualised%) Payout (%) Cash Flow From Operating Activities Cash Flow From Investing Activities Cash Flow From Financing Activities

0 0.02 7.45 930.7 6 11.9 10.25 225 88.07

0 0 7.9 601.5 8 10.59 9.04 200 89

0 0 8.99 377.2 4 8.48 6.89 137.5 79.68

0 0 4 0 0 0 0 0

84.31

70.74

78.44

-0.21

-68.19

-21.17

0.49

-10.5

0

-90.66

-56.32

-74.83

-57.3

0.31

The company’s sales took a great take off after the de-merger. The FMCG Company had started with the sale of 520cr straight after the de-merger. The sales kept growing on YOY basis. The PAT also kept increasing signifying the performance and the dominance of the company in the market. Growth in revenues to exploit economies of scale in purchases and manufacturing, further enhancing operational efficiencies.

KEY RATIOS Godrej Industries Ltd. YEAR Key Ratios Debt-Equity Ratio Long Term Debt-Equity Ratio Current Ratio

Mar08

Mar04

Mar03

Mar02

Mar01

0.63

0.93

1.21

1.08

1.06

0.34 1.11

0.7 0.8

0.82 0.87

0.71 0.96

0.75 1.05

Turnover Ratios ALLAINCE BUSINESS SCHOOL, BANGALORE

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Fixed Assets Inventory Debtors Interest Cover Ratio PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) RONW (%)

1.47 4.45 6.31 2.45 15.19 11.95 10.31 10.78 7.54 8.25

1.66 7.01 10.36 6.55 14.27 11.46 12.52 12.61 9.8 32.03

1.53 7.37 9.29 3.68 14.59 11.42 11.49 7.85 4.68 15.6

1.17 5.61 6.95 2.39 18.73 14.8 12.54 10.26 6.33 13.76

1.83 7.95 11.79 2.95 16.18 13.27 11.69 10.99 8.08 24.7

Godrej Consumer Products Ltd. YEAR Key Ratios Debt-Equity Ratio Long Term Debt-Equity Ratio Current Ratio

Mar08

Mar04

Mar03

Mar02

Mar01

0.95

0.48

0.41

0.43

0

0.85 0.85

0.35 0.68

0.33 0.74

0.32 0.76

0 0

3.61 6.51 83.46 17.3 21.28 19.57 20.14 17.84 16.13 113.3 3

3.44 12.68 31.25 30.92 16.14 14.43 15.67 13.53 11.82 147.5 1

3.62 15.68 24.41 23.67 15.41 13.72 14.83 11.74 10.05 108.5 1

7.14 33.97 47.73 13.64 14.91 13.11 13.95 9.87 8.06 157.8 4

0 0 0 0 0 0 0 0 0

Turnover Ratios Fixed Assets Inventory Debtors Interest Cover Ratio PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) RONW (%)

0

Significance: ALLAINCE BUSINESS SCHOOL, BANGALORE

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1) The debtequity ratio for the Godrej Industries limited stood at 1.08

for the year 01-02 which showed the company had a balanced debt and equity after the demerger also. However, the company’s debtequity improved in 2003-04 to 0.93 2) The debtequity ratio for the Godrej consumer product limited was

0.43 for the year 01-02 which showed the companies 50% were Equity. 3) Current Ratio for Godrej Industries Limited was 0.96 and was below 1 which showed the companies did not have a healthy ratio. 4) Current Ratio for Godrej Consumer Product Limited was 0.73 and

was below 1 which showed that the company’s major part of working capital was current liabilities. However, the companies Current Ratio has improved over a period of time.

ROCE (Return On Capital Employed) REALITIES Effective Deployment of Capital : ROCE capital of consumer division stood above 30% while that of other businesses were less than 5% this pulled the entire companies and hence effecting its market valuation .

CONSUMER PRODUCT BUSINESS FY99 OPM(%) 8.5 ROCE(%) 12 Source : www.indiainfoline.com

FY00 16.8 38


FY01 13.5 36

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CHEMICAL BUSINESS FY99 OPM(%) 5.1 ROCE(%) 0.0 Source : www.indiainfoline.com

FY00 8.2 4

FY01 12.7 11

Significance:

The ROCE was improving and the capital employed in the business was becoming effective and were providing higher returns on a YOY basis. The demerger made the Capital Employed more productive.

