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Godfrey Phillips: Margins under pressure
May 31, 2010

Godfrey Phillips India Limited has announced its FY10 results. The company has reported a 14.8% YoY growth in sales and a 29.7% fall in net profits. Here is our analysis of the results.

Performance summary
  • Godfrey Phillips' sales for 4QFY10 grew by 14.8% YoY largely aided by higher sales in the cigarette and tobacco segment.
  • Operating (EBITDA) margin fell by 4.5% to 8.3% during the quarter. This fall was a result of rise in raw material costs and higher advertisement expense during the quarter.
  • Net profit margin fell by 2.5% to 4% due to fall in operating income as a result of rising cost of tobacco and increase in brand building expense.
  • While sales for FY10 grew by 22% YoY, net profit increased by 9% YoY. At the same time net profit margins fell by 1% to 8.4%. This performance comes on the back of lower operating income, higher interest expense and higher depreciation charges.


Standalone financial picture
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 3,113 3,573 14.8% 11,548 14,079 21.9%
Expenditure 2,716 3,278 20.7% 9,877 12,409 25.6%
Operating profit 398 295 -25.8% 1,671 1,669 -0.1%
Operating margins (%) 12.8% 8.3% 14.5% 11.9%
Other Income 39 24 -38.8% 327 413 26.3%
Interest (net) 11 15 37.3% 59 69 17.7%
Depreciation 100 92 -8.7% 280 339 21.0%
Profit before Tax 325 212 -34.8% 1,659 1,674 0.9%
Extraordinary item - -   - -  
Tax 122 69 -43.4% 570 490 -14.0%
Profit after Tax/(Loss) 203 143 -29.7% 1,089 1,184 8.7%
Net profit margin (%) 6.5% 4.0% 9.4% 8.4%
No. of Shares (m) 10 10 10 10  
Diluted earnings per share (Rs)*         113.8
Price to earnings ratio (x)*         16.3  
* trailing twelve month earnings

What has driven performance in 4QFY10?
  • The strong growth in the company's sales was a result of a strong performance from its cigarettes and tobacco products business divisions. Sales of cigarettes and tobacco products grew by 15% YoY during the quarter. Tea and other retail products saw a growth of 11% YoY.
    Segment-wise performance
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Cigarettes & Tobacco Products            
    Revenue 2,821 3,248 15.2% 10,520 12,869 22.3%
    % share 90.6% 90.9%   91.1% 91.4%  
    PBIT margin 11.4% 7.0%   16.4% 11.0%  
    Tea & other Retail Products            
    Revenue 292 325 11.1% 1,028 1,210 17.7%
    % share 9.4% 9.1%   8.9% 8.6%  
    PBIT margin -8.1% -6.7%   -12.7% -5.6%  
    Total            
    Revenue 3,113 3,573 14.8% 11,548 14,079 21.9%
    PBIT margin 13.7% 10.3%   11.6% 10.4%  

  • Operating income during the quarter fell by 26% due to higher raw material costs (as a percentage of sales), a reflection of higher ruling tobacco prices during the quarter. Higher advertisement costs as a percentage of sales also contributed to fall in operating income. Raw material costs increased by 21% YoY while advertisement costs increased by 43% YoY. This fall was partially offset by lower staff costs and lower other expenditure as a percentage of sales.

  • Godfrey Phillip's net profit fell by 29.7% YoY. This is due to lower operating income coupled with higher interest costs and higher depreciation expense. However, the company got some relief due to lower effective tax rates.

What we expect?
At a price of Rs. 1,855 the stock is trading at 12.8 times our estimated FY12 earnings. We have a 'HOLD' view on the stock .

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