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(GPIL)
Stock Note HDFC Sec Scrip code GODPHIEQNR Business Profile Industry Cigarettes CMP (Rs.) 1935.6
Incorporated in 1936, the K. K. Modi group promoted Godfrey Phillips India Ltd. (GPIL) is the second largest player in the Indian cigarette industry. The company owns some of the most popular cigarette brands in the country like Four Square, Red and White, Jaisalmer, Cavanders and Tipper. Over the years, GPIL has set its own benchmarks in innovation with revolutionary brands like Stellar, the first slim cigarette and I-gen, the first euro norm cigarette in India. The companys products are distributed over an extensive India wide network of more than 500 distributors and 800,000 retail outlets. With the Corporate Office in Delhi, the Company has offices over 8 locations in India. GPIL has two major stakeholders, one of India's leading industrial houses - the K. K. Modi Group, which holds 46% stake and one of the world's largest tobacco companies, Philip Morris Inc, US, which holds 25%. Nationally, GPIL enjoys ~12-13% market share in cigarettes in terms of volume and 11-12% share in value.
K. K. Modi Group
The K. K. Modi Group is part of a US $ 2.4 bn Modi Enterprises that was founded by Rai Bahadur Gujarmal Modi in 1933. The group spans a diverse range of businesses which include agro-chemicals, tobacco, tea and beverages, education, entertainment, direct selling, network marketing and gourmet restaurants. These businesses further include steel, sugar, textiles, chemicals, tyres, computers, copiers, cosmetics, telecommunications, entertainment, homecare, pharmaceuticals and on line lottery.
GPILs Partners
Philip Morris Inc (PMI) Philip Morris Inc. joined hands with the K. K. Modi Group in 1979. Philip Morris, the owner of some of the world's most respected brands including Marlboro, is one of the largest shareholders in GPIL and has an agreement with the Company to provide technological services and assistance in all areas of business. In 1968 Philip Morris International Finance Corp, a wholly owned subsidiary of Philip Morris Inc., U.S.A. acquired full ownership of Godfrey Phillips Ltd., London, U.K., which was the Holding Company of Godfrey Phillips India Ltd. till the issue of shares to the Indian public during 1975. As a result of acquisition of Godfrey Phillips Ltd., London, U.K. as above, Philip Morris Inc. through its wholly owned subsidiary, Philip Morris International Finance Corporation became the Holding Company of GPIL. After the public issue in 1975, offer for sale to Indian public in 1979 and a rights issue in 1981 the shareholding of Philip Morris International Finance Corp in GPIL came down to 35.93% & further to 25% post the alliance of GPIL with Philip Morris. Altadis In December 2002, GPIL became the exclusive distributor for the brands of the world's largest cigar manufacturer, Altadis in India, Nepal and Sri Lanka. Altadis the worlds largest cigar manufacturer has three major areas of activity, which are blond and dark cigarettes, distribution and cigars. Blond and dark cigarettes are manufactured and marketed by the group itself, under well-established brand names in France and Spain. It is a market leader in its segment. Altadis's value-added logistical expertise in tobacco and consumer-product services is extended to retailers to new sectors. Altadis ranks 3rd in Western Europe in cigarettes and 1st in the world in cigars. Altadis group is the undisputed leader in three of the largest cigar markets namely United States, Spain and France. Some of the well known cigar brands of the Company are: Farias, Fleur de Savane, Phillies, Dutch Master, VegaFina, Pleiades, Don Diego, Longchamp, Antonioy Cleopatra, Santa Damiana, Meccarillos, Cruzeros, Montecristo, Partags, Cohiba, La Gloria Cubana, H. Upmann, Picaduros, Ducados Mini, Van Holden, Entrefinos, Tampa Nugget, Hav-a-Tampa, Backwoods and yotras marcas.
Subsidiary Companies: GPIL has four wholly owned subsidiaries namely International Tobacco Company Ltd, Chase
Investments Ltd, City Leasing & Finance Co Ltd and Manhattan Credits Finance Ltd. These are direct subsidiaries. The other indirect subsidiaries include Kashyap Metal & Allied Industries Ltd (66.23%), Unique Space Developers Ltd. (66.67%), Gopal Krishna Infra & Real Estate Ltd. (66.67%) and Rajputana Infra Corp Ltd. (66.23%). All the direct & indirect subsidiaries have been incorporated in India. International Tobacco Company (which owns a plant at Guldhar, Ghaziabad) manufactures cigarettes on behalf of GPIL, which account for 57.6% of GPILs total sales quantity of cigarettes. GPIL pays manufacturing charges (Rs. 362.4 mn in FY10) to International Tobacco for manufacturing on its behalf, which is netted off in the consolidated accounts. None of the other subsidiaries have started generating the revenues.