POST DEMERGER Godrej Consumer Product Limited Key Insights: 

GCPL emerged as one of the fastest growing FMCG companies with a CAGR of 20% for past 3 years



Four categories: soaps, hair colours, toiletries and detergents



Focus on employee empowerment and performance linked incentives has led to this phenomenal growth



Asset efficiency ratios rank among the highest amongst peers with ROCE for FY2002 at 90%

POST DEMERGER INITIATIVE


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Post demerger GCPL gets a lean and efficient sales and distribution system which it aims to leverage for faster growth its two lost cost manufacturing facilities for soap and hair color and its efficient contract procurement operation also hope to help make the consumer business a highly profitable operation GCPL efficient new product development process called the innovation funnel and its strong emphasis on brand management market research and consumer insight is considered to be a strong plus point post de-merger GCPL has taken several initiatives like 

Leveraging the strong distribution network : GCPL has recognized distribution as one of its core competency it covers a vast network of 32 companies’ stockiest 2475 distributors and super sub stockiest and more than 43 retail outlets throughout the country.



FOCUS on R&D: GCPL is focused on developing new products innovative in nature. They will be developed by GODREJ research center the center has well equipped laboratories in the area of oil and fatty acids soaps and cosmetics.



Cooperate Governance: This company has adopted CII model for cooperate governance to ensure that its strategic plans are consistent for the welfare of share holder and its higher standards of cooperate behavior.



Focus on quality: GCPL has received ISO 9000 quality certification for its Silvassa factory in ISO 14000 environment certification for its plants in malanpur. The company has recently started work on establishing TPM standards at its manufacturing and its adopting CII excellence model as its guide path for ensuring that it becomes world standard company.

SEGMENTS

BRANDS

Toilet soap

Cinthol, 54 fairglow, ganga, Godrej no1 Manufacture of 12 HLL Nirma , J&J

Soap contract

%OF GROSS SALES


GROWTH RATE 20

-13

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Detergents Hair Colour

Ezee, Trilo 7 Godrej, color 19 plus , Kesh Kala Toiletries Shaving Cream, 8 Color Gloss Shampoo Source : www.indiainfoline.com

44 23 110

GCPL‘s revenue growth was fuelled by 318% jump in the sales volume of Godrej’s No1. This was well complement by an equally impressive growth registered by fair glow range of products in hair color segment the launch of 4th variant of hair color helped spur the growth.

Besides Godrej power hair dye became the best selling rural brand. During this period the companies toiletries business grew by 55% in the value terms YOY the company raised its market share in soaps to 5.9% from 5.3%. However it had to loose market share in shaving cream and talcum powder to 9.8% from 10.8% and 1.5 from 22% respectively on the other hand backed by good response to the fair glow brand the company was able to gain a market share of 3.6% of the fairness cream segment. The company sales grew at 35% to Rs 1404cr on a YOY basis while net profit stood at 9.2cr during the first quarter financial Year01-02. Categories Soaps Hair color Toiletries Detergents Total Godrej Brands

1QFY01 54 21.9 6.6 .8 83.3

1QFY02 66.4 27.9 10.3 .3 104.9

%change 23 27.4 56.1 -58 26.0

Contact Manufacturing

20.6

35.5

72.3

140.9

35.20

Total Sales 103.9 Source : www.indiainfoline.com

CONCLUSION Company demergers are a very common feature nowadays. This helps companies to create individual profit-centers and investors in the company also benefit from the process, as there is a fresh valuation of the demerged entity. The factors that are considered are: ALLAINCE BUSINESS SCHOOL, BANGALORE

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Extent of separation: Godrej soaps limited demerged into two separate entities: 1) Godrej Industries Ltd.( Godrej Soaps Ltd) 2) Godrej Consumer Product Limited.

Identifying benefits: The main benefit for the demerger or for the separation of GPCL from Godrej Soaps Limited was to give GPCL a name in FMCG sector. The demerger was successful and it helped GPCL creates its name in the market and drive the sales of the company.

Trading price and Investor interest: The stock outperformed the broad and narrow indices. The stock was traded at an average above price. The GPCL took off after the de-merger .

Financials: The financials of the company improved. There was an increase in the sales of the company. The key ratios of the company had improved. The company’s financial position grew stronger.

BIBLIOGRAPHY www.godrejcp.com www.godrej.com


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http://www.blonnet.com/ www.indiainfoline.com www.capitaline.com www.moneycontrol.com www.rediffmoney.com www.bloomberg.com www.wikipedia.org www.economictimes.com


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DEMERGERS

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