CMP 2603.80

Target Price 2786.00

ISIN: INE260B01010

JANUARY 15th

2014

GODFREY PHILLIPS INDIA LTD.

Result Update: Q2 FY14

BUYBUYBUYBUY

Index Details

Stock Data

Sector Tobacco Products

BSE Code 500163

Face Value 10.00

52wk. High / Low (Rs.) 3550.00/2250.00

Volume (2wk. Avg. Q.) 214

Market Cap (Rs. in mn.) 27079.52

Annual Estimated Results (A*: Actual / E*: Estimated)

YEARS FY13A FY14E FY15E

Net Sales 20964.80 25996.35 31195.62

EBITDA 3518.20 3690.13 3985.59

Net Profit 1694.80 1774.95 1881.75

EPS 162.96 170.67 180.94

P/E 15.98 15.26 14.39

Shareholding Pattern (%)

1 Year Comparative Graph

GODFREY PHILLIPS INDIA LTD BSE SENSEX

SYNOPSIS

Godfrey Phillips India is one of the largest players

in the Indian cigarette industry & has other

business interest in tea pan masala and

confectionary.

The company’s net sales registered 29.66%

increase and stood at a record Rs. 6034.90 million

from Rs. 4654.30 million over the corresponding

quarter last year.

During the quarter ended Q2 FY14, EBITDA was

at Rs. 915.30 millions an increased by 20.48%

against Rs. 759.70 million in Q2 FY13.

Net profit has increased by 17.87% at Rs. 382.50

million in Q2 FY14 against Rs. 324.50 million

reported respectively in the corresponding

quarter of the previous year.

Net sales for the half year ended H1 FY14 was at

Rs. 12184.60 million an increased by 28.36%

against Rs. 9492.60 million in H1 FY13.

The company’s operations primarily span the

entire northern and western part of the country

with new markets like West Bengal and South of

India.

Net Sales and Operating Profit of the company are

expected to grow at a CAGR of 18% and 4% over

2012 to 2015E respectively.

PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

Godfrey Phillips India Ltd. 2603.80 27079.52 162.96 15.98 2.56 400.00

ITC Ltd. 322.45 2558303.00 10.21 31.58 11.48 525.00

VST Industries Ltd. 1675.80 25877.60 82.70 20.26 8.51 650.00

NTC Industries Ltd. 23.75 255.30 2.62 9.06 0.87 0.00

QUARTERLY HIGHLIGHTS (STANDALONE)

Results updates- Q2 FY14,

Godfrey Phillips India Ltd manufactures some of the

most popular cigarette brands in the country and

distributes iconic brand Marlboro under a license

agreement with Philip Morris. The company has

reported its financial results for the quarter ended

30 SEPTEMBER, 2013.

Months SEP-13 SEP-12 % Change

Net Sales 6034.90 4654.30 29.66

PAT 382.50 324.50 17.87

EPS 36.78 31.20 17.87

EBITDA 915.30 759.70 20.48

The company has achieved a turnover of Rs. 6034.90 million for the 2nd quarter of the current year 2013-14 as

against Rs. 4654.30 millions in the corresponding quarter of the previous year. The company has reported an

EBITDA of Rs. 915.30 millions an increased by 20.48% and a net profit of Rs. 382.50 million against Rs. 324.50

million reported respectively in the corresponding quarter of the previous year. The company has reported an

EPS of Rs. 36.78 for the 2nd quarter as against an EPS of Rs. 31.20 in the corresponding quarter of the previous

year.

Break up of Expenditure

During the quarter cost of material consumed rose by 34 per cent, Employee Benefits Expenses by 14% and

increase in Purchase of Traded Goods by 22% along with other expenditure by 59% compared to corresponding

quarter of previous year. Total expenditure was increased up by 29% in Q2 FY14 to Rs. 5377.50 million as

against Rs. 4165.20 million in Q2 FY13.

