Dear Readers,

Cigarette smoking is addictive, so while it is really harmful for the health of smokers, cigarette makers and the investors in such companies (ITC, VST Industries, Godfrey Phillips) have minted huge sums of money.

Godfrey Phillips India is one such company and we have discussed it briefly in the below note.

Godfrey Phillips India – Basic details

Godfrey Phillips India Limited (GPI), the leading company of K K Modi Group, is India’s second largest cigarette maker and India’s number one Cigar distributor.

GPI owns some of the most popular cigarette brands in the country like Four Square, Red and White, Cavanders, Tipper and North Pole and additionally, GPI also manufactures and distributes iconic brand Marlboro under a license agreement with Philip Morris. Philip Morris is also the co-promoter of GPI with 25% stake in the company.

Godfrey Phillips is the largest importer of Cigars in India, and appointed distributor of world famous companies like Habanos SA (Cuba), Altadis (SA), Oettinger Davidoff (Switzerland), Altadis (USA), Scandinavian Tobacco Group, and Villiger Sons (Switzerland).

The company recently launched Pan Vilas pan masala and as per the company, in a short span of three years, Pan Vilas has a national market share of more than 13% in the premium pan masala category.

Besides Cigarettes, Cigars and chewing products such as Pan Vilas, the company has business interests in tea and a chain of Twenty Four Seven convenience stores, however at the moment the contribution of non-tobacco segment is small.

Cigarettes Industry

The organised segment of the cigarette manufacturing industry constitutes around 90 per cent of the overall industry, with the remainder made up of contraband and grey market goods. Cigarettes account for only 14% of total tobacco consumption in India as compared to an average over 80% globally.

The domestic cigarette industry is vulnerable to government policies, with regard to excise duties and imposition of multiple taxes (luxury and entry tax). Moreover, the regulatory impact of the Tobacco Act in terms of restrictions on advertising and distribution of cigarettes hampers the industry’s brand-building capabilities. However, increase in the taxes does not affect the profitability of cigarette companies in general. Brand loyalty and addiction allows the companies to pass on the rise in prices to consumers.

As mentioned above, the consistent rise in excise duty and regulatory restrictions are the biggest challenges for the sector. However, India’s low per capita cigarette consumption bodes well for the sector.  Today per capita consumption of cigarettes in India is a tenth of the world average. A rapidly growing population base, especially among the younger age groups, along with increasing disposable income are the key factors which will drive the growth of cigarettes industry.

Financial performance snapshot

As can be observed from the above illustration, the performance of GPI has been good with decent growth and return ratios.

The margins and returns on Cigarettes and Tobacco products are higher; however the blended margins (including Tea and other retail products) are lower as the other businesses are at the moment reporting losses.

On net basis, GPI is debt free and has good free cash flow generation; however for some reason the company has availed foreign currency loans and during the last two years it has reported unrealized foreign currency translation loss of 60 crores cumulatively.

Risks/concerns – Besides the strict government policies and regulations on tobacco industry, the other major concerns are as below:

Lalit Modi (of IPL fame) is a part of promoter group and is a probable successor to Mr. K. K. Modi

The company has been investing behind businesses other than tobacco products and the same have been dragging down the profitability of the company.


Team Katalyst Wealth
Ph.: 0512-6050062, Mob: +91-98188 66676
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