Case

Rights Issue - Godrej Consumers

Subject: IBFS (Investment Banking & Financial Services)
Under Guidance of Prof. A. K. Mishra

Group 1 (WMP 13th Batch)

S. No. Name Roll No. E-Mail ID
1. Marut Dutt EFPM06005 efpm06005@iiml.ac.in
2. Rajinder Kumar Sharma WMP11037 wmp11037@iiml.ac.in
3. Ranjan Gupta WMP12071 wmp12071@iiml.ac.in
4. Ina Thakral WMP13021 wmp13021@iiml.ac.in
Godrej Consumers Products Limited (GCPL)
• Industry: Consumer Goods
• Parent: Godrej Group
• Listed on BSE and NSE (GODREJCP)
• 52 Week Low Share Price: Rs 628.15
• 52 Week High Share Price: Rs 979.33
• Brands: Cinthol, Godrej No.1, Godrej Powder Hair Dye, Ezee, etc.
• Manufacturing Facilities:
• Malanpur (Madhya Pradesh)
• Guwahati (Assam)
• Baddi- Thana (Himachal Pradesh)
• Baddi- Katha (Himachal Pradesh)
• Pondicherry (or Puducherry) - Union Territory
• Chennai (Tamil Nadu)
• Sikkim
• Number of Employees: 21000 (as of 2014)
• Competitors: HUL, Ponds, L’Oreal, Gillette, Palmolive, Nirma, etc.
• ISO Certified and SHE (Safety, Health & Environment) Policy
Facts from Case
• No. of Equity Shares in Issue = 32,263,440
• Face Value of Equity Share = Re 1
• Premium Price per Equity Share = Rs. 122
• Total Value of Issue = Rs. 3968.40 Million = Rs. 3968400000
• Ratio for Right Issue = 1:7 (1 Equity Share for every 7 Equity Shares held by Shareholders)
• Record Date of Issue = 19-Mar-2008
• Issue price = 123 times of face value of Equity Share = Rs. 123
• Net Proceeds of the Issue: Rs 3903.40 Million

Objectives of the Issue:

• Funding of Capital Expenditure (Rs 1135 Million to be funded through Net Proceeds of the Issue)
• Investment in its Joint Venture, Godrej SCA Hygiene Limited (Rs 205 Million)
• Prepayment / Repayment of certain debt (Rs 840 Million to be funded through Net Proceeds of the Issue)
• Investment in its Subsidiary, Godrej Netherlands B. V. (Rs 464 Million to be funded through Net Proceeds of Issue)
• Finance the acquisition of Kinky Group (Proprietary) Limited (Rs 1259.40 Million)
Facts from Case
Financial Highlights of Godrej Consumers Products Limited (GCPL) for Year 2007-2008:
• Equity Share Capital (Face Value of Re 1 per Share): 225.84
• Reserves and Surplus: 1279.15
• Sales: 8875.6
• Total Income: 8962.9
• PAT: 1481.0
• Dividend: 927.57
• Price of 91-Day T-Bills: Rs 98.04 each

Forecasts (based on proposal of Innovative Products & Services and Cost Reduction due to high
competition & increasing Raw Material Prices):
Particulars 2010-11 2011-12 2012-13
PAT Growth Rate 28 % 34 % 40 %
Dividend Pay-out Ratio 54 % 51 % 48 %
Questions in Case (Page 20 in Poly-copy)
a. Mr. Ankur, an investor, holding shares of Godrej, wants to know whether price of Rights Issue is
justifiable or not. Mr. Rakesh, an analyst, suggested to use Dividend Discount Model (DDM) to
justify the price.

It is required to determine share price of Godrej Consumers Products Limited (GCPL) as on 31-
Mar-2008 and it is required to suggest if price of Rights Issue is justifiable or not.

b. Companies coming up with Rights Issue have to fulfil regulatory framework as per Company Act
and SEBI guidelines.
 Objectives of Section 81 of Companies Act, 1956 with respect to Rights Issue.
 Minimum Subscription Price to make Rights Issue successful
 Procedure to refund of money in case of under subscription of Rights Issue
 Shareholders Ms. Alpa, Ms. Ameena, Ms. Renu & Ms. Shilpi subscribed to present Rights Issue, it is
required to determine number of shares to be allotted to each.
Answering the Questions in Case
a. Mr. Ankur, an investor, holding shares of Godrej, wants to know whether price of Rights Issue is
justifiable or not. Mr. Rakesh, an analyst, suggested to use Dividend Discount Model (DDM) to
justify the price.

 Determination of Share Price of Godrej Consumers as on 31-Mar-2008

 Price of Rights Issue as Rs 123 (123 times of FV Re 1 of Equity Share) is justifiable or not?

Cost Of Market Price per Value of

Equity share Right Justifiable
Scenario 1 Assumed 5% as risk premium (long term) 9.55% ₹ 132.46 1.18 Yes
Calculated using the one year Sensex data
Scenario 2
given in case 11.23% ₹ 99.59 -2.93 No
Answering the Questions in Case
b. Companies coming up with Rights Issue have to fulfil regulatory framework as per Company Act
and SEBI guidelines.

 Objectives of Section 81 of Companies Act, 1956 with respect to Rights Issue:

o Two years from the formation of a company or at any time after the expiry of one year from the
allotment of shares in that company made for the first time after its formation.

o Shares shall be offered to the persons who, at the date of the offer, are holders of the equity
shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on
those shares at that date.

o Notice specifying the number of shares offered and limiting a time not being less than fifteen days
from the date of the offer.

o After the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation
from the person to whom such notice is given that he declines to accept the shares offered, the
Board of directors may dispose of them in such manner as they think most beneficial to the
company.
Answering the Questions in Case
b. Companies coming up with Rights Issue have to fulfil regulatory framework as per Company Act
and SEBI guidelines.

 Procedure to refund of money in case of under subscription of Rights Issue (Minimum

Subscription Clause)
o If the company does not receive minimum subscription of 90% of the issue, the entire
subscription shall be refunded to the applicants within 42 days from the date of closure of the
issue.

o If there is delay in the refund of subscription by more than 8 days after the company becomes
liable to pay the subscription amount, the company shall pay interest for the delayed period, at
rates prescribed under section 73 of the Companies Act, 1956.

o In case of underwritten Rights issue, minimum subscription of 90% of the issue including
development of Underwriters is used.
Answering the Questions in Case
b. Companies coming up with Rights Issue have to fulfil regulatory framework as per Company Act
and SEBI guidelines.

 Shareholders Ms. Alpa, Ms. Ameena, Ms. Renu & Ms. Shilpi subscribed to present Rights
Issue, it is required to determine number of shares to be allotted to each.

Shareholder No. of Shares held Ratio for Right Issue Number of Shares
currently Allotted
Ms. Alpa 352 352 / 7 = 50.3 ~ 50
Ms. Ameena 280 1:7 (1 Equity Share for every 7 280 / 7 = 40
Equity Shares held by
Ms. Renu 215 Shareholders) 215 / 7 = 30.7 ~ 30
Ms. Shilpi 60 60 / 7 = 8.6 ~ 8
Answering the Questions in Case
b. Companies coming up with Rights Issue have to fulfil regulatory framework as per Company Act
and SEBI guidelines.

 Minimum Subscription Price to make Rights Issue successful

o Minimum Subscription Price is calculated after considering that minimum EPS of Next Year could
be equal to EPS of Current Year.

o In that case, Minimum Subscription Price would be Rs 96.10