Godfrey Phillips India

With such leading cigarette brands as Four Square, Marlboro and Red and White under its umbrella, Godfrey Phillips India has been doing exceptionally well in the tobacco segment. Its confectionary business has been more or less dependent on new launches and a significant distribution network. Does this imply that investors should add this stock to their portfolio? The article examines the pros and cons of doing so

Godfrey Phillips India (GPI) Limited is an FMCG company and part of the K K Modi Group. The group holds 47.48 per cent of the company’s equity shares, while Philip Morris owns 25.1 per cent. GPI primarily manufactures cigarettes, operating brands such as Four Square, Red and White, Cavender’s, Stellar, Focus, and Originals International. It also manufactures and distributes Marlboro in India under an agreement with Philip Morris. Beyond tobacco, the company has a confectionery business under the ‘Funda’ brand, with select products catering to international markets. 

Business Segments: Tobacco and Confectionery 

Domestic Business - GPI’s domestic operations focus on cigarettes and confectionery. Its cigarette brands, including Marlboro, Four Square, and Red and White, are supported by a distribution network that ensures impressive market reach. The confectionery division, launched in 2007, includes products like Funda-Gums Hums Mint and Naturalz chewable pulp candies, designed for Indian consumers. While the cigarette segment benefits from established brand strength, the confectionery segment’s growth depends on new product development and market penetration. 

International Business - The company derives about 30 per cent of its revenue from international operations, spanning over 30 countries. It is a major supplier of leaf and cut tobacco to global manufacturers such as Philip Morris, Eastern Company, European Tobacco, Libyan Tobacco Company, RNTA, and JTI. Its capabilities include cultivation, processing and blending, with exports of tobacco varieties like Karnataka Light Soils (KLS) and Northern Light Soils (NLS). 

GPI’s manufacturing facilities produce over 12 billion cigarettes annually, including contract manufacturing services that cover customised blends, packaging, and brand development. The company also exports its own brands, such as Jaisalmer and Force 10, to markets in the Middle East, South America, and the Far East. Its leaf division in Andhra Pradesh focuses on tobacco procurement and processing, ensuring adherence to quality standards. 

Diversification into Confectionery
While the confectionery segment accounts for a smaller share of revenue (3 per cent in 9MFY25), it represents a strategic diversification. The Funda brand includes products like Funda Goli candies with Indian-inspired flavours such as Kachha Aam and Imli. The Imli Naturalz and Funda C lines focus on natural ingredients and added vitamins. The introduction of Funda Gum Shums mint gum marks an expansion into new product categories. 

A significant development in this segment is GPI’s distribution agreement with Ferrero India, signed in May 2024. This allows the company to distribute Ferrero brands like Tic Tac and Kinder Joy, expanding its product portfolio and consumer reach. GPI has a broad distribution network, with over 800 distributors and 9,000 field personnel supporting both tobacco and confectionery businesses in India. While the tobacco segment remains the primary revenue driver, the confectionery segment’s expansion and the Ferrero partnership indicate potential growth opportunities. 

Sector Overview
India is a key player in the global tobacco market, holding the position of the second-largest producer after China. With approximately 10 per cent of global tobacco cultivation occurring within its borders, India contributes 9 per cent to worldwide production, averaging 800 million kg annually. India’s competitive edge stems from its low production, farming, and export costs, coupled with a reputation for producing tobacco with lower levels of harmful substances. The key production states include Gujarat, Andhra Pradesh and Uttar Pradesh, which collectively account for a significant portion of the nation’s output. 

As the second-largest exporter, India ships a diverse range of tobacco products to over 115 countries, primarily to the UAE, Belgium and Indonesia. Globally, cigarettes are the primary form of tobacco consumption, but India’s tobacco use is diverse, featuring chewing and smoking products at various price points due to high cigarette taxes. Despite being the world’s second-largest tobacco consumer, legal cigarettes only make up 9 per cent of India’s tobacco use, contrasting sharply with the 90 per cent global average. 