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Facilities: GPILs plants are situated at Andheri (Mumbai) and Baramati and the plant located at Guldhar (Ghaziabad) is owned by GPILs wholly owned subsidiary, International Tobacco Company Ltd. Product Profile:
The companys business can be categorized into two segments, i) Cigarettes & Tobacco products and ii) Tea & Related Products. The cigarettes & tobacco products segment accounts for 91.3% (in 9MFY11) of GPILs total revenue. The balance is contributed by diverse businesses like Tea, Confectionery, Chewing Products, Cosmetics and Retail (included under Tea & Related products). The table below gives a brief overview of GPILs businesses & its brands. Product Category Cigarettes Brands Stellar Four Square Red & White Jaisalmer Cavanders Tipper North Pole Symphony Premium Teas Super Cup Samovar Super Cup Duet Utsav Rangoli Chewing Products [Pan Masala] Confectionery Cosmetics Pan Vilas Funda Mint & Funda Goli ColorBar Description It is Indias first slim cigarette. It has been specially engineered to deliver low nicotine without a compromise in taste and flavor. This is GPILs flagship brand. GPIL has different brands in this category namely; Four Square Kings, Four Square Lights, Four Square Premiums, Four Square Special Filter, Four Square Fine Blend, Four Square Rich Gold. One of the most renowned brand names of the nation, it has been rated in the top 50 brands in the FMCG sector. A Premium King Size brand. It is a luxurious blend of finest sun dried Virginia tobaccos, which deliver a smooth mellow flavor. Filter variant of cavanders, which acts as an economical upgrade option to non-filter smokers. Under the new excise regime, Tipper was introduced in the filter genre at an extremely affordable price. North Pole is the largest selling menthol cigarette in India. A premium assortment of original brews and flavours is available in three variants, Assam Tea, Darjeeling Tea and Green Tea. A mid premium segment brand of Tea City is a blend from sprawling tea gardens of Assam which gives a full bodied brew. It is for them who like their tea strong. Super Cup comes in two formats: Leaf & Dust Samovar Green tea is a special blend of pure long leaves. Along with strong granular CTC one can enjoy the aromatic Darjeeling tea, which comes in a pouch inside. An economy brand that comes in leaf as Utsav Chai & dust variant as Utsav Dust Chai. It is an economy brand that comes in two variants to suit all taste palates Leaf and Dust. Launched in January 2010. Magnesium Carbonate-free pan masala which is compliant to the stringent requirements of PFA rules Funda Mint available in four flavours saunf fresh, double thanda, Kaccha Aam and Rasili Lychee. Funda Goli available in two flavours viz; Kaccha Aam & Rasili Lychee. ColorBar is a brand from USA and is marketed and distributed by ColorBar Cosmetics Pvt. Ltd., a part of the K. K Modi Group of Companies. The products have premium international formulation and the range consists of lip sticks, lip glosses, retractable lip liners, long stay lipsticks, kajal etc. 24X7 Stores are 24-hour convenience chain of stores located in the central areas of the city of Delhi offering wide variety of products and services to customers. Providing international shopping experience, the store stocks packaged foods & beverages, personal & home care items, has a pharmacy & other service counters where one can pay bills or courier documents.
