Godrej Makes An In-House Transfer Of Goodknight

The tarnsfer was made at Rs 243 per share, Rs 77 lower than the Rs 320 per share Sara Lee had paid to pick up its 40 per cent stake in Godrej Hicare last year.

The entire transaction came to light following the publication of its annual report for 1995-96. On the surface, the move does not mean any change in the ownership of Godrej Hicare, but market observers do not rule out the possibility of this being a precursor to a major restructuring of Godrej group's holdings.

To fund the purchase, Godrej Soaps subscribed to Puran's rights issue in November 1995 and February this year at an astronomical premium of Rs 83,240 per share. Funds from the issue amounting to Rs 105 crore were used by Puran to buy Godrej Hicare shares later. (See chart)

 

Puran became a fully-owned Godrej subsidiary in 1995-96. It has no business activity and posted a total income of Rs 2.8 crore and a loss of Rs 47 lakh last year.

The sale enabled Godrej Soaps to post a profit on sale of investments and also escape paying capital gains tax on it. Sale of shares to subsidiaries does not attract capital gains tax.

Thus last year, out of a Rs 5 crore profit the company made on investments, Rs 3.5 crore came from Godrej Hicare. This came in handy as out of the Rs 45 crore net profit Godrej Soaps posted in 1995-96, Rs 32 crore came from other income.

Adi Godrej, replying to a faxed questionnaire (see box) said the deal was part of a realignment of the shareholding pattern within the Godrej group. He denied the sale was done at a discount.

Before the deal, Godrej Soaps owned 81.13 per cent of Godrej Hicare (then called Transelektra). Last year, 40 per cent of this stake was sold to Sara Lee Corporation of the US at Rs 320 per share.

Godrej Soaps held the remaining 41 per cent, but it controlled Hicare through stakes in other subsidiaries -- Puran and Sahyadri Aerosols Ltd which held 8.87 per cent and 11.02 per cent, respectively.

Early this year, Godrej transferred almost its entire holding in Hicare to Puran at Rs 243 per share. The number of shares sold was 33,61,172. In addition to its existing 8.87 per cent stake, this purchase gave Puran a controlling stake of 50 per cent in Hicare.

Before this went through, Godrej ensured Puran had sufficient funds by subscribing to its two rights issues at a premium of Rs 83,240 per share. The total amount was Rs 105 crore, out of which Puran bought Rs 81 crore worth Hicare shares.

Adi Godrej justifies the high premium saying Puran should have a net worth commensurate with the "intrinsic value of Hicare shares" it was buying. He added the investments came out of Godrej Soaps' internal accruals.

An analysis of Godrej Soaps' 1995-96 balance sheet shows the company performing poorly on all counts (see box). Says a senior investment banker in DSP Financial Consultants, "It was obviously to offset poor profits that Godrej sold off these shares. He has gained on two counts. Not only has he booked a profit, but also escaped capital gains tax."

Since Puran is a wholly-owned subsidiary, there is no cash outflow from Godrej and it is only a book entry, he adds.

It is not, however, clear if this was the only purpose. Adi Godrej refuses to elaborate on the realignment of shareholding pattern within the group. He, however, affirms the move will not affect the agreement signed with Sara Lee last year.

On a slippery course

Godrej Soaps found Rs 105 crore to invest in its loss-making subsidiary when its own performance was suffering. The company's results for 1995-96 reveal a squeeze in margins, plunging volumes and lower profitability.

Soap sales fell by 18.6 per cent and detergents by 80 per cent. Production of detergents was down 205 per cent. The increase in value of sales was largely on account of trading in imported oils, which fetched a profit of Rs 13 crore.

Sales and production declined alongside higher borrowings. Interest cost spiralled from Rs 39.4 crore to Rs 70.4 crore. Of this, net interest expense was Rs 48.9 crore against Rs 28.9 crore in 1994-95. Godrej Soaps has zero interest cover. The company increased profitability through other and extraordinary income of Rs 32 crore. Operating profit fell from Rs 181 crore in 1994-95 to Rs 178 crore in 1995-96.

About the deal

In reply to the faxed questionnaire, Adi Godrej, managing director of Godrej Soaps made the following points about the deal.

n The transfer of Transelektra shares was aimed at a realignment of the shareholding pattern within the Godrej group. The transfer was not made at a discount but at an appropriate price comparable with the purchase price of the Sara Lee group.

n The high premium paid to Puran Plastics was necessary because the company's net worth should be commensurate with the value of Transleketra shares it is holding.

Since it is a wholly-owned subsidiary of Godrej Soaps, the split between equity and net worth is of no significance to either of the companies.

The investment in Puran came out of Godrej's gross internal accruals.