Godfrey Philiips - Safe value stock in a momentum chasing market

[sarthakkumar19_]

Godfrey Phillips India Limited - What is GPIL smoking?

CMP – Rs. 925 Market Cap – Rs. 4808 cr What does Godfrey Phillips India Limited do? Godfrey Phillips India Limited (GPIL) is flagship company of Modi Enterprises. The company have two line of businesses. Their main business is Tobacco and the other is Consumer & Retail. Tobacco: GPIL manufactures and distributes iconic brand Marlboro in India under a license agreement with Philip Morris USA. They also own and sell their own cigarette brands in India like Four Sqaure, Red & White, Cavanders…

A wonderful summary of the investment thesis has been provided by rupaniamit. I was unable to post on that thread probably since it was categorized as “collaborators corner”. If there is any way to merge with that thread, kindly let me know. Also, its my first time trying to initiate a thread so if there are any mistake, kindly guide.

I have gone through the summary and want to update based on what rupaniamit said were the key monitorables.

The following were mentioned as key risks to Godfrey Philips
Risks:

1 Declining cigarette volume trend in India
2 Current EBITDA margins not sustaining and reverses to older/lower levels
3 Any sudden increase in taxes on cigarette impacting demand
4 Any irrational capital allocation where good money is thrown after bad
5Hostile takeover/sell-off of GPIL due to ongoing family feud which may impact market’s perception of business’ true value.
6 Current retail foray continues to burn money at higher rate.
7 Any other unknown unknowns.

No.2 - The company has been able to maintain its margins in the latest quarter.

No.3 - Favourable action (no increase in taxes in budget and unlikely in GST meet)

Additionally, promoters have increased stake in December quarter after a long time.

Plus the low FII shareholding means a selloff in the US market may not affect Godfrey Phillips too violently.

Based on latest investor presentation, GPIL derives 21% of its sales from international markets (tobacco leaf, cigarettes and processed tobacoo).

And exporting cigarettes is one of the growth priorities of the company.

Based on this, I feel that even if the domestic regulatory environment turns unfavourable, the company can make up some part in the export market.

Inspite of Covid, the company was able to maintain same operating profit in Dec, 2020 as Dec, 2019 (167 crores). So even if you take the consensus that “value investing is dead” to be true, the company could still make it as its earnings are growing. And if you like to bet against the consensus, I think it’s one of the best bets in the market currently.

Disclosure - Invested and looking for counter views to temper my enthusiasm.

[AmitContrarian]

@sarthakkumar19_

Invested and looking for counter views to temper my enthusiasm.

Meet your promoter -

http://www.businessworld.in/article/All-You-Need-To-Know-About-10-Court-Cases-Against-Lalit-Modi/19-06-2015-82721/

Great value buy BTW , it will perform also safe 10-15 % CAGR bet today.

[ChaitanyaC]

The sales of cigarettes and tobacco products have been more or less the same for the past 6-7 years, so has been the price. The price did not move anywhere in 5 years, and the journey has been rather lumpy. I have read that companies which cannot grow and have high margins give good dividend, looks like that is the case here. VST scores better in comparison, including the last 1 year (not considering the current issues it has).

EPS has been increasing for the past 3 years but the same is not reflecting in the price. It does not look like a growth story as of now. I don’t know if there are any temporary issues or overhangs dragging the business/performance, I don’t follow the company.

So even if the company makes same kind of profits or even better profits despite the lack of sales growth, as the PE has dropped from 51-15 in 2019, what would be the triggers for the re-rating? Will their new geographies sales increase? What has been the 24Seven contribution?

Disclosure: Not invested.

[sarthakkumar19_]

@ChaitanyaC

EPS has been increasing for the past 3 years but the same is not reflecting in the price. It does not look like a growth story as of now.

I don’t think a growth company is one whose price rises, it’s the profits that should rise. Please correct me if I’m wrong.

@ChaitanyaC

So even if the company makes same kind of profits or even better profits despite the lack of sales growth, as the PE has dropped from 51-15 in 2019, what would be the triggers for the re-rating? Will their new geographies sales increase? What has been the 24Seven contribution?