Tea
Retail
24X7
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Investment Rationale Cigarette business doing well despite the regulatory hurdles
GPIL is the second largest player (after ITC) in the Indian cigarette industry. The company owns some of the most popular cigarette brands in the country like Four Square, Red and White, Jaisalmer, Cavanders and Tipper. Nationally, GPIL enjoys ~12-13% market share in cigarettes in terms of volume and 11-12% share in value. The business is a major growth driver for GPIL, accounting for 91.3% of its total net revenues (in 9MFY11). The company continues to channelize its efforts and resources towards consolidating its presence in existing markets & expanding in new markets in the eastern and southern regions, i.e. West Bengal and Tamil Nadu, and is confident of achieving the desired growth targets. GPIL constantly endeavours to benefit from inherent capabilities to introduce innovative products suited to customer preferences and its products in new markets have been widely appreciated by its consumers and trade partners. Leveraging the advancements in technology, Four Square introduced a Limited Edition Series in FY10 with an innovative pack design that had, for the first time in India, a complete tactile look and feel. In the eastern front, Four Square Fine Blend gained strong momentum post launch in FY09. Further, in FY10, GPIL launched Cavanders Gold and Cavanders Special. Cavanders Gold was launched in the existing markets whereas Cavanders Special was introduced in the new market of Tamil Nadu. Both these launches have been successful. Besides this, the company has also maintained its arrangement with Philip Morris [PMI] (alliance with PMI entered into in 2009) to manufacture and distribute several of their brands, including the iconic Marlboro cigarette brand. It is available pan-India in about 65,000 retail outlets. The brand has seven variants including the newly launched Marlboro Gold Advance & Gold Advance Compact (GPIL launched Compact in May 2010 thus foraying into larger regular-filter market in May 2010). Escalating taxation and constraining regulations have continuously restricted the Cigarette Industrys growth. On top of that, the Goods and Services Tax, expected to be implemented in 2011, would be an unfair tax on tax, as it is proposed to be levied ad-valorem, instead of on product cost net of excise duty. The increase in excise on cigarettes by 18% in the Union Budget FY11, coupled with rise in VAT to 20% in some States resulted in shifting consumer segments and affected costs. However, GPIL has successfully responded by reiterating collective representation, product customization, diversification and geographical expansion. Despite the influence of various environmental factors, GPIL has maintained its growth momentum. The company has been able to generate robust revenue streams over the years despite onerous tax structure. Also the government ban on smoking in public and pictorial warnings on the cigarette pack in the recent past has shown a minimal impact on the cigarette revenues of the company. Over the last four years, GPILs domestic cigarettes sales have grown at a CAGR of 13.2%.
25000 17.7 Gross Domestic Sales (Rs. in Mn) 20000 16360 15000 14600 12.1 10000 10.3 12.7 19260 21700
5000
4 2
Future growth in cigarettes is dependent on future income growth of the population at large. A large portion of India is set to emerge from Deprived and Aspirers to the Seekers and Strivers class in the next twenty years, raising the number of potential cigarette smokers, as consumers switch from bidis to cigarettes. While we do not expect an inspiring growth in the cigarettes business on the back of higher tax incidence and regulatory hurdles like ban on cigarettes advertising, government ban on smoking in public and pictorial warnings on the cigarette pack, the structural shifts in the Indian economy of rising disposable income, improvements in standard of living, rising urbanisation and aspiration needs will lead to a decent rise in consumption of cigarettes over the next few years. Further the compulsion of pictoral warnings on the cigarette packets have
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had / likely to have a minimal impact on the sales volumes largely due to India having significant sales of single stick purchases of cigarettes and also because smoking is an addiction and not easy to quit. Being one of the leading players in the Indian cigarettes industry, GPIL is expected to benefit from the expected rise in the consumption of cigarettes in India. Moreover, the addition of PMIs Marlboro to its cigarettes portfolio is expected to further boost its turnover. The Marlboro portfolio has seen a steady growth of over 30% since the strategic alliance with PMI. We expect GPILs overall cigarettes sales to grow at a decent rate going forward.
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cause of concern. This could be due to higher ad spends being incurred to scale up the business size rapidly. While we expect the segment to continue to report robust turnover growth, it could take some more time to breakeven. While the timing of the same is uncertain, once the segment starts adding to the bottomline, GPIL margins could improve significantly. The company is looking at making its tea and Pan Vilas products the new growth drivers going forward.
