Fundamental Analysis Of Godfrey Phillips: Tobacco is a product that is both harmful and very profitable. It’s known for causing serious health problems and millions of deaths each year. Yet it’s a huge money-maker for certain companies. Today we will be one such manufacturer who stands to capitalize on this 17 Billion dollar industry.

Fundamental Analysis Of Godfrey Phillips

We will explore how the company operates, the products it sells, and how the government’s rules & regulations affect the cigarette manufacturer. Despite the health risks, the tobacco industry remains a powerful part of the economy, employing many households. Without any further delay, let us learn more about the Company.

Fundamental Analysis Of Godfrey Phillips – Company Overview

Godfrey Phillips India is the flagship company of Modi Enterprises. Godfrey is one of the largest FMCG Cigarette companies in India. It is the maker of some of the most popular cigarette brands in the country like Four Square, Red &White, Cavanders, Tipper, and North Pole. It also manufactures & distributes iconic brand Marlboro under a license agreement with Philip Morris. 

With an already established brand & business in the FMCG Cigarette industry, the Company has also expanded its presence in confectionary & retail. It launched its premium retail chain 24Seven and has already established itself as a formidable brand.

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The Company’s business can be divided into three segments: Cigarette division, Leaf Division & Confectionary Products.

  1. Cigarette Division: The domestic Cigarette brands include Four Square, Red & White, Cavanders, Stellar, and Focus. 
  2. Leaf Division: Godfrey Phillips India has an independent ‘leaf division’ in the tobacco growing area of Guntur in Southern India, giving it access to the best quality tobacco. The Company is very few in India to have its R&D as well as Quality Assurance facility to support operations.
  3. Retail: 24Seven is India’s organized retail chain in the round-the-clock convenience store format with more than 145 stores/kiosks spread across Delhi NCR, Punjab, and Telangana.  The Company is expanding its presence in food & beverages and private label items to garner a rise in gross margins.

Industry Overview

India is the world’s second-largest tobacco producer with an annual production of 800 million kg and the third major exporter of tobacco after China and Brazil. Indian tobacco accounts for 10% of the area and 9% of the total production in the world. Tobacco farming is drought tolerant and is a short-duration crop. It is one of the major commercial crops, contributing substantially to the socio-economic landscape of India.

India has an edge over other leading tobacco producers due to its low production costs, and average farm and export prices. In India, tobacco is grown in 13 states. Given its highly labor-intensive production, the tobacco industry provides employment directly and indirectly to more than 45.7 million people working in processing, manufacturing, and exporting tobacco and products.

In India, the consumption of legal cigarettes represents a mere 8% of the overall tobacco consumption, which stands in stark contrast to the global scenario where legal cigarettes account for 90% of tobacco consumption. The remaining 92% of tobacco consumption in India is comprised of multiple traditional products including chewing tobacco, bidi, Khaini, etc.

The domestic Cigarette industry showcased further signs of recovery in FY23 with the economy bouncing back on account of the restoration of normalcy in market operating conditions. However, global geopolitical tensions, hyperinflation, and extended supply chain disruptions were some fresh challenges the year.

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Fundamental Analysis Of Godfrey Phillips – Financials

Revenue & Net Profit

Godfrey Phillips reported an FY23 revenue of Rs. 4260 Cr, a 32% jump from Rs. 3229 Cr in FY22. The Company had a strong year in terms of revenue growth because of the introduction of new products/variants and expansion of the product in other geographies.

The revenue growth of Godfrey Phillips is rather inconsistent in the long term with strong double-digit growth in FY20, to a de-growth & slow growth in FY21 & FY22. Since FY19, the revenues have grown at the rate of 13% CAGR.

Net Profits of the Company have increased by a whopping 58% from Rs. 438 Cr in FY22 to Rs. 690 Cr in FY23. A drop in manufacturing and employee expenses as a percentage of revenue has led to improved margins. The Company’s profits have increased strongly in FY20 & FY23 leading to a 28% CAGR growth since FY19.

