Friday, January 7, 2011

Godfrey Phillips-Well poised

Godfrey Phillips India Ltd  (GPIL)is India’s second largest Cigarette company in terms of market share.
Key Facts & Figures:
Core business: Cigarettes ( Four square, Red & White, Cavanders,Stellar, Tipper, Jaisalmer,North Pole)
Marlboro has been launched in tie up with Phillip Morris India. GPI will take up manufacturing, distribution and sales of Marlboro while Phillips Morris will handle the marketing.
Other businesses: Confectionery ( Funda Mint), Chewing Products-Pan Masala ( Pan Vilas),Tea (Tea City-Symphony & Utsav),Retail ( 24 X 7 convenience stores-currently only in NCR region)
Current Market share in Cigarettes : approx 13%
Key numbers:
Equity Capital: Rs.10.40 crores
Debt: Rs.215 crores
EPS ( 2009-10): Rs.114
Dividend: Rs.25
Current market price : Rs.2159
K.K.Modi group : 46%
Phillip Morris: 25%
Investment Rationale:
1)      GPIL’s entry into new territories in the Indian market last year, namely WB &TN .These are lucrative markets and account for about 18% of the overall Indian market size.
2)      Currently ITC’s  domestic cigarette sales are about 10,000 cr / annum while GPIL’s domestic cigarette sales are about 1100 cr. Though this clearly reflects the strengths of ITC’s brands and distribution muscle; it also underlines the huge market available for GPI-especially post launch of the Marlboro portfolio with 7 variants.
3)      Construction of new plant at Rabale, Navi Mumbai underway and expected to start commercial production within the next 3-6 months. The plant will have a capacity to manufacture about 237 crore cigarette sticks per year at full capacity.
4)      Domestically manufactured Marlboro launched in 2009 has found good acceptance and achieved reasonable success in converting the unofficial (imports)Marlboro users. The Marlboro portfolio has seen about 30% growth rate since the strategic alliance with Phillip Morris India.
5)      Pan Masala brand ‘Pan Vilas’ launched around a year back (manufactured at a GPI’s new plant in Baramati, near Pune) has found good market acceptance.
6)      GPIL is aggressively expanding its export markets for cigarettes as well as cut tobacco and unmanufactured tobacco.
7)      Performance for Quarter ended Sept 2010, has been exemplary with a PAT of 49.43 cr on the basis of better realizations and increased exports.
8)      GPIL’s manufacturing operations in Mumbai are currently located at Chakala in Andheri East on approx totally 5 acres of land (the land size is unconfirmed) spread over 3 plots . The location is strategically prime from a commercial perspective with the Airport being just 2 km and the Western Express Highway  less than half kilometer.According to newspaper reports,about a week back, a 7 acre plot within 1.5 km of the GPIL plot was sold for about 800 crore ( around 114 crore per acre).Though this transaction might have been on the higher side with the buyer paying a premium as he had a plot contiguous to the  one sold, whenever the GPIL chakala land is sold, it should fetch a valuation of around 350-400 cr. Once the Rabale, New Mumbai plant becomes operational, GPIL will have the option to monetize this prime real estate asset.
1)      Escalating taxation on the cigarette industry
2)      GST which is due for launch this year will result in double taxation.
3)      Aggressive competition from ITC
Godfrey Phillips is currently available at an Enterprise value of 2245 cr ( debt adjusted against investments on the b/s). It is my opinion that the company is in the midst of a steep growth curve and re-rating will follow. I expect the market to value the company between Rs.4500 and 5000 within the next 18-24 months.

At the time of writing this report, the author /his family have an investment interest in the stock mentioned above. Under no circumstance does the information in this report represent a recommendation to buy or sell the above-mentioned stock.  This report has been prepared and issued on the basis of publicly available information, internally developed data & other sources believed to be reliable. This is just a suggestion solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments.


  1. Hi sir,
    Despite the good results posted by the company,why the share price not appreciated much.I think cut leaf export may boosted the bottomline.Any how good result.What is your opinion.Please share your thoughts.Thank you.

  2. Hi Prakash,
    we'll have to wait for the AR to get precise update on the reasons for the increase in sales/profitability. From what i know, they've started production at the new plant at Rabale, Navi Mumbai.It should stabilize by 2011 end. Overall, my belief is going ahead they should earn about Rs.190-210 in the current year.I'm not too worried that the stock price has not reacted +vely. When the re-rating does happen, it'll be very very swift.

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