This means India’s cigarette consumption per person is among the world’s lowest, despite having 18 per cent of the world’s population. Cigarette taxation has driven consumers towards cheaper, less-taxed tobacco alternatives like ‘bidis’ and chewing tobacco. While legal cigarette consumption has decreased from 21 per cent in the 1980s to 9 per cent today, overall tobacco use has risen. Although cigarettes account for less than 10 per cent of the total tobacco consumption, they generate over 80 per cent of the tobacco sector’s tax revenue. 

Growth Triggers 

• Monetising its distribution infrastructure through the Ferrero India agreement is expected to drive growth in the confectionery segment.
• Targeting new cigarette markets and focusing on international business will further diversify revenue streams.
• Strengthening the company’s partnership with Philip Morris International and expanding unmanufactured tobacco exports are the key priorities.
• Expected 15 per cent volume growth in cigarette revenues. 
   

Q3FY25 Performance
The revenue of the company stood at ₹1,889.35 crore which increased by 28.24 per cent on a YoY basis. The operating profit of the company stood at ₹406.12 crore which increased by 42.53 per cent on a YoY basis. The PAT of the company stood at  ₹280.89 crore which jumped by 53.66 per cent on a YoY basis. The company’s EBITDA margin stood at 21.43 per cent with a significant improvement of 11.85 per cent and the PAT margin stood at 14.82 per cent. This robust quarterly performance is the result of impressive volume growth, exports, and recovery in the domestic market. The tobacco segment contributed 97 per cent of the revenue, of which 30 per cent revenue came from international business and 3 per cent from the nontobacco segment. 

FY24 Performance
In the fiscal year 2024 (FY24), GPI witnessed a significant increase in its revenue, which surged by 23.92 per cent to reach ₹5,238.88 crore compared to ₹4,227.77 crore in FY23. The net income also experienced robust growth, rising by 19.19 per cent to ₹723.29 crore compared to `606.82 crore in FY23. The company demonstrated strong profitability with a PAT margin of 13.64 per cent and an EBITDA margin of 20.86 per cent for FY24. The earnings per share (EPS) for the full financial year stood at ₹169.82, marking a notable increase from `27.89 in the previous year. 

Key Risks

The primary risks related to the company and the sector include:
1. Rapid growth of illegal cigarette volumes, and availability of cheap and unregulated tobacco products pose significant risks.
2. A recent development also suggests that the Indian government is expected to increase GST on cigarettes.
3. Heightened health awareness, higher taxes, and regulatory restrictions challenge the industry. 

Key Ratios

• dividend yield: 0.99 per cent
• ROCE: 22.2 per cent
• ROE: 19.0 per cent n Face value: ₹2.00
• PEG: 1.0
• Promoter holding: 72.58 per cent. 
   

Outlook and Valuation

Godfrey Phillips India has demonstrated a robust financial performance in FY24. The company has been growing its revenue at a three-year CAGR of 21 per cent and profit at a three-year CAGR of 34 per cent. The shares of the company are currently trading at a TTM PE of 28.1 times, which is slightly higher when compared with the industry PE of 26.8 times but can be justified on account of the company’s growth. The price-to-book value of the company is 6.24 times, with the industry price-to-book value being 5.18 times. 

GPI demonstrates a strong growth trajectory, driven by both its tobacco and confectionery segments. The domestic cigarette 

industry, despite facing global supply chain pressures and rising input costs, has shown resilience. GPI has leveraged its brand equity to regain market share, particularly in the RSFT (regular size filter-tipped) segment with brands like Four Square. The company’s entry into the KSFT (king size filter-tipped) segment with Stellar also indicates successful portfolio expansion. 

GPI’s strategic partnership with Ferrero India for the distribution of sweet-packaged food products is a significant growth catalyst, leveraging its extensive distribution network. The company’s unmanufactured tobacco exports also show an upward trend, not only contributing significantly to top-line growth but exports too. Godfrey Phillips India is expected to deliver robust volume growth in its domestic cigarette segment, driven by recovery and strong performance from Marlboro, which is the core brand of the company. 

With volume increase, coupled with strategic market expansion and efficient brand management, it is expected to significantly contribute to the company’s revenue growth. Despite all the positive factors associated with the company, we believe the recent price action, especially looking at above average selling volume when the stock price is coming down, is not enough to provide confidence in the immediate future performance of the stock. Keeping all the growth factors about the company in mind, we recommend HOLD.