Break up of Expenditure (Rs. millions)

Q2 FY14 Q2 FY13

Advertising & Promotions 717.00 823.60

Other Expenditure 1466.20 921.70

Purchase of Traded Goods 1097.10 897.30

Cost of Material Consumed 1312.40 980.60

Employee Benefit Expenses 548.70 482.70

Depreciation & Amortization

Expense 209.70 225.40

Segment Revenue

Latest Updates

• Godfrey Phillips India Ltd has reported that the Registered Office of the Company has been shifted from its

present location at Chakala, Andheri(East), Mumbai, Maharashtra - 400099 to a new location at

‘Macropolo Building’, Ground Floor, next to Kala Chowky Post Office, Dr. Babasaheb Ambedkar Road, Lalbaug,

Mumbai - 400 033.

• Company continues to enjoy the highest rating of ‘CRISIL A1+’ for Short Term Debt Programme, ‘CRISIL

AA+/Stable’ for Long Term Loan, ‘CRISIL AA+/Stable’ for Cash Credit Limit and ‘CRISIL A1+’ for Non-fund

based Limit.

COMPANY PROFILE

Godfrey Phillips India Ltd manufactures some of the most popular cigarette brands in the country like FS1, Four

Square, Red and White, Cavanders, Tipper and North Pole. Additionally, Godfrey Phillips India also manufactures

and distributes iconic brand Marlboro under a license agreement with Philip Morris. The Company cigarettes are

manufactured in state-of-the-art factories at Guldhar, Andheri & Rabale. A robust supply-chain & distribution

network ensures that the popular brands reach the length & breadth of the country. The wide network comprises

of 520 exclusive distributors and over 800,000 retail outlets.

Godfrey Phillips India concerted efforts in Tea City has led to successful Symphony and Super Cup launch. The

Company has forayed into the highly competitive confectionary segment with Fundamint and FundaGoli using

their extensive distribution launch to have a pan India reach. Godfrey Phillips India has also recently launched

Pan Vilas pan masala which has already shown great potential with positive outcomes.

The company undertakes a considerable number of Six Sigma Projects in order to inculcate quantum

improvements year after year. Manufacturing facilities at Ghaziabad, U.P; Mumbai, Maharashtra and Rabale, Navi

Mumbai, Maharashtra are recognized not only for their superior production capabilities, but also for the

adoption of environment friendly processes.

� Diverse Business

• Cigarette

Godfrey Phillips India is one of the largest players in the Indian cigarette industry and has two major

stakeholders, the K. K. Modi Group and Philip Morris. The company’s operations primarily span the entire

northern and western part of the country with new markets like West Bengal and South of India. The

Company cigarettes are manufactured in state-of-the-art factories at Guldhar, Andheri & Rabale. A robust

supply-chain & distribution network ensures that the popular brands reach the length & breadth of the

country. The wide network comprises of 520 exclusive distributors and over 800,000 retail outlets.

Brands

� FS1

� Four Square

� Red & White

� North Pole

� Cavanders

� Tipper

• Cigars

Brands

� Cohiba

� Montecristo

� Romeoy Julieta

� Partagas

� Guantanamera

� Davidoff

� Phillies

� Hav-A-Tampa

� Don Diego

� Santa Damiana

� Flor de Copan

� Henri Wintermans

• Pan vilas

Pan Vilas is manufactured at Baramati, a state-of-the-art plant that employs some of the world’s most

advanced food processing technologies. The brand goes a step further to ensure quality and establish trust by

using a natural alternate to banned Magnesium Carbonate and applying the best worldwide technology in

manufacturing.

• Tea

� Symphony Assam Tea

� Symphony Green Tea

� Symphony Darjeeling Tea

� Samovar

� Utsav

� Super Cup

� Super Cup Duet

� Rangoli

� Madhuban Festive Pack

• Funda Goli

Godfrey Phillips India first ventured into the highly competitive confectionery segment in 2008 with the

launch of our mouth freshener- Funda Mint. The launch of the Funda Goli range of candies in 2009 has helped

us establish a niche for ourselves as a unique confectionery brand

• Twenty Four Seven

Twenty Four Seven Convenience Stores are India’s only convenience stores operating round the clock. It’s

offer’s comprise of fresh food, groceries, vegetables, RTE (ready to eat) meals, frozen food, wide assortment

of beverages, imported products, OTC pharmaceuticals, cosmetics, personal care products, travel accessories,

pet food, toys, music, movies, magazines, cigarettes, hukkas, gifts and souvenirs.

