Godfrey Phillips India Ltd Company Analysis

INDUSTRY ANALYSIS OF THE CIGARETTE INDUSTRY Industry Trends: Global Perspective: The world No Tobacco Day was celebrated on 31st May by WHO to remind the world of the tobacco industrys efforts to weaken the WHO Framework Convention on Tobacco Control (FCTC). The overwhelming response all over the world necessarily came as an eclipse to the Industry. There are approximately one billion smokers all over the world and the revenue generated is hundreds of millions USD. WHOs 14th World Conference was the very first firm step to curb the rising monopoly of the industry. In contradiction to this, we can see how much the industry contributes to the GDP via taxes. It is also a source of employment. Also they have been constantly striving to lessen the wastes, tar and nicotine level, reduce the tobacco per cigarette. But then most of the governments all over the world want that lesser number of people smoke cigarettes & so they are levying heavy taxes, they are creating awareness among people with help of media, NGOs, etc. So, the social & economic atmosphere is becoming tougher for them to sustain. Today there are reports even taking an objection on the packing style & design of the cigarette packets (Source: http://www.guardian.co.uk/commentisfree/2012/jul/17/tobaccopackets-children-plain-packs). At the same time it has been made compulsory that they give cautionary warnings in written on the packets in a legible fashion. So, the companies undertake organization of music concerts and allied activities for marketing purpose, for which they are criticized. So, overall the picture is grim for the industry as the only source of marketing is word of mouth, to add, the social & economic factors are strenuous. Indian Perspective: The condition is the same for the industry in India, but the explanation is a bit different. Putting forth the statistics, India is the second largest producer of tobacco in the world. As well as it is one of the leading exporters of tobacco in the world. Agriculture contributes 24% to the GDP & 13.5% of it is tobaccos share. It provides employment to nearly 4 million persons. Here, the taxes on cigarettes are high, however, the taxes on bidis & other forms of tobacco is very less. So, the effort of the government will not bear any fruit as the market for bidis is 85% of the total number of smokers. The industry is reeling under ever increasing taxes, thus, the competitiveness of the industry is been negatively affected. In such a scenario, they are going in for unrelated diversification.

PEST Analysis: Political: Following the increasing health concern about tobacco consumption, the Central Ministry of Agriculture has not launched any development scheme for the crop since the completion of the Seventh Five-year plan. The political impact of the decisions made by the policy makers is inter twined with the economic impact of these policies, this has been discussed further. Economic: The non-smoking tobacco products, commonly used among rural masses, are not taxed. Bidis, which are used by people in lower economic strata of the society, are not taxed or are lightly taxed. The prices of certain tobacco products cheaper for low-income groups, those products which forms the major 85% market of the tobacco industry, ignores the potential higher occurrence of tobacco related diseases. Thus, the government taxation system is a fiscal policy. Many arguments are put forth, like the employment, income generation etc., but the policy makers have to understand that this a myopic judgment. Thus, lesser investments in R&D & affecting the exports and thus, the competitiveness of the industry. Social: The advertisements have been banned; smoking has been banned in public places, government offices; awareness has been brought about by every possible mean about the harmful effects, lawsuits have been designed, increased government regulation and public litigation has created gloomy situation for the industry. It has been observed that there are some pediatric problems as well. Since, the industry needs new persons to replace the old and dead ones; they somehow influence the younger ones. Technological: the cigarette industry in India has generally not kept pace technologically with the developed countries, e.g. the cigarette making rate. But there are many things that have improved: they have been modernizing their processing and manufacturing facilities, with new or upgraded machines introduced for cigarette making to improve processing, reduce component prices and improve quality and efficiency; they have reduced cigarette damage and waste; reduced tar and nicotine levels through filterization; reduced usage of tobacco per cigarette; improved cigarette paper and filter design; reduction in tobacco used per cigarette has been significant. Competitor Analysis: Shares in Indian Market: ITC: 72%, Godfrey Phillips: 12%, GCT: 8%, VST: 8%. However, the aim of Godfrey Phillips is to be the number one player in the market. So, let us analyze the different parameters like pricing, quality, and distribution etc. of this company in a precise matter

Pricing: The pricing strategy of ITC includes provisions like increasing the prices of items that are particularly meant for high paying strata of the society to meet with the tax levels. The broader market is that of bidis. So, they are trying to explore that section as well. Bidis market is either lightly taxed or not at all taxed. Quality: There have been made consistent efforts made to improve the quality of the end products. New filter cigarette segment of less than 60mm size is being developed, the initiative under progress. They have been awarded many prestigious awards like 'Best Manufacturer of Cigarettes' for the year 2008 & 2007 and Best Exporter of Cigarettes for 2008. ITC's cigarettes are manufactured in state-of-the-art factories with cutting-edge technology & excellent work practices benchmarked to the best globally. Distribution: Excellent distribution network. (We will discuss Godfrey Phillips in detail in the later part of the analysis.) SWOT Analysis: Strengths: India is a country with huge population. So, there is a vast scope of increasing the business. Addictive nature of cigarettes, Distribution Network Weaknesses: Heavy taxes levied, awareness among people about the ill effects of smoking, no chance for advertisement, Opportunities: Bidis is an unexplored segment, international market penetration Threats: e-cigarette, increased smuggling due to increase in taxes, Growing anti-tobacco activities

COMPANY ANALYSIS OF GODFREY PHILLIPS INDIA LTD Company Description: Godfrey Phillips India Ltd. is Indias second largest cigarette maker. It is number one cigarette company in North India and Indias number one cigar marketing organization. GPI owns FS1, Four Square, Red and White, Jaisalmer, Cavanders and Tippers. General Information: Headquarters: New Delhi Manufacturing Units: Mumbai, Ghaziabad, Kolkata, Uttaranchal Sales Division: Chennai, Delhi, Ahmadabad, Hyderabad, Mumbai, Kolkata Establishment Year: 1946 Number of Employees: 1000 CEO: Surinder Seru Share Holding Pattern: The major promoter is Modi group. The promoter held shares have decreased drastically, which can be a negative sign. As far as the FIIs are concerned; they have remained almost the same in the two consecutive quarters. Financial Performance of the Company: (Source: http://www.moneycontrol.com/financials/godfreyphillipsindia/ratios/GPI) Net Profit: Rs. 459 million on dec., 2011 Its profit has declined 25.44% in March 2012 quarter. Net Sales: Rs. 4820 million on dec., 2011 Dividend per share is increasing, which implies that growth can be sustained. Net operating profit per share is also increasing. Earnings per share & book value are increasing steadily.

Overall the company prospects seem bright