Key Rating Drivers & Detailed Description

Strengths: 

Strong brand equity and diversified revenue streams

Backed by longstanding presence of 125 years in the consumer durables segment, G&B enjoys a strong brand image and customer recall. During fiscal 2023, the company has successfully leveraged its brand equity to continue its growth across various segments, comprising of the consumer products (contributed to 69% of revenue), industrial products (30% of revenue) including 4% of revenue contributed by the Construction, RMC (ready-mix concrete), Real Estate & Property Development business, while other domains contributed the remaining 1%.

Within consumer products, G&B has diversified into consumer appliances, office and home furniture, storage solutions, locks, security equipment, and prima (vending and batteries). The company is a leading player in the refrigerator segment, with around 7% share in the domestic market.  It also manufactures air conditioners, washing machines and microwave ovens. The industrial segment comprises of material handling equipment (MHE), process plant equipment (PPE), electricals and electronics (E&E), precision engineering, aerospace and tooling divisions and electric motors. The company had a healthy combined order book of around Rs 4,000 crore as on March 31, 2023 in E&E and PPE segments. Steady lease income of over Rs 300 crore from its investment properties, in addition to revenue from property development also support cashflows.

In fiscal 2023, the consumer products segment saw strong revenue growth on the back of robust demand for most of the sub-segments, including the appliances sub-segment which had seen modest revenue growth over the past two fiscals. On the other hand, the industrial products continued its strong performance, aided by good traction of project inflows and steady execution across sub-segments.

Strong financial flexibility driven by healthy portfolio of equity investments and land bank

G&B derives strong financial flexibility from its significant holding in listed group companies and sizeable land bank. Stakes in Godrej Consumer Products Ltd (rated 'CRISIL A1+') and Godrej Properties Ltd (rated 'CRISIL A1+') were valued around Rs 9,400 crore as on June 5, 2023. Gross debt stood at Rs 2,909 crore and net debt at Rs. 2,324 crore as on March 31, 2023. Financial flexibility is aided by the large free-hold land bank at Vikhroli (Mumbai) and sizeable developable land (around 1000 acres), which can be monetised. The company will continue to enjoy strong financial flexibility in the long term given its portfolio of equity investments and land bank.

Weaknesses:

Intense competition in the consumer appliances segment

G&B drew 29% of its revenue from the consumer appliances business in fiscal 2023. This segment is intensely competitive, as reflected by the presence of large multinational corporations. Hence the operating margin remains susceptible to stiff price competition and volatility in foreign exchange (forex) rates.

Apart from consumer appliances, G&B has diversified its operations across the consumer durables (furniture, security solutions, locks and others) and industrial segments. While margin in the consumer durables segment may remain modest, performance of the industrial product segment (which fetches comparatively higher margins) is expected to leverage the healthy order book and deliver growth in both revenue and margins.

Exposure to volatility in raw material prices and forex rates and high operating leverage

Raw materials, primarily copper, aluminium, plastic and steel, account for about 60% of the cost structure, with a large portion being imported. Though G&B has taken initiatives to source inputs locally and hedges its forex exposure partially, profitability remains susceptible to volatility in raw material prices and forex rates.

The company has moderate operating leverage, which could hit profitability in case of a slowdown in the industry. Operating margin has been moderately impacted over the past three fiscals because of overall slowdown in consumption and low gross margins in the appliances, interio and storage divisions. The company is in the process of moving its manufacturing facilities of key products outside Vikhroli to reduce costs. While these measures should yield benefits in the longer run, operating margins are expected to remain modest over the medium term.

Modest financial risk profile marked by constrained profitability and high working capital intensity

Earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of G&B was modest at 5.4% and 5.3% (adjusted for lease accounting as per IND AS 116) over the last two fiscals respectively. This was largely due to intense competition in the consumer segment coupled with the covid-19-induced economic slowdown; the impact was partially offset by strong bounce back of the industrial division over the period. However, with continued loss in consumer appliances segment for fiscals 2022 and 2023, the margins are expected to remain range bound in the fiscal, amidst strong competition in the segment.

The company also has significant financial leverage, driven by high working capital intensity and sizeable capital expenditure (capex). The capex spend partially relates to addition of capacity at Khalapur (Maharashtra) and Dahej (Gujarat).

Leverage was marginally higher around Rs. 2,909 crore (Gross Debt) and Rs 2,324 crore (Net debt) as on March 31, 2023 as compared to Rs 2,854 crore and Rs 2,431 crore, respectively, as on March 31, 2022, owing to higher capex and working capital requirements. Adjusted gearing remains healthy below one time. Interest coverage ratio declined to 4.0 times in fiscal 2023 compared with 4.8 times in fiscal 2022, mainly on account of higher interest rates. The same is expected to remain steady around 4-4.5 times over the medium term. Net cash accrual to adjusted debt ratio was healthy at 0.18 times in fiscal 2023 which is likely to continue over the medium term. Debt to EBITDA is also expected to remain at similar elevated levels over the medium term.

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