Alliance with PMI has helped to have an access to the flagship brand Marlboro and PMIs technology
GPIL has an arrangement with Philip Morris Inc (PMI), US [alliance entered into somewhere in April 2009] to manufacture and distribute their brands, including the iconic Marlboro brand of cigarettes. In 2003, PMI had launched Marlboro, its largest selling cigarette brand, in India on its own, through an arrangement with a local distributor, Barakat Foods & Tobacco (BFT). Philip Morris directly imported the product, which was then distributed by BFT under a non-exclusive agreement. The company wanted to retain control over its flagship brand (Marlboro) due to which PMI sidelined its partner GPIL and formed an alliance with BFT for distributing its Marlboro brand in India. This alliance between the PMI and BFT had created a rift between the PMI and GPIL, which was affecting both the companies. However, in 2009, PMI and its Indian JV partner, the KK Modi group settled their dispute over the sale of Marlboro cigarettes in India, which we feel is a tactical retreat by both companies keen on gaining market share. As per the current alliance between GPIL & PMI, GPIL has taken up manufacturing, distribution and sales of Marlboro while PMI has kept the marketing duties. We feel there are two main reasons behind the stepping down of PMI and forming a cordial alliance with GPIL viz; i) The Union health ministrys push for certain curbs on cigarette imports. Under current regulation, cigarettes can be imported but companies pay substantial import duties. Manufacturing in India will help PMI save costs and give it GPILs sales and distribution network, which will help Marlboro to gain the desired market share; ii) The second reason accounts for the smuggled cigarettes, which are making entry in India, especially Marlboro. GPIL would provide cushion to PMI from all these factors, which entails the breaking of the ice between two partners. GPIL manufactures the brand in India by utilizing idle capacity at its plants in Mumbai and Ghaziabad and pays royalty to PMI for using the manufacturing technologies. PMI and K.K Modi group were earlier having 36% share each in GPIL. However, post the new alliance, K.K Modi holds 46% in GPIL & PMI holds 25%. The brand has given GPIL an access to PMIs technology & has added to GPILs portfolio a high-end brand with strong consumer pull, which it always lacked. The brand is available at selected cities in India in approximately 65,000 retail outlets and has 7 variants including the recently launched Marlboro Gold Advance and Gold Advance Compact. The Marlboro portfolio has seen a growth rate of over 30% since the strategic alliance. With the expansion of retail outlets and launch of new variants, we expect this brand to continue to grow at a decent rate over the next few years, which would boost GPILs revenues & profits.
The noticeable improvement in the Companys export performance over FY08-10 is visible from the above table. Proactive measures and various initiatives to boost export performance have been yielding encouraging results. The unmanufactured tobacco, which accounts for a major portion of GPILs exports (65.6% in FY10) has grown at a robust rate over the last two years. Even cigarette exports have done well. While the cut tobacco exports growth has moderated, the tea exports declined in FY10.
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For cigarette and cut tobacco exports, GPIL is actively looking at new markets and has recruited new managers for prospecting business in new geographies. Apart from continuous focus on CIS and Russian Federation, efforts are on to increase number of markets. The major regions where GPIL is currently exporting include South East Asia, Africa, Middle East and Latin America. For unmanufactured tobacco exports, the measures taken by GPIL include broadening the customer base and opening of new markets for direct exports in Middle East and Europe. Decline in the tea exports in FY10 was mainly on account of loss of business in Kazakhstan due to their Government raising import duty on packet tea rendering the imports unviable. Efforts are being made to forge new international contacts, attain cost and quality efficiencies and meet Multi Original Blend Standard requirements of International Buyers. The exports have grown at a CAGR of 41% over FY07-10. The company currently exports the cigarettes and tobacco to more than 20 countries and it has plans to increase the number to 30 by 2011-12. With these significant efforts to expand the overseas reach, we expect the exports business to grow at a robust rate going forward.