� International Business

Godfrey Phillips India has also spread its footprint into the international markets. The International Division

collaborates with some of the top players in the international tobacco industry to assist them in marketing

their products and providing various professional and expert services including contract manufacturing, cut

tobacco, smoke analysis and various other consultancy services. Many countries from the Middle East to

West Africa, South East Africa, South East Asia, East Europe, Australia, South America and Central America

have been added to the portfolio. The International Division also exports Bulk and Specialty Teas to Germany,

USA, Japan, UAE, Kazakhstan and Iran.

FINANCIAL HIGHLIGHT (STANDALONE) (A*- Actual, E* -Estimations & Rs. In Millions)

Balance Sheet as at March 31, 2012 -2015E FY12A FY13A FY14E FY15E

I. EQUITY AND LIABILITIES:

A) Shareholders’ Funds:

a) Share Capital 104.00 104.00 104.00 104.00

b) Reserves and Surplus 9105.10 10313.23 12245.15 14126.91

Sub-Total Net worth 9209.1 10417.23 12349.15 14230.91

B) Non-Current Liabilities:

a) Long-term borrowings 2318.85 1661.30 1694.53 1711.47

b) Deferred Tax Liabilities [Net] 0.00 38.40 39.94 41.93

c) Other Long Term Liabilities 1.91 2.00 2.30 2.60

d) Long Term Provisions 298.20 358.20 422.68 481.85

Sub-Total Long term Liabilities 2618.96 2059.90 2159.44 2237.85

C) Current Liabilities:

a) Short-term borrowings 343.67 592.54 414.78 423.07

b) Trade Payables 1189.36 1574.72 1810.93 2046.35

c) Other Current Liabilities 2381.41 2610.32 4568.06 6212.56

d) Short Term Provisions 626.84 629.9 466.13 480.11

Sub-Total Current Liabilities 4541.28 5407.48 7259.89 9162.09

TOTAL EQUITY AND LIABILITIES (A + B + C) 16369.34 17884.61 21768.48 25630.85

II. ASSETS:

D) Non-Current Assets:

Fixed Assets:

I. Tangible Assets 5247.70 6932.09 8041.22 9150.41

II. Intangible Assets 23.19 59.08 90.03 113.44

III. Capital work-in-progress 1374.09 152.71 85.52 66.70

a) Total Fixed Assets 6644.98 7143.88 8216.77 9330.55

b) Deferred tax assets 75.22 0.00 176.00 179.52

c) Non Current Investments 1605.48 1615.01 2406.36 3224.53

d) Long Term Loans and Advances 422.72 419.9 529.07 656.05

Sub-Total Non-current assets 8748.4 9178.79 11328.21 13390.65

E) Current Assets:

a) Current Investments 1977.83 1570.30 1884.36 2185.86

b) Inventories 3771.57 5383.54 6460.25 7623.09

c) Trade Receivables 749.50 792.97 911.92 1021.35

d) Cash and Bank Balances 218.61 221.1 260.90 300.03

e) Short Term Loans and Advances 769.56 584.98 754.62 928.19

f) Other Current Assets 133.87 152.93 168.22 181.68

Sub-Total Current Assets 7620.94 8705.82 10440.27 12240.20

TOTAL ASSETS (D + E) 16369.34 17884.61 21768.48 25630.85

Annual Profit & Loss Statement for the period of 2012 to 2015E

Value(Rs.in.mn) FY12A FY13A FY14E FY15E

Description 12m 12m 12m 12m

Net Sales 19118.00 20964.80 25996.35 31195.62

Other Income 303.30 306.00 336.60 366.89

Total Income 19421.30 21270.80 26332.95 31562.52

Expenditure -15906.20 -17752.60 -22642.82 -27576.93

Operating Profit 3515.10 3518.20 3690.13 3985.59

Interest -316.50 -269.20 -376.34 -481.72

Gross profit 3198.60 3249.00 3313.79 3503.87

Depreciation -626.30 -880.00 -915.20 -960.96

Profit Before Tax 2572.30 2369.00 2398.59 2542.91

Tax -758.70 -674.20 -623.63 -661.16

Net Profit 1813.60 1694.80 1774.95 1881.75

Equity capital 104.00 104.00 104.00 104.00

Reserves 9105.10 10470.20 12245.15 14126.91

Face value 10.00 10.00 10.00 10.00

EPS 174.38 162.96 170.67 180.94

Quarterly Profit & Loss Statement for the period of 31 MARCH, 2013 to 31 DEC, 2013E

Value(Rs.in.mn) 31-Mar-13 30-June-13 30-Sep-13 31-Dec-13E

Description 3m 3m 3m 3m

Net sales 6057.70 6149.70 6034.90 6789.26

Other income 96.90 129.10 48.20 59.77

Total Income 6154.60 6278.80 6083.10 6849.03

Expenditure -5031.60 -5722.40 -5167.80 -5838.77

Operating profit 1123.00 556.40 915.30 1010.26

Interest -60.30 -57.40 -139.30 -125.37

Gross profit 1062.70 499.00 776.00 884.89

Depreciation -243.80 -216.50 -209.70 -215.99

Profit Before Tax 818.90 282.50 566.30 668.90

Tax -221.00 -49.00 -183.80 -171.91

Net Profit 597.90 233.50 382.50 497.00

Equity capital 104.00 104.00 104.00 104.00

Face value 10.00 10.00 10.00 10.00

EPS 57.49 22.45 36.78 47.79

Ratio Analysis

Particulars FY12A FY13A FY14E FY15E

EPS (Rs.) 174.38 162.96 170.67 180.94

EBITDA Margin (%) 18.39 16.78 14.19 12.78

PBT Margin (%) 13.45 11.30 9.23 8.15

PAT Margin (%) 9.49 8.08 6.83 6.03

P/E Ratio (x) 14.93 15.98 15.26 14.39

ROE (%) 19.69 16.03 14.37 13.22

ROCE (%) 34.88 34.29 31.85 30.23

Debt Equity Ratio 0.29 0.21 0.17 0.15

EV/EBITDA (x) 8.40 8.27 7.84 7.25

Book Value (Rs.) 885.49 1016.75 1187.42 1368.36

P/BV 2.94 2.56 2.19 1.90

Charts

OUTLOOK AND CONCLUSION

� At the current market price of Rs. 2603.80, the stock P/E ratio is at 15.26 x FY14E and 14.39 x FY15E

respectively.

� Earning per share (EPS) of the company for the earnings for FY14E and FY15E is seen at Rs.170.67 and

Rs.180.94 respectively.

� Net Sales and Operating Profit of the company are expected to grow at a CAGR of 18% and 4% over 2012 to

2015E respectively.

� On the basis of EV/EBITDA, the stock trades at 7.84 x for FY14E and 7.25 x for FY15E.

� Price to Book Value of the stock is expected to be at 2.19 x and 1.90 x respectively for FY14E and FY15E.

� We expect that the company surplus scenario is likely to continue for the next three years, will keep its

growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of

Rs.2786.00 for Medium to Long term investment.

INDUSTRY OVERVIEW

Indian cigarette market has shown a decline of around 2% in volume and a growth of 20% in terms of value over

the previous year. This year a new segment has been created – the 64 mm filter tipped cigarette segment with

relatively lower excise duty, which is considered as cost effective option and has provided some relief to the

manufacturers in terms of volume protection. Premiumisation trend continued with Kings Segment, which now

accounts 14% of the industry’s share whereas Mini Kings has been able to grow to a modest level of 4.3%.

However, the Regular Size Filter (RSFT) category, which forms the body of the industry has lost industry’s share

from 82.2% to 76.9% in FY 13. Also, the industry continues to face the menace of illicit trade.

Indian leaf tobacco exports were higher as compared to last year, both in volume and value terms

IMF forecasts real global GDP growth of 3.3% in 2013, about the same as the 3.2% in 2012, and the expectation is

that growth rates will improve to 4% the year after. Emerging markets are expected to grow in between 5% to

6% in the next 2 years.

SEGMENT WISE PERFORMANCE IN 2012-2013

Cigarettes

The domestic cigarettes business was subject to increased rates of central and state taxes during the year under

report. Although the resultant pricing pressure caused domestic volumes to decline, The Company still registered

a growth of over 5% in terms of value, from Rs. 27760.00 mn in the previous year to Rs. 29200.00 mn and also

captured a healthy market share of the newly-created 64 mm segment.

Godfrey Phillips India Ltd is working on a roadmap to strengthen key brands like, Four Square, Red & White and

Cavanders, through a combination of product innovation, distribution-led initiatives and consumer engagement

programs. New research methodologies are being used to understand consumers in a more holistic manner. It is

also embarking on a series of critical strategic projects to improve brand saliency and offer unique value

propositions to consumers which will help it place its key brands at a higher growth path.

Tea

Post the slight dip witnessed last year, the domestic tea business bounced back on track and recorded sales of Rs.

1060.00 mn as against Rs. 950.00 mn during preceding year, a growth of 12%. The Company undertook various

initiatives such as launching new product offerings for both general and institutional customers and expanding

modern trade business with entry into new chains and trade formats, which contributed to the growth story.

Apart from inroad made into the HORECA, HTS (hot tea shops) and Railways, various other alternative

distribution channels are being targeted for business expansion. Heightened print mass media campaigns and

ground activations have led to greater salience and traction for the Tea City portfolio. Post complete automation,

both the tea blending and packing units at Kolkata and Bazpur have become ISO 22000:2005 certified. Super cup

franchise rejuvenation progressed well on track with upgraded product quality and contemporary packaging

leading to a volume growth of 11% during the year. Targeted innovative campaigns and offering have helped in

stabilizing and growing other franchises like Utsav and Samovar.

Chewing Products

Your Company had another good year for its Chewing business as it achieved turnover of Rs. 1420.00 mn during

financial year 2012-13 as compared to Rs. 1210.00 mn during financial year 2011-12. This growth was achieved

in the backdrop of significant changes in the industry during the year including ban on Gutkha in most of the

States in India. This growth could have been still higher but for the surprise move by the Maharashtra

government to cover tobacco-free pan masala category also under its order to ban Gutkha invoked in July 2012.

Full implementation of the Gutkha ban is expected to result in upsides in the pan masala business. During the

year, the Company entered the market in Jharkhand. While ‘Pan Vilas’ continues to be the flagship offering, an

economy pan masala variant under the brand ‘Raag’ is in the process of being launched in the markets like: UP,

MP, Jharkhand, Orissa, and Gujarat. We are operating in zarda segment with the brands ‘Swarn Vilas’ and

‘Tarana’. We are looking to further streamline operations to drive efficiency and contain costs while

strengthening distribution reach to tap into new markets especially in rural segments and thereby improve

market share. The Company will look to enter newer segments within the chewing products category such as

flavored elaichi and supari, and mouth freshener, in both premium and mid premium categories.

Retail

Company’s foray into retail business through 24X7 convenience stores is making steady progress. The Company

is currently operating through 35 stores spread across NCR and expects to more than double this number during

the current year. New business models are currently under evaluation with the help of Japanese consultants and

we hope to scale greater heights in times to come.

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale

of any financial instrument or as an official confirmation of any transaction. The information contained herein is

from publicly available data or other sources believed to be reliable but do not represent that it is accurate or

complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. This document is provide for assistance only and is not intended to be and must

not alone be taken as the basis for an investment decision.

Firstcall India Equity Research: Email – info@firstcallindia.com

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