Godrej Soaps: Hold

Recommendation: Hold

Aarati Krishnan

THE Godrej Soaps stock has attracted a fair share of stock market interest in the recent times, moving up from Rs 40 to Rs 50 over the past two weeks.

The stock still trades at a modest price-earnings multiple of around nine times its annualised earnings for the first half of 2000-01. The downside for the stock from the current levels is limited.

Business prospects for the consumer products business at this point seem fairly bright. The company's Cinthol soap commands a significant market share and considerable brand loyalty. Further, Godrej Soaps' strategy of launching mid-priced soaps has paid off reasonably well, with brands such as FairGlow and Allcare meeting with good initial response.

This and a dominant share of the hair colour market ensured a 21 per cent growth in the company's consumer products business in 2000-01 first half _ impressive by FMCG standards. With the company cutting back on low-margin activities such as oil trading and contract manufacturing, profitability parameters have improved substantially.

Further, the company is in the process of liquidating its investments in group companies, which should release funds for investments in core activities. It is in the process of finalising an offer for selling its holdings in Godrej Sara Lee. These divestitures could bring in the much-needed cash flows for investment in brand-building activities. For 2000-01 first half, Godrej Soaps' profits before exceptional items jumped to Rs 36 crore from Rs 12.95 crore the previous year.

However, despite the plethora of plus factors, fresh investments in Godrej Soaps would carry a degree of risk. The company's recent proposal to demerge the consumer products division into a separate company continues to be the major uncertainty surrounding the company.

Post-demerger, Godrej Soaps is likely to be left with activities such as chemicals manufacturing and oil trading, which have traditionally prevented the stock from commanding a higher valuation. The debt-free consumer products division, once it is hived-off, may be the more lucrative part of Godrej Soaps' businesses. But with the modalities of the demerger as yet unclear, the manner in which the split will be structured and the shareholders allowed share in the new company, would be crucial in determining returns. Shareholders can remain invested and review their decision once the demerger proposal is in concrete shape.