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GPIL operating profit & PAT have grown at a CAGR of 6.2% & 9% respectively over FY07-10. OPM fell from 16.3% in FY08 to 11% in FY10, while PAT fell from 13.8% in FY08 to 8.3% in FY10. Decline in the operating margins was on the back of higher material cost. This coupled with higher depreciation expense pulled down the PAT margins. However over FY10-12, we expect the margins to improve on the back of significant decline expected in the material cost as a % to net sales, since we expect the contribution from high end cigarettes & high margin Marlboro brand to increase. Also we expect the losses of noncigarette businesses to reduce (in Q3FY11, the non-cigarette business reported positive PBIT of Rs. 1.7 mn vs. loss of Rs. 4.6 mn in Q3FY10). Also it should be noted that the amount of traded goods (purchase for resale) have declined by 45.1% in 9MFY11 (over 9MFY10) and that has also contributed to significant expansion in GPILs operating margins, which have improved from 11.6% in 9MFY10 to 13.4% in 9MFY11. The focus seems to be shifting from trading to manufacturing, which fetches higher margins. OPM is expected to improve to 13.6% in FY11 & further to 14.8% in FY12. We feel that 18.2% OPM delivered by GPIL in Q2FY11 was exceptionally high and is unlikely to sustain in the coming quarters. Operating profit is expected to grow at a CAGR of 30.6% over FY10-12. Further we dont expect a very significant jump in depreciation cost over the next two years. This coupled with higher OPM is likely to improve the PAT margins to 8.9% in FY11 & 9.4% in FY12. PAT is expected to grow at a CAGR of 20.1% over FY10-12. The charts below give an overview of GPILs operating profit & PAT growth since FY08 along with our future projections:
Operating Profit (Value) 3000 Opt. Profit (Rs. in Mn) 2500 2000 1500 1000 500 0 FY08 FY09 FY10 Year End 16.3 13.3 11.0 1474.1 1505.4 1526.7 13.6 2124.3
% of sales 18 2603.8 16 14 Percentage (%) PAT (Rs. in Mn) 14.8 12 10 8 6 4 2 0 FY11E FY12E 1800 1600 1400 1200 1000 800 600 400 200 0 FY08
1243.4
1085.5 9.6
1150.7
8.3
FY09
FY10
FY11E FY12E
Year End
Recent organizational restructuring could lead to faster decision-making and better valuations
KK Modi Group, on April 15, 2011, announced an organizational restructuring with the setting up of a family council to ensure promoter interests in its businesses while roping in ex-IOC Chairman Sarthak Behuria to steer the corporate functioning. The move is part of its strategy to become a $5bn group in terms of market capitalisation in the next 5 years to be fuelled by growth in domestic & global markets. After the re-organisation, there will be three major governance bodies to help manage the group & promoters interests, Corporate Management Council (CMC), Corporate Executive Committee (CEC) & Family Council. The CMC will be the apex decision-making body for the group and will be chaired by KK Modi. His wife Bina Modi will lead the family council, while Behuria will be leading the CEC. The CMC will act as a forum to make strategic business decisions pertaining to the group, in consultation with other promoters. The CEC under the stewardship of Behuria will be responsible for driving the group's portfolio strategy, support growth aspirations of the various operating companies. It will also work to make transformational moves and accelerate GPILs international expansion via organic and inorganic means. This organisational restructuring could lead to faster decision-making and GPIL could get better valuations going forward.
Industry Outlook
TOBACCO INDUSTRY The Economic Survey 2009-10 indicated that with growth in private expenditure on food, beverages and tobacco falling behind the overall growth in private consumption expenditure, the share of expenditure on food items has gradually been declining over the years. As per the CSO (Central Statistical Organisation) data, the share of private expenditure on food, beverages and tobacco was 35.3% (2008-09) of the total private consumption. This is a decline from 39.6% in 2004-05. After registering a growth of around 14% annually in the eight-year period ending 2008-09, the category of beverages and tobacco products experienced a decline of 2.2% in 2009-10 (Apr-Nov). Cigarette production has not shown any significant growth since 200708. The cigarette industry continues to reel under burdensome taxation and an increasingly restrictive regulatory environment.
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Impact of Taxation Union Budget 2010-11 increased excise duties on cigarettes by about 18%, further pressurizing volume growth, affecting product pricing and impacting consumer behaviour. The continuously rising taxes are resulting in a shift in cigarette consumption to cheaper alternatives that have higher tar/nicotine levels. Coupled with the existing rise in VAT on cigarettes from 12.5% to 20% in state budgets, this was another discriminatory blow for the cigarette segment. Excise Duties on cigarettes since Union Budget FY03: Rs. / 1000 sticks 75-85MM 70-75MM <70MM Non-Filter 60MM-70MM <60MM FY03 1450 1090 670 450 135 FY04 1450 1090 670 450 135 FY05 1450 1090 670 450 135 FY06 1595 1200 740 495 150 FY07 1675 1260 780 520 160 FY08 1759 1323 819 546 168 FY09 1759 1323 819 1323 819 FY10 1759 1323 819 1323 819 FY11 1959 1473 969 1495 669
Due to various issues remaining unresolved amongst various stakeholders, the earlier deadline of April 01, 2010 for GST implementation got extended to April 01, 2011 & now stands postponed till next year. The Empowered Committee of State Finance Ministers continues consultations on compensation to states, subsumation of state taxes, Constitutional amendments and model legislation for GST, amongst other issues. The Industry continues to interact with and impress upon policymakers the need for a rational and stable taxation structure, keeping in view the need to bridge the large differential in tax rates between cigarettes and other tobacco products. The Specific Duty structure for cigarettes has proven to be extremely beneficial and superior to the earlier ad-valorem structure and should be continued. GST on cigarettes is seen by the Industry largely as a tax on tax and is recommended to be levied on value net of taxes. The Industry continues to address all challenges by competitive strategies based on on-the-ground insights, detailed consumer interface and product innovation. Meanwhile one positive thing what happened in Union Budget 2011-12 was that there was no further hike in excise duty on cigarettes. This has provided huge relief to the cigarette companies. Regulatory Environment The Industry continues to be inundated with restrictive regulations. The present graphic health warnings on tobacco packages have become more impactful. The increasing influence of international guidelines pertaining to trade barriers, products, packaging and other related restrictions may present fresh challenges for the domestic cigarette industry. The Industry has faced ground-level issues regarding interpretation and enforcement of COTPA (Cigarettes & Other Tobacco Products Act) Rules, prompting successful representations for greater awareness of regulatory updates amongst implementation authorities. On its part, the Industry along with various stakeholders, is cohesively working towards generating momentum towards addressing related issues by engaging regulatory authorities at various levels and highlighting its selfregulated practices, law abiding and responsible behaviour. Despite higher taxation & regulatory hurdles, cigarette consumption in India could grow at a decent rate Future growth in cigarettes is dependent on future income. A large portion of India is set to emerge from Deprived and Aspirers to the Seekers and Strivers class in the next twenty years, raising the number of potential cigarette smokers, as consumers switch from bidis to cigarettes. While we do not expect an inspiring growth in the cigarettes business on the back of higher tax incidence and regulatory hurdles like ban on cigarettes advertising, government ban on smoking in public and pictorial warnings on the cigarette pack, the structural shifts in the Indian economy of rising disposable income, improvements in standard of living, rising urbanisation and aspiration needs will lead to a decent rise in consumption of cigarettes over the next few years. Further, in the past it has been proved that the imposition of smoking ban in public places by the Indian government has not affected the cigarette volume significantly and the impact has been only in the short to medium term. Moreover, the compulsion of pictoral warnings on the cigarette packets have also had minimal impact on the sales volumes mainly because of two reasons i) Firstly, India has significant sales of single stick purchases of cigarettes, which reduces the impact of these pictorial warnings as many smokers never actually see them; ii) Secondly, it is very difficult to quit smoking, as it is an addiction and even though people are aware about the pictoral warning they generally dont care about it.
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Competitive Profile:
In the cigarettes business, which accounts for 91.3% to GPILs total revenues, GPIL faces stiff competition from other established Indian cigarette players like ITC, VST & GTC. At CMP, GPIL trades at 14.4xFY11E EPS & 12.1xFY12E EPS, which is at a huge discount to ITC and at a marginal discount to VST. The discount to ITC could be justified due to GPILs relatively much smaller business size & market share and lower operating & PAT margins as compared to ITC. Further ITCs dependence on cigarettes is lower, as the business accounts for ~43% to the total revenue. ITC has presence in other businesses like FMCG, Hotels, Paper Board & Packaging & Agri Business, which are not prone to frequent Government intervention. However, GPIL deserves to trade at a premium to VST due to GPILs relatively higher market share, lower tobacco leaf sales (which is volatile) and larger distribution network. GPIL used to trade at a premium to VST earlier but recently, the premium shrunk due to 45% rise in the stock price of VST Inds over the past three weeks. Further, GPIL also faces competition from other multinational cigarettes / tobacco players like British American Tobacco, Imperial Tobacco, Swedish Match, Reynolds American, Altria Group etc. GPIL trades at a discount to some of the global peers on TTM basis (GPILs PE: 16.2x TTM EPS; Global peers: Trading in the range of 13-18x TTM EPS) GPILs business model is very sound. The company has been able to generate robust revenue streams over the years despite onerous tax structure. Also the government ban on smoking in public and pictorial warnings on the cigarette pack in the recent past has shown a minimal impact on the cigarettes revenue of the company. Further considering its wide distribution network, strengthening overseas presence, diversification into other segments like Tea, Cosmetics, Chewing Products, Confectionery and Retail and access to high margin flagship brand Marlboro to its high-end cigarettes brand post the alliance with PMI, we feel that GPIL deserves to trade at higher valuations going forward. Further the Indian market offers better scope in terms of likely increase in cigarettes volume growth due to demographic factors and also due to the absence of consumer litigation in India. This makes us believe that GPIL should trade at a premium to all its global cigarette peers going forward. Peer Comparison: FY10: Company Name FY10 OPM NPM EPS Net Sales Book Value P / BV (%) (%) (Rs.) PE (x) (Rs. in Mn) Mkcap/Sales (x) (Rs.) (x) 33.5 22.4 5.3 36.2 181531.9 8.1 19.1 10.0 16.4 13.1 40.2 22.4 4721.7 2.9 162.5 5.5 11.0 8.3 110.6 17.5 13838.7 1.5 655.2 3.1
(Company, HDFC Sec)
FY11E OPM NPM EPS Net Sales Book Value P / BV (%) (%) (Rs.) PE (x) (Rs. in Mn) Mkcap/Sales (x) (Rs.) (x) 34.7 24.0 6.4 30.0 211937.2 7.0 22.3 8.6 23.6 16.4 61.6 14.6 5784.3 2.4 159.5 5.6 13.6 8.9 134.3 14.4 15658.2 1.3 760.2 2.5
(Consensus, HDFC Sec Estimates)
FY10 Comparison of Cigarette business (Sales, PBIT & Capital Employed) with ITCs cigarette segment: Cigarette Business (Rs. in Mn) Net Sales PBIT PBIT Margin Capital Employed GPIL 12869.0 1414.6 11.0% 5631.7 ITC 93211.5 49381.2 53% 30765.5
(Company)
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Q-o-Q: Sequentially, the results were decent on revenue front, but disappointing in terms of profitability. Net Sales grew by 12.8%, mainly on the back of decent growth reported by Cigarettes & Tobacco segment (up 12.2% Q-o-Q). Even Tea & Related products segment reported healthy sequential growth of 18.3%. However, operating profit declined by 18.9%, while the OPM fell by 512 bps Q-o-Q from 18.2% in Q2FY11 mainly on the back of higher material cost & selling & admin expenses, which rose 26.6% & 39.2% respectively. Decline in the other income (down 35.3% Q-o-Q) put further pressure on PAT, which fell by 24%. PAT margins fell by 437 bps Q-o-Q from 13.4% in Q2FY11.
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1220 7762.3
943 6825.5
29.4 13.7
130.8 7386.8
832.7 5.1
379.6 6892.5
751.8 6665.2
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Balance Sheet
YE March Share Capital Reserves & Surplus Shareholders Funds Minority Interest Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Capital Employed Gross Block Less: Depreciation Net Block CWIP Investments Inventories Sundry Debtors Cash & Bank Loans & Adv. & other current assets Total Current Assets Current Liabilities & Provisions Working Capital Capital Deployed FY08 104 5081 5185 32 1034 0 1034 26 6277 3172 1519 1654 223 3360 2414 231 95 746 3486 2445 1041 6277 FY09 104 5863 5967 29 953 0 953 0 6948 4139 1806 2333 627 2155 3686 304 189 790 4968 3136 1833 6948 FY10 104 6710 6814 26 1146 0 1146 22 8008 4984 2115 2869 735 1948 3654 493 363 806 5315 2860 2456 8008 FY11E (Rs. In Million) FY12E 104 9158 9262 26 1959 0 1959 22 11269 6997 3041 3956 810 3785 4258 585 727 905 6476 3757 2718 11269
104 7803 7907 26 2176 0 2176 22 10131 5980 2530 3450 772 3604 3836 518 467 862 5683 3378 2305 10131
Key Ratios
YE March FD EPS (Rs.) PE (x) Book Value (Rs.) P/BV (x) OPM (%) PBT (%) NPM (%) ROCE (%) RONW (%) Debt-Equity Current Ratio Mcap/Sales (x) EV/EBITDA FY08 119.6 16.2 498.6 3.9 16.3 20.7 13.8 30.5 24.6 0.2 1.4 2.2 14.3 FY09 104.4 18.5 573.7 3.4 13.3 14.6 9.6 24.7 18.1 0.2 1.6 1.8 13.9 FY10 110.6 17.5 655.2 3.0 11.0 12.3 8.3 22.1 17.6 0.2 1.9 1.5 13.7 FY11E 134.3 14.4 760.2 2.5 13.6 13.6 8.9 22.1 18.3 0.3 1.7 1.3 10.3 FY12E 159.6 12.1 890.6 2.2 14.8 14.4 9.4 23.6 18.6 0.2 1.7 1.1 8.2
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