PESTLE ANALYSIS

ABOUT GODFREY PHILLIPS

INDIA LTD.
GPIL is an associate of the KK Modi group of companies
and Philip Morris International Finance Corporation
(Philip Morris), a subsidiary of Altria Group Inc. The KK
Modi group owns around 46% of Godfrey Phillips, whereas
Philip Morris owns 25%
GIPL is a distant second player in the Indian cigarette
market.It has a comfortable market position supported by
a portfolio of well-established cigarette brands which
enjoy strong loyalty from customers. Its key brands are
Four Square, Marlboro, Red and White and Cavanders.
Annual turnover exceeds INR 1800 crore (approx. US
$369.6 million)
Incorporated in India in 1936, the Company established
its own manufacturing facilities in 1944.

In 1946 GODFREY PHILLIPS became a Public Ltd. Co. with

its manufacturing operations in Mumbai.

Its products are distributed through an extensive India

wide network comprising 484 exclusive distributors and
over 800,000 retail outlets.

GPIL operations are concentrated in the northern and

western regions of India. The major regions where the
company currently exports include South East Asia,
Africa, Middle East and Latin America.

Exports contributed 22% of its total sales for FY10.

GPIL diversified its business into Confectionary, Tea,
Cosmetic and Retail. These new segments contributed 8%
to its total revenue in FY10. These segments made
operating losses in FY10.
 THE POLITICAL
ENVIRONMENT OF
GODFREY PHILLIPS
INDIA LTD.

IndiaisthebiggestdemocracyintheWorld. The
government type is federal republic. The
government has been more or less stable since
the past ten years.
In India, tobacco enterprise contributes Rs.
20,000 crores annually, through foreign
exchange earnings and internal excise revenue.
 The ban on smoking in public places,
which has been in effect since
October 2008, and the ruling that
cigarettes have to carry a pictorial
warning along with the statutory
health warning, has not affected
sales and has not had any major
impact on the industry.
In addition, the government has
deferred its decision for cigarette
manufacturers to carry more graphic
warning pictures by one year in
reaction to the shutdown of factories
by major manufacturers upon
announcement of the decision.
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, increases in
the excise duty do not affect the
profitability of cigarette companies,
 The domestic cigarette industry continues to be
vulnerable to government policies, with regard
to excise duties and imposition of multiple
taxes (luxury and entry tax). Union Budget
2010-11 increased excise duties on cigarettes
by about 18%, it could adversely impact product
pricing and volume growth.

Foreign exchange fluctuations as the company

earns 22% of its revenues through exports.

Continuously rising taxes could result in a shift

in cigarette consumption to cheaper
alternatives that have higher tar/nicotine levels.
ECONOMIC ENVIRONMENT
TAXATION :
Cigarette taxes account for approximately 38% of
the retail price. This falls well below the rate
recommended by the World Bank (from 65% to
80% of retail price) that is commonly present in
countries with effective tobacco control policies.
Taxes in India are complex and vary by tobacco
product. Cigarettes are taxed based on their
length which make for a large market in very
cheap tobacco products.
Tobacco taxes in India are not regularly adjusted
for inflation, and over time tobacco products are
becoming increasingly affordable
 Directors Annual
Report
A piece of the Directors Annual Report and Accounts for
the year ending March 31, 2011:
After recessionary phase of 2008-2010, the global
economy has shown moderate signs of improvement in
2010-11. Indian economy continued to outperform most
emerging markets during 2010-11 retaining its position
as the second fastest growing economy, after China,
amongst the G-20 countries. China and India contributed
nearly a quarter of the incremental world output.
While the Indian cigarette industry registered a decline
in volumes in 2010-11, there is an upward trend in
value owing largely to higher prices due to incidence of
taxation. GPI has, however, not only protected itself
from contraction in volumes but also marginally
improved its market share.
The other trend to watch is the shift to higher price
points. Premium segment cigarettes are increasingly
 Godfrey Phillips India net profit
rises 22.26% in the December
2011 quarter.
Capital Market / 15:11 , Feb 01, 2012
Sales rise 13.47% toRs.473.08
crore.

Particulars Quarter Ended

Dec. 2011 Dec. 2010 % Var.

Sales 473.08 416.93 13.47

OPM % 14.74 14.95 -1(approx)

PBDT 74.28 65.06 14(approx)

PBT 62.64 55.60 13(approx)

NP 45.91 37.55 22.26

 Comparison with competitors
Marke
P/E P/BV EV/EBI
Compa t Cap ROE ROCE D/E
(TTM) (TTM) DTA
ny (Rs. in (%) (%) (x)
(x) (x) (x)
Cr.)
158,61
ITC 27.22 9.97 17.28 33.4 48.8 0.01
7.07
3,011.2
Godfrey 16.07 3.82 7.45 22.9 28.1 0.23
Phillips 7
1,862.8
VST Ind 14.04 7.15 6.01 37.7 53.7 0.00
s. 4
Golden 61.07 0.00 8.83 0.00 0.0 0.0 5.26
Tobac
NTC Ind 23.06 93.26 0.84 20.74 0.4 1.9 0.19
coRTCL
s. 3.08 0.00 0.23 8.44 0.6 1.3 0.03
 Imports
and
INDIA: IMPORTS AND
EXPORTS OF Exports
CIGARETTES (USD 000)
YEAR IMPORTS EXPORTS

2007 13557 448595

2008 17296 674811
2009 31239 897633
2010 18679 878687
 Key Positives for
GPI
Habitual industry: Despite high government intervention and campaigns
against smoking along with high tax rates, the industry continues to thrive. Also,
ban on smoking in public places and restrictive advertising has not stopped this
industry from growing.

Excise an easy pass on: Since it is a habit industry, companies find it

comparatively easy to pass on excise duty hikes. Last year, the government
increased excise by 10%, but it was easily passed on to consumers, without
demand being affected.

Per capita consumption ridiculously low: The per capita consumption of

cigarettes in India is merely a tenth of the world average. Thus, as disposable
incomes increase,
people might shift from bidis to cigarettes and hence there lies a huge potential to
convert. Being the No. 2 player in the segment, GPI is likely to be a big beneficiary of
this change.
 Key Negatives for
GPI

Heavily penalized through punitive taxation policies:

Cigarette companies pay roughly 50% of their revenues as excise.
As a result, the share of cigarettes in total tobacco consumption
has declined from 21% in 1981-82 to a mere 14% in 2004.

Domestic cigarette companies suffer a double whammy: On

the one hand, they are barred from sponsoring sports and cultural
events and on the other hand, contraband cigarette volumes
continue to thrive. Net result, volume growth is sluggish. In the last
20 years, tobacco consumption in non-cigarette varieties has
increased especially in the chewing format by 68 m Kgs, and
reduced in the cigarette format by 21 m Kgs.
 The Social
Environment
With the increasing threat to the tobaccoindustry
as a whole and decreased consumption levels of
cigarettes, need gaps in the market are being met by
new products like non-tobacco beedi , paan - (betel
leaf) flavoured tobacco-free gumlets, and substitutes
and tobacco patches like Click which are targeted at
the traditional cigarette consumer base.
Social targeting of health conscious
consumers with misleading claims..
New products and tactics created
to counteract consumer knowledge
Use of misleading terms (ex low-
tar) on cigarette packaging or in
advertisements that encourage
health-concerned smokers to
switch to cigarettes brands that
they perceive as safer
Offers consumers that are
Stellar Slims
concerned about health risks from
Cigarette ad: Low
tobacco an alternative to quitting. nicotine,
King sized
satisfaction
 Igen

Godfrey Phillips launched I-gen in 2006. I-gen

cigarettes have a black filter and the black, red and
silver packaging is aimed at making the product
look trendy and contemporary
The brand is described on the companys website as
a cigarette that holds the promise cigarette quality
and immense style
 GPIs Social Marketing
Strategy
The Bravery Awards.

Since 1990 Godfrey Phillips India has

sponsored the Bravery Awards (first under
the brand name Red and White and now
under the company name).
Honors citizens that perform physical and
social acts of bravery.
Indian film actress Preity Zinta acted as an
ambassador of the awards from 2006-08.
Also launched blood drives and the
Amodini-Women's Empowerment
initiative. Through Amodini, Godfrey
Phillips Bravery continues to equip rural
women with self respect and financial
independence.
 Amodini meaning
Happiness

Through Amodini, Godfrey Phillips Bravery continues to equip rural

women with self respect and financial independence.
Joining hands with reputed NGOs such as Charities Aids Foundation,
Literacy India, Mann Deshi Foundation and American India Foundation
Trust, Godfrey Phillips India helps promote gender equality and redress
power imbalances. Amodini has successfully empowered over 7,000
beneficiaries by providing them with the necessary training and
opportunities that have helped them gain financial independence.
A system audit conducted by a third party company-Chess Management-
confirmed that the company was successful in meeting all its statutory
responsibilities with regards to society proving the resilience of its
internal value systems.
 TECHNOLOGICAL
ENVIRONMENT

The cigarette manufacturing companies have been

modernizing their processing and manufacturing facilities,
with new or upgraded machines introduced for cigarette
making.
The impact of the advanced technology has been to improve
processing, reduce component prices and improve quality
and efficiency. It has also reduced cigarette damage and
waste; reduced tar and nicotine levels through filterization;
reduced usage of tobacco per cigarette; and improved
cigarette paper and filter design.
 The share of filter-tipped cigarettes increased from less
than 30 percent in 1970 to 66 percent in 1998. The
reduction in tobacco used per cigarette has been
significant. According to industry sources, currently about
750 g of processed tobacco is used to manufacture l000
cigarettes, against the 1000 g used three decades ago.