Fiscal YearGross RevenueNet Profit
2023 ₹ 4,259.82 ₹ 690.42
2022 ₹ 3,228.60 ₹ 438.01
2021 ₹ 2,961.42 ₹ 376.45
2020 ₹ 3,068.01 ₹ 384.77
2019 ₹ 2,612.22 ₹ 260.26
4-Year CAGR13.00%27.62%

Profit Margins

On the Operating Margins front, we see that year on year Godfrey has consistently improved its margins. From a 5-year low of 18.71% in FY19, it is now up to 26% by FY23. The average of the last 5 years comes around 24%.

The same story continues with the Net Profit Margins, which have improved from a low of 10% in FY19 to a 5-year high of 18.51% in FY23. Although the NPM has reached a near 20% mark, this might not be sustainable as this is partly due to an increase in other Income. 

Fiscal YearOperating Profit Margin (%)Net Profit Margin (%)
202326.04%18.51%
202226.68%15.63%
202124.96%14.24%
202023.41%12.90%
201918.71%10.10%
5 Year Average23.96%14.28%

Return Ratios

The Company’s return ratios have both sustainably improved due to better earnings in the past 5 years. In FY23, Godfrey Phillips had an ROE of 20.65% and an ROCE of 24.25%. Return on Capital had been shifting between 15-20% due to the Company taking in higher debt over the years & paying it off. 

Fiscal YearROE (%)ROCE (%)
202320.65%24.25%
202216.81%19.53%
202112.82%15.29%
202015.28%19.72%
201911.22%15.94%
5 Year Average15.36%18.95%

Debt Analysis 

The Company is a well-established business requiring no extraordinary funding for any expansion. Due to this, it maintains a fairly low debt-to-equity ratio. However, the Company had raised debt back in FY21 due to which its debt-to-equity ratio climbed to a high of 0.16x, but due to repayments & equity growth, the numbers have come down. 

Since the Company has a low debt-to-equity ratio interest coverage ratio figures are not that important. As of FY23, Godfrey Phillips had an Interest Coverage ratio of 26.6x.

Fiscal YearDebt / EquityInterest Coverage Ratio
20230.1126.61
20220.1315.33
20210.1613.82
20200.0915.26
20190.02327.04
5 Year Average0.1079.61

Fundamental Analysis Of Godfrey Phillips – Key Metrics

The Key Metrics of Godfrey Phillips are given below.

ParticularsAmountParticularsAmount
CMP ₹ 3,087.00 Market Cap (Cr.) ₹ 11,911.00
EPS ₹ 132.80 Stock P/E 14.84
ROE (%)20.65%ROCE (%)24.25%
Promoter Holding (%)72.60%FII Holding (%)10%
Debt to Equity ₹ 0.10 Price to Book Value3.14
Operating Profit Margin26.04%Net Profit Margin18.51%

Fundamental Analysis Of Godfrey Phillips – Future Plans

  1. The Company is committed to enhancing shareholder value by expanding its portfolio & addressing new growth opportunities.
  2. It will be adding pricing power to flagship brands
  3. It will invest in product development and quick adoption of digital technologies across all modes of operation.
  4. Godfrey India will be exiting its Chewing products business. It has already sold Trademarks, titles, rights to the leasehold land & other interests to initiate the exit.

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Conclusion

Godfrey Phillips is one of the largest cigarette manufacturers in India, known for popular brands like Four Square, Red & White, Cavanders, and Marlboro (under license). Despite the health risks associated with tobacco products, the company operates in the highly profitable Rs. 17 billion Indian tobacco industry, which employs millions of people.

The company’s financials show strong revenue growth of 32% in FY23, reaching Rs. 4,260 crore, driven by new product launches and geographic expansion. Net profits also increased substantially by 58% to Rs. 690 crore, supported by improved margins due to lower manufacturing and employee expenses. 

Godfrey Phillips has consistently improved its operating and net profit margins over the past five years, with net profit margins reaching a high of 18.51% in FY23. The company maintains a relatively low debt-to-equity ratio, reflecting its well-established business and limited need for extraordinary funding. 

Looking ahead, Godfrey Phillips aims to enhance shareholder value by expanding its portfolio, addressing new growth opportunities, adding pricing power to flagship brands, investing in product development, and leveraging digital technologies across operations. 

Additionally, the company plans to exit its chewing products business, aligning with its core focus on cigarettes and related products.

Written by Nasir Hussain 

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