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Godfrey Phillips: Lower cost boost
Nov 2, 2010

Godfrey Phillips India Limited has announced its 2QFY11 results. The company has reported an 18.5% YoY growth in sales and a 127.5% growth in net profits. Here is our analysis of the results.

Performance summary
  • Godfrey Phillips’ sales for 2QFY11 grew by 18.5% YoY largely aided by higher sales in the cigarette and tobacco segment.
  • Operating (EBITDA) margin grew by 10.6% to 19.8% during the quarter. This fall was a result of fall in raw material costs as a percentage of sales during the quarter.
  • Net profit margin increased by 6.3% to 13.1% due to strong growth in operating income partly offset by higher effective tax rate.
  • Net profit for 1HFY11 fell by 9.1% YoY while net profit margin fell by 1.6% to 9.7%. This performance comes on the back of lower other income, higher interest income and higher effective tax rate.

Standalone financial picture
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales         3,179          3,768 18.5%     7,027      7,439 5.9%
Expenditure         2,888          3,022 4.6%     6,070      6,288 3.6%
Operating profit            291             746 156.4%         957      1,151 20.3%
Operating margins (%) 9.2% 19.8%   13.6% 15.5%  
Other Income              75                84 12.1%         324          111 -65.8%
Interest (net)              21                26 25.7%           36            46 25.3%
Depreciation              77                99 28.6%         151          182 20.5%
Profit before Tax            268             705 162.7%     1,093      1,034 -5.4%
Extraordinary item -   -                -               -    
Tax              51             211 312.1%         299          312 4.3%
Profit after Tax/(Loss)            217             494 127.5%         794          722 -9.1%
Net profit margin (%) 6.8% 13.1%   11.3% 9.7%  
No. of Shares (m)              10                10             10            10  
Diluted earnings per share (Rs)*              106.9  
Price to earnings ratio (x)*                 16.4  
* trailing twelve month earnings

What has driven performance in 2QFY11?
  • 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 19% YoY during the quarter. Tea and other retail products saw a growth of 15% YoY.

    Segment-wise performance
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Cigarettes & Tobacco Products            
    Revenue         2,884          3,429 18.9%     6,464      6,825 5.6%
    % share 90.7% 91.0%   92.0% 91.7%  
    PBIT margin 8.5% 17.8%   13.2% 14.7%  
    Tea & other Retail Products            
    Revenue            295             339 14.7%         563          614 9.0%
    % share 9.3% 9.0%   8.0% 8.3%  
    PBIT margin -9.7% -3.0%   -7.3% -3.4%  
    Total            
    Revenue         3,179          3,768 18.5%     7,027      7,439 5.9%
    PBIT margin 6.8% 15.9%   11.6% 13.2%  

  • Operating income during the quarter increased by 26% YoY due to lower raw material costs (as a percentage of sales). Lower advertisement costs as a percentage of sales also contributed to fall in operating income. Raw material costs fell by 2.8% to 36% while advertisement costs fell by 1.3% to 13.9% (as a percentage of sales)

  • Godfrey Phillip’s net profit grew by 127.5% YoY. This is due to higher operating income partly offset by higher effective tax rates. Effective tax rates increased from 19.1% in 2QFY10 to 29.9% in 2QFY11.

What we expect?
At a price of Rs. 1,755 the stock is trading at 12.1 times our estimated FY12 earnings. We have a ‘HOLD’ view on the stock .

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