Godfrey Phillips India Ltd:Annual Report 2023-24 Analysis

Godfrey Phillips India Ltd.: A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History:

Godfrey Phillips India Ltd. (GPI) was incorporated in 1936. The company originated as a modest enterprise involved in the distribution of tobacco products. Over the years, it transformed itself into a significant player in the Indian cigarette industry.

Headquarters Location and Global Presence:

GPI’s headquarters are located in New Delhi, India. While primarily focused on the Indian market, the company also has a presence in select international markets through exports.

Company Vision and Mission:

• Vision: To be the leading consumer goods company, admired for its innovative products, ethical practices, and contribution to society.
• Mission: To provide consumers with superior quality products and experiences, while creating value for stakeholders and operating in a responsible and sustainable manner.

Key Milestones in Their Growth Journey:

• Early Years: Establishment and growth as a tobacco product distributor.
• Expansion into Manufacturing: Development of in-house cigarette manufacturing capabilities.
• Diversification: Expansion into related product categories, including chewing products.
• Partnerships: Strategic alliances and collaborations to enhance product offerings and market reach.
• Brand Building: Development and promotion of popular cigarette brands.

Stock Exchange Listing Details and Market Capitalization:

GPI is listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Recent Financial Performance Highlights:

Financial reports can be found on the company’s website or financial news outlets.

Management Team and Leadership Structure:

The company is led by a Board of Directors and a team of experienced professionals in various functional areas, including manufacturing, marketing, finance, and human resources.

Their Products #

Complete Product Portfolio with Categories:

• Cigarettes: Offering a wide range of cigarette brands catering to diverse consumer preferences.
• Chewing Products: Expansion into the chewing tobacco and related products segment.
• Retail: The company owns and operates 24/7 convenience stores.

Flagship or Signature Product Lines:

• Red & White: A popular brand known for its affordability and widespread availability.
• Four Square: A well-established brand with a loyal following among certain consumer segments.
• Marlboro: GPI is the licensee for manufacturing and distributing Marlboro cigarettes in India.

Manufacturing Facilities and Production Capacity:

GPI operates state-of-the-art manufacturing facilities equipped with advanced technology to ensure high-quality production.

Quality Certifications and Standards:

The company adheres to stringent quality control measures and has obtained relevant certifications and standards.

Major Competitors #

Direct Competitors in India and Globally:

• ITC Limited
• VST Industries Limited

Competitive Advantages and Disadvantages:

• Advantages: Strong brand portfolio, established distribution network, manufacturing expertise.
• Disadvantages: Highly regulated industry, increasing health awareness, competition from illicit cigarettes.

How They Differentiate From Competitors:

GPI differentiates itself through brand building, product innovation, and strategic partnerships.

Future Outlook #

Expansion Plans or Growth Strategy:

GPI is focused on strengthening its brand portfolio, expanding its distribution network, and exploring opportunities in related product categories.

Sustainability Initiatives or ESG Commitments:

GPI is committed to sustainable business practices and has implemented various initiatives to reduce its environmental footprint.

Industry Trends Affecting Their Business:

• Increasing health awareness and anti-smoking campaigns.
• Government regulations and taxation policies.
• Growth of the illicit cigarette market.
• Shifting consumer preferences towards healthier alternatives.

Long-Term Vision and Strategic Goals:

GPI’s long-term vision is to be a leading consumer goods company, recognized for its innovation, ethical practices, and contribution to society. Their strategic goals include:

• Strengthening their brand portfolio and market share.
• Expanding their distribution network and reach.
• Developing innovative products and solutions.
• Operating in a sustainable and responsible manner.

Comprehensive Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Gross Revenue: Increased significantly from ₹3,325.82 crores in FY22 to ₹4,425.29 crores in FY23, and further to ₹5,664.68 crores in FY24, demonstrating consistent top-line growth.
• Profit Before Taxation: Rose substantially from ₹561.60 crores in FY22 to ₹789.61 crores in FY23, and to ₹1,086.56 crores in FY24.
• Profit After Taxation: Showed consistent improvement, with ₹431.97 crores in FY22, ₹608.38 crores in FY23, and reaching ₹880.84 crores in FY24.
• Earnings Per Share (EPS): Increased consistently, from ₹83.08 in FY22 to ₹117.01 in FY23, and further to ₹169.41 in FY24, reflecting strong profitability.
• Operating Profit Margin: Decreased from 15.29% for FY23 to 13.70% for FY24.
• Net Profit Margin: Increased from 14.33% for FY23 to 16.63% for FY24
• Return on Net Worth: Increased from 20.65% for FY23 to 24.95% for FY24.
• Shareholders’ Funds: Grew steadily from ₹2,723.69 crores in FY22 to ₹3,188.40 crores in FY23, and to ₹3,841.18 crores in FY24.
• Debtors Turnover: Increased from 61.68 in FY23 to 69.92 in FY24.
• Current Ratio: Increased from 1.28 for FY23 to 1.63 for FY24.

Business Segment Performance #

• Cigarettes: The primary revenue contributor, with domestic industry volume consolidating in FY24 after strong growth in FY23. Faced increased global supply chain strain and escalating tobacco/input costs. Regained market share in core markets and established a foothold in the King Size Filter-Tipped (KSFT) segment.
• Confectionery Products: Gross sales grew by 30% over the previous year, driven mainly by the “Naturalz Imli” brand and expanding distribution.
• Exports: Unmanufactured tobacco exports experienced significant growth, achieving a record revenue of ₹1,206.38 crores, a 55% increase over FY23. Expanded customer base and entered new geographies. Cigarette exports decreased from Rs. 149.71 Crores to Rs. 108.65 Crores.
• Retail: The Board approved exiting the Retail Division and ceasing business activities in the near future, after careful assessment.

Major Strategic Initiatives and Their Progress #

• Brand Strengthening: Focused on making core cigarette brands more relevant to target consumers and improving image equity.
• Cost Efficiency: Pursued cost efficiency across the business, deploying support to key cigarette variants.
• Innovation: Continued innovation to gain market share and consumer mindshare, including new product launches in the confectionery segment.
• Digital Transformation: Significant progress in digitizing core processes, modernizing IT infrastructure, and improving IT security footprint.
• Share-Based Employee Incentive plan: “Godfrey Phillips Employees Share Purchase Scheme-2023” was implemented.

Risk Landscape Changes #

• Geopolitical Tensions: The impact of global geopolitical tensions on the supply chain intensified, creating additional strain.
• Input Cost Escalation: Sharp increases in tobacco prices and other input costs put pressure on margins.
• Illicit Trade: Growth of the illegal cigarette trade remains a significant challenge, driven by higher taxes and regulatory measures.

ESG Initiatives and Metrics #

• Environmental: Increased the share of renewable energy in manufacturing operations from 38% to 48%, implemented auto condenser tube cleaning systems and variable frequency drives for energy efficiency.
• Social: Continued focus on community development programs in 170+ villages, addressing issues like safe drinking water, sanitation, education, and child labor. CSR initiatives benefited over 250,000 people. Recognized as a ‘Great Place to Work’ for the sixth consecutive year.
• Governance: Implemented the “Godfrey Phillips Employees Share Purchase Scheme-2023” to enhance employee ownership. Maintained high credit ratings (“CRISIL A1+” and “CRISIL AA+/Stable”).

Management Outlook #

• The management is confident in driving growth across various product categories in both domestic and international markets due to best-in-class manufacturing facilities, a vast distribution network, and adequate financial resources.
• Continued focus on leveraging brand equity, driving cost efficiencies, pursuing innovation, and expanding market reach are anticipated.
• The Board of Directors are of the opinion that Independent Directors meet the conditions of independence, and are Independent of management.

Detailed Analysis #

Financial Position Analysis of Godfrey Phillips India Limited #

Balance Sheet Analysis (3-Year Comparative) #

(All amounts are in Rs. lakhs)

* 2021-2022 figures obtained from page 4 of the file provided.

Significant Year-over-Year Changes (>10%) #

• Current Assets: Increased significantly by 41.72% (Rs. 59,217.98 lakhs) from 2023 to 2024, primarily due to a large increase in Inventories.
• Non-Current Investments: Increased by 12.33% due to investment activities.
• Inventories: Increased very significantly (59.84%) between 2023 and 2024, indicating a substantial build-up of stock.
• Other Equity: Increased very significantly, attributable to the Retained Earnings growth.

Working Capital Trends #

• Analysis: Net Working Capital increased significantly from 2023 to 2024, majorly due to the sharp increase in Inventory.

Asset Quality Metrics #

• Analysis: A very small percentage of trade receivables are credit impaired. The company is effectively managing its credit risk. Depreciation rates shows stability.

Debt Structure and Maturity Profile #

• Analysis: The Group primarily uses a mix of current borrowings and lease liabilities. The overall debt level is relatively low compared to equity. Most financial liabilities are due within 1 year.

Off-Balance Sheet Items #

*Includes amounts in dispute for Excise, Income Tax, Sales Tax, Goods and Service Tax and others authorities.

• Analysis: The most significant off-balance sheet items are the contingent liabilities related to tax and other regulatory demands. The guarantee provided to a bank for a subsidiary’s credit facilities also represents a contingent liability.

Godfrey Phillips India Limited Financial Analysis: FY24 #

Revenue Breakdown #

Segment-wise Revenue #

• Cigarettes: FY24 revenue: ₹354,273.60 lakhs; Growth Rate: 20.11% (from FY23 revenue of ₹294,962.57 lakhs).
• Unmanufactured Tobacco: FY24 revenue: ₹124,074.91 lakhs; Growth Rate: 51.82% (from FY23 revenue of ₹81,730.14 lakhs).
• Cut Tobacco: FY24 revenue: ₹2,837.25 lakhs; Growth Rate: 12.16% (from FY23 revenue of ₹2,529.53 lakhs).
• Retail Goods: FY24 revenue: ₹42,702.18 lakhs; Growth Rate: 2.85% (from FY23 revenue of ₹41,520.46 lakhs).
• Chewing Products: Zero revenue in FY2023-24 as a result of assets sale of the related business in the last year.

Geographical Revenue #

• Within India: FY24 revenue: ₹389,547.59 lakhs; Growth Rate: 19.03% (from FY23 revenue of ₹327,284.01 lakhs).
• Outside India: FY24 revenue: ₹134,340.35 lakhs; Growth Rate: 40.72% (from FY23 revenue of ₹95,469.67 lakhs).

Cost Structure Analysis #

• Cost of Materials Consumed: FY24: ₹108,345.12 lakhs (20.5% of gross revenue); FY23: ₹91,742.31 lakhs (20.7% of gross revenue).
• Purchases of Stock-in-Trade: FY24: ₹135,915.43 lakhs (24% of gross revenue); FY23: ₹91,489.41 lakhs (20.7% of gross revenue).
• Excise Duty: FY24: ₹88,503.03 lakhs (15.6% of gross revenue); FY23: ₹69,733.35 lakhs (15.8% of gross revenue).
• Employee Benefit Expenses: FY24: ₹33,640.54 lakhs (5.9% of gross revenue); FY23: ₹30,837.23 lakhs (6.96% of gross revenue).
• Other expense: FY24: 74,603.57 (13.17% of gross revenue); FY23:66,907.77 (15.12% of gross revenue)

Margin Analysis #

• Gross Profit Margin: FY24: 17.5% (Gross Sales Value of ₹5274.68 crores and Gross Profit of ₹1,975 crores, as stated in the Chairperson’s message.) FY23: No direct data available.
• Operating Profit Margin: FY24: 13.7%; FY23: 15.29%. A decrease of 1.59 percentage point is noted.
• Net Profit Margin: FY24: 16.63% (based on Total Comprehensive Income); FY23: 14.33%. An increase of 2.3 percentage points is observed.

Non-Recurring Items #

• FY23: Gain on sale/assignment of trademarks and other assets related to the chewing business: ₹3,490.96 lakhs.

EPS Analysis #

• Basic and Diluted EPS: FY24: ₹169.41; FY23: ₹117.01. An increase of ₹52.4 per share.

Cash Management Analysis: Godfrey Phillips India Limited (FY24) #

Cash Flow Analysis (Consolidated, Rs. Lakhs) #

Operating Cash Flow (OCF) #

• Profit before tax: 109,498.44
• Adjustments for non-cash and non-operating items: (7208.65)
• Net Cash Flow generated by operations :29023.93

Working Capital Changes: #

• Increase in Trade receivables, loans, other financial assets, and other assets: (6568.78)
• Increase in Inventories: (51344.40)
• Increase in Trade payables, other financial liabilities, other liabilities and provisions: 16054.00
• Net cash generated by operations reduced by 67279.55

Investing Cash Flow (ICF) #

• Purchase of property, plant and equipment, capital work in progress, investment properties, intangible assets, and intangible assets under development: (9,559.35)
• Proceeds from sale of property, plant and equipment, capital work in progress, investment properties, intangible assets and intangible assets under development: 194.57
• Net purchase of investments: (670.56)
• Proceeds from sale / assignment of Trademarks and leasehold land rights and other fixed assets relating to chewing business: 0
• Dividend received: 17,608.00
• Interest received: 579.48
• Net Short term fixed deposits changes: 752.78
• Net cash used in investing activities: (54075.47)

Financing Cash Flow (FCF) #

• Net proceeds from current borrowings: 932.39
• Interest paid: (2817.12)
• Dividends paid: (22,842.18)
• Payment of lease liabilities: (3,975.61)
• Purchase of Treasury share: (6638.81)
• Receipts of share exercise price under ESPS: 2079.05
• Net cash used in financing activities: (33,262.28)

Working Capital Management Efficiency #

• Trade Receivables Turnover Ratio: 69.92 (FY24) vs. 61.68 (FY23) - indicates faster collection.
• Inventory Turnover Ratio: 4.7 (FY24) vs. 5.24 (FY23) - suggests slight slowdown in inventory movement.
• Trade Payables Turnover Ratio: 7.11 vs 6.11 - indicating better utilization of supplier credit.

Dividend and Share Buyback Trends #

• Dividend: Rs. 56 per share for FY24 (2800%), absorbing Rs. 291.16 crores. Previous year: Rs. 44 per share (2200%).
• Share Buyback: 6638.81 used for purchasing treasury shares for ‘Godfrey Phillips Employees Share Purchase Scheme-2023’.

Debt Service Coverage #

• Debt Service Coverage Ratio: 42.88 (FY24) vs. 31.08 (FY23) - indicates a stronger ability to cover finance costs.

Liquidity Position #

• Current Ratio: 1.66 (FY24) vs. 1.37 (FY23).
• Cash Conversion Cycle: Not directly calculable from the provided data.

Financial Analysis of Godfrey Phillips India Limited #

Profitability Ratios (3-Year Trends) #

• ROE, net profit margin and ROIC show an improving trend for the last three years.
• Operating Profit Margin is declining due to a greater increase in cost of goods sold than revenue from operations.

Liquidity Metrics #

• Current Ratio saw a significant rise in the most recent financial year mainly on account of a higher level of inventory.
• Quick Ratio saw an increase in the most recent financial year.

Efficiency Ratios #

• Inventory turnover efficiency has decreased.
• Receivables Turnover has been improving and collections are slightly faster.

Leverage Metrics #

• Debt/Equity is decreasing year on year.
• Interest coverage Ratio shows an improving trend and is satisfactory.

Working Capital Ratios #

• Working Capital turnover ratio is on decreasing trend because of significant increase in inventories.
• Payable Turnover ratio is increasing which is not a good indicator of the company’s performance.

Key Observations #

• ROE: increased due to higher profitability.
• Current ratio and quick ratio: increased which indicates improvement in liquidity.
• ROIC: Improved between 2021-22 to 2022-23, and based on the net profit growth, it can be estimated that it further grew in FY23-24.
• Profit Margins: Net Profit Margin has increased, indicating effective cost management or higher pricing power.
• Leverage: Debt/Equity Ratio is consistently decreasing year on year, which is a healthy sign, but could also mean that the business is not leveraging enough debt to finance its operations.

Godfrey Phillips India Limited (GPIL) Financial Analysis: FY24 #

Revenue and Profitability Metrics #

• Cigarettes: FY24 revenue was Rs. 3,542.74 crores, a 20.11% increase from FY23 (Rs. 2,949.63 crore).
• Unmanufactured Tobacco: FY24 revenue was Rs. 1,240.75 crores, a 51.83% year-over-year increase.
• Retail: FY24 revenue was Rs. 427.02 crores, a 2.85% increase from FY23 (Rs. 415.20 crore).
• Overall Gross Sales Value: Grew by 23.89%, reaching Rs. 5,274.68 crores in FY24 from Rs. 4,257.65 crores in FY23.
• Overall Profit After Tax: Increased to Rs. 880.84 crores in FY24 from Rs. 608.38 crores in FY23.
• Gross Profit: Rs. 1,975 crore in FY24, with a margin of 17.5%.
• Confectionery: The segment grew by 30% in gross sales over the previous year.
• Exports: Revenue increased overall to 1343.4 crore for FY 23-24

Market Share and Competitive Position #

• Cigarettes: The company regained market share in one of its core markets, strengthening its position in the Regular Size Filter-Tipped (RSFT) segment and establishing a foothold in the King Size Filter-Tipped (KSFT) segment.
• Exports: Unmanufactured tobacco exports have been growing year on year.
• Confectionary: Growing it´s distribution network across markets.

Key Products/Services Performance #

• Cigarettes:
  • Strong performance in RSFT segment with core variants like “Four Square Special” and “Four Square Crush.”
  • Recent additions in the KSFT segment include “Stellar.”
• Confectionery:
  • “Naturalz Imli” is the flagship brand, driving growth.
  • “Funda Gumshums” chewing gum is gaining traction.
• Export: Unmanufactured tobacco shows the highest ever revenue of Rs.1206 Crore

Geographic Distribution and Market Penