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Godfrey: In Philip Morris’ shadow

Sep 20, 2000

The meltdown of the past week has hit the big boys the most. However, second rung stocks in across all sectors have had to face the brunt. One such stock is Godfrey Phillips (GPIL). The company is into the manufacture of cigarette brands such as ‘Four Square’ and ‘Red and White’. The stock is currently quoting at Rs 400 (near its 52–week low of Rs 343). We met up with the company yesterday and initiate coverage on the stock.

GPIL is the Indian affliate of the US$ 78 bn food and tobacco titan Philip Morris, which owns the cigarette brands such as ‘Marlboro’ and ‘Four Square’ apart from ‘Kraft’ cheese and ‘Maxwell House’ coffee. Philip Morris has a 36% stake in Godfrey with 34% being held jointly by the K. K. Modi and M. K. Modi groups.

Cigarette volumes across the industry have been taking a beating in the first quarter and Godfrey is no exception to the trend. At present, GPIL has a share of around 12% in value terms (down marginally from 12.5% it held in FY2000). This is primarily due to the ban on smoking in railway stations which came into effect three months ago is likely to hurt volumes in the current year.

The management however was categorical in stating that it would not diversify into unrelated areas. (The company does have a presence in the packet tea business in a small way but there are no plans to expand that business.)

The company however has a strong balance sheet with net cash (marketable investments plus cash less long term debt) of over Rs. 80 per share. Whatever, debt the company has in its books is primarily due to fact that it has to purchase tobacco in the harvest season (around May–June) to meet its full year requirements of raw materials. We expect the company to report a per share earnings in the range of Rs 33 which implies an earning multiple of slightly over 12 times.

Perhaps the only gray area is the company’s over dependence on Philip Morris. The latter not only owns the brands but has in the past applied for starting a 100% subsidiary. This was rejected to due to the opposition from the Modi group (and understandably so) which refused to give a No Objection Certificate to the government.

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