As mentioned by @rupaniamit , GPIL started reporting big jump in their EBITDA margins starting Q1FY20. If this trend sustains, market should notice

[ChaitanyaC]

Isn’t the whole idea of growth investing is to increase the return by investing in companies that are growing? And how will we be rewarded without the increase in share price, excluding the dividends and buybacks? And I think most of the investors are not bothered about dividends because the company is a growth phase and it is investing the earnings and becoming big.

Sometimes there is no relation between the increase in EPS and the share price because there are some reasons which drag the prices. The very business might be in trouble, or the growth is stopped, or some other temporary problem may exist. The market senses this before us and despite the EPS growth, the price moves nowhere. So the answers lie in those reasons. So if the price has been stagnant for years, there has to be a trigger which changes the perception of market so that the company/investors get rewarded.

I personally look for growth stories and not value buys. So this could be a value buy on a few parameters, I don’t know but looks like a story to be followed as they are into retail now.

I am learning, so I could be completely wrong with my learning and observations.

[shardhr]

@sarthakkumar19_ : - Good initiative to start a separate thread for this. I initiated a position in this as a value pick and at that time @rupaniamit thread proved to be a great supplement to my primary thesis. And I picked his brains out via DM over that thread to further understand his perspective. He was very generous and helpful :-). Not sure if this is his current holding or not. Bt with you chipping in it seems lone value-seekers here have further company.

Apologies for being a bit off-topic, bt that’s whr this thread seemed to head after a good initial write up by @sarthakkumar19_ .

Hence I’ll briefly mention why this is a value pick and major points which need to be analyzed w.r.t this co going fwd : -

1. Why value\cheap : - The co. along with other cig cos. is valued currently for zero growth. However, pricing power of this business and prudent capital allocation will certainly aid earnings growth for these cos. over next 5-10 yrs.

2. The promoter grp issues : - Lalit Modi is part of promoter grp and the cases are his individual cases against him, not the company. Separately, thr’s a promoter grp tussle going on over whether to sell the stake or continue managing the co. The co. is managed by LM’s mother whereas his stance is to sell-out this stake. - This rift is one of the major causes of undervaluation here. Nd for value-seekers, this wat creates buying opportunities in an otherwise mostly efficient market.

3. Threat of hostile take-over : - No chance of this. Total promoter holding is 70+ and arnd 40% of Modi’s stake is the one in dispute. It’ll be either sold out completely or not and mgmt remains under thr control.

4. Retail Foray : - Retail is a tough business to be in but the growth runway provided by shift from unorganized to organized opens up opportunities for well managed retailers. Thr stores have 2 advantages - thr 24X7 operating model and a centralized kitchen to sell high-margin food products. Jst my personal opinion, bt I favor a company spending cash on sm business endeavor and failing rather than hoarding cash in mutual funds\stocks( and subsequently taking write-offs in debt fund investment misadventures :-P)

Disclosure : - Invested

[sarthakkumar19_]

Hdfc securities initiated coverage on Godfrey Phillips.
Can anybody from Bangalore confirm about their point about initial success with Malboro branded cigarettes.

Thanks

Initiating Coverage - Godfrey Philips India Ltd.pdf (1.0 MB)

[sarthakkumar19_]

One question I have for experienced members.
If the Modi family does sell the company, does that increase the possibility of cash and investments on balance sheet coming to investors as dividend. I mean would it be reasonable to assume better capital allocation by new owners.

Thanks

[ashish_agnihotri]

@sarthakkumar19_ d you have any visibility on their growth plans for retail. Please share if you have some idea.

[sarthakkumar19_]

Hello Ashish,
I would much rather prefer them not growing their retail business since making money in an awesome business (cigarettes) and using it for a gruesome business (retail) doesn’t seem logical to me. What I have observed about Twenty four seven is that they are now focusing on food business (they even have a tiffin delivery service at pretty reasonable rates). I think food is somewhere in between cigarettes and retail in terms of quality of business, so I like this development.

[ChaitanyaC]

Looks like the company must have been following the footsteps of ITC, considering the fact that subdued growth in the main business, so the foray into retail although the margins are good in the main business. Considering the big retail market this move could be considered both tactical and worrisome as this could mean both ITC and GP have acknowledged the fact that things have changed for better or for worse, that they cannot grow as much as they did on tobacco business alone. I don’t know about VST’s plans or pipeline.

So this may be another retail story unfolding.