However, the cigarette industry in India has generally not

kept pace technologically with the developed countries. For
instance, the speed of cigarette makers and packers in
India is 2 000 to 3 000 cigarettes per minute (cpm),
compared to 7 000-10 000 cpm abroad. The plants abroad
have a very high levels of automation in primary
processing, material handling systems and secondary
technology.
 LEGAL ENVIRONMENT
The govt of India in 1975 enacted the Cigarettes (regulation of
production, supply and distribution) act, which made it
mandatory to display a statutory health warning on all packages
and advertisements of cigarettes.
During the 1980s and 1990s, the central and state govts imposed
further restrictions on tobacco trade and efforts were initiated to
bring forth a comprehensive legislation for tobacco control.
The Indian parliament passed the cigarettes and other tobacco
products (prohibitionof advt and regulation of trade and
commerce, production, supply and distribution) bill, 2003 in april
2003. The bill became an act on 18 may,2003. Rules related to
some sections of the law were formulated and enforced from 1
may 2004.
KEY PROVISIONS OF THE CIGARETTES AND OTHER TOBACCO
PRODUCTS ACT, 2003.
Ban on smoking in public places (including indoor
workplaces)
Ban on direct and indirect advertising of tobacco products-
point of sale advertising is permitted
Ban on sales to minors
-tobacco products cannot be sold to children less than 18 years
of age
-tobacco products cannot be sold within a radius of 100 yards
of educational institutions.
Pictorial health warnings
English and one or more indian languages to be used for
health warnings on tobacco packs
Testing and regulation :ingredients to be declared on tobacco
product packages (tar and nicotine)
 Ban on Foreign Direct Investment
India liberalised investment in its tobacco sector in
1998 but the rules allowed 100 per cent foreign
direct investment in cigarette-making provided the
manufacturer obtained an industrial licence and
approval from the Foreign Investment Promotion
Board, an agency of the commerce ministry.
However as of April 2010, India has closed the
doors on new foreign direct investment in
cigarettes. The ban applied to new proposals and
did not have any impact on existing equity stakes
held by overseas companies.
The move impacted GPI tremendously in which
Phillip Morris has a 25 per cent stake.
 ECOLOGICAL ENVIRONMENT
World No Tobacco Day (WNTD) is observed
around the world every year on May 31. It is
meant to encourage a 24-hour period of
abstinence from all forms of tobacco
consumption across the globe.

Deforestation is considered one of the most

severe environmental problems worldwide.
Modern cigarette manufacturing uses wood to
cure the tobacco and to roll and package the
cigarettes. In fact, a cigarette manufacturing
machine uses four miles of paper per hour to
roll and package cigarettes. It is estimated
that one tree is consumed for every 300
Tobacco cultivation involves a great deal of
pesticides which must be used in the all
stages of tobacco growth. Because tobacco
depletes soil nutrients at a heavy rate, it
requires regular inputs of chemical
fertilizers.
Not only do these fertilizers, herbicides
and pesticides directly poison farmworkers
and may cause chronic health problems,
but they also seep into the soil and pollute
waterways and ecological systems and
poisoning livestock and food crops.
ECOLOGICAL POLICIES ADOPTED BY
GPI
As a conscientious corporate citizen, GPI
realizes their responsibility towards the
conservation of the environment.
Both the GPI factories have taken up
environment friendly initiatives like recycling
of water, rainwater harvesting, solar power
system etc. They have developed steam
heated hot water generator system to replace
the electrical system, and have various
automation and interlocking systems to save
power.
Guldhar Plant is the first cigarette
manufacturing unit followed by Mumbai and
an upcoming plant in Rabale.
 Guldhar Factory was awarded the Greentech
Foundation Gold Award in 2009 and 2010 for
Outstanding Achievement in Environment
Management. These awards are the most
coveted awards in the corporate world for
outstanding achievements in the field of
Environment Management.

It also received the Eco Friendly Award 2009

from Ghaziabad Management Association for
implementing Best Environment Management
Practices.

They also enable their farmers with GAP or

Good Agricultural Practices by undertaking
their training and imparting them with
technical know-how. Their efforts in this regard
 Conclusio
n
Working out the PESTLE analysis
leads us to the conclusion that :

The STRENGTHS & OPPORTUNITIES of GPIL come from the Economic

sector (wherein the cigarette industry being a habitual industry keeps
the demand steady and relatively inelastic), the Social sector (success
of Red and White Bravery Awards and Amodini), the Technological
Sector (modernizing their processing and manufacturing facilities,
with new or upgraded machines introduced for cigarette making) and
the Ecological sector (Environment friendly initiatives undertaken).
The WEAKNESSES & THREATS of GPIL come mainly from the Political
and the Legal sectors (the ban on smoking in public places, the
regulatory impact of the Tobacco Act in terms of restrictions on
advertising, ban on foreign direct investment, etc.)
 CREDITS

JUHI VASANWALA
NIKITA ASRANI
LUKMAAN MULLA
JITEN KHEMANI
SAGAR GURNANI
MAAZ JETHWA