[sarthakkumar19_]

Dear @dd1474 ji,

Since you own both ITC and VST Ind, I request you to share your thoughts on Godfrey Phillips on the following points

• Reasons for undervaluation wrt ITC and VST. Return ratios for Godfrey are comparatively low but improving.
• Possible timeline for resolution of the promoter family dispute.
  Also if the Modi family does sell the company, does that increase the possibility of cash and investments on balance sheet coming to investors as dividend. I mean would it be reasonable to assume better capital allocation by new owners.
  Another point that I wanted to understand was that when two promoter groups are not at good terms with each other, does that not help minority shareholders since each group would be vigilant about any wrongdoing by the other. Not that I suspect this company in particular, just asking in general.
• Godfrey’s expansion in the South.
• Risks to investing in Godfrey (other than opportunity cost and raising legal smoking age bill, which if implemented might also be a deterrent for illegal cigarettes with stronger punishments and hence might just even out)
• Any other point you find important.

Thanks

[dd1474]

Thanks for seeking my comments on point. Find enclosed my view on each point in the post. Please note that my I have no investment in Godfrey Philllip but invested in ITC and VST Industries and hence my view may be biased.

1. Very difficult to pin point reason for undervaluation, despite having global partner as equity stake holder. However, in past the Indian management has managed to keep Foreign partner to remain observer then taking charge (something similar to ITC) and hence despite Phillip Morris as equity and business partner, the company is not getting proper valuation in my view. In case with new professional management, if return ratios improved in medium term along with market share, I feel that market would provide higher valuation to the company.
2. Very diffcult for me pass any comment on how family dispute would fold out in future. In my limited understanding, both side have gone into legal battle and final judgement in legal matter take its own time (for executing judgement even with arbitration jurisdiction out of India) in my view.
3. I have gone through presentation of Godfrey and understand they are gaining market share in cigarette, to best of my memory. No specific view about whether they are gaining market share in south or other region as same details are not shared in presentation. So can not provide any specific view on the point
4. There are risk of investing in equity. Each investment would have its own peculiar and general risks. Hence, investor need to look at his/her style of investing, risk tolerance and built portfolio. I would look at two specific risk for Godfrey. A) Industry risk of Cigarette which has not been good for society. This is already known and one shall address by way of allocation in total portfolio for sector. B) Company sepcific risk: About dispute between Modi group fractions and future of control being with professional management or Philip Morris. Very difficult to forecast outcome, but would suggest to provide probability of all sceanrio and get some idea about likely management of the company in future. See same in context of valuation and take final call.

My apology for not providing specific answer, but that is because I do not have same even in the company I am invested.

Thanks once again for you being seeking my views and wish you all the best for your future in investment journey.

[jet_nebula]

“The action came on a complaint filed by Lalit Modi’s son Ruchir Modi, who wrote to MCA alleging corporate governance issues and malpractices in the company.”

[sarthakkumar19_]

I had read somewhere that companies delaying quarterly results is generally not a good sign. Godfrey has not come out with quarterly results yet. I wrote to the company IR but have not received any response. Can someone please explain the delay in declaring quarterly results.

Thanks

[sarthakkumar19_]

Hello,
Did anyone attend the AGM. Is the AGM video or audio available.

Thanks

[nishantrautela]

FY24 Q2 results seems to be subdued with revenue increasing only marginally but quite a hit on the operating margins … @harsh.beria93 would love to hear how you perceive this … Thanks in advance …

[harsh.beria93]

In the past few quarters, Godfrey has been reporting good nos especially when compared against peers. I am sharing some notes around domestic volume growth and export business below.

04.02.2024 (thoughts post FY24Q2 results and comparison vs peers)

• Godfrey continues double-digit domestic volume growth

• Marlboro brand grew volumes by 27% due to launch of lower priced SKUs

• ITC reported (-2%) negative volume growth

• VST reported negative volume growth

Their domestic volume growth has been consistently higher than ITC over the past many quarters. Since post COVID dip in FY21, domestic tobacco volumes has grown at almost 18% CAGR.

Another major revenue kicker has been their growing export business with Phillip Morris, especially triggered by the Ukraine Russia war. This is also benefitting other tobacco companies, but Godfrey has benefitted the most so far (look at growth in export nos below). International business has almost become 4x in last 6 years.

Disclosure: Invested (position size here, bought shares in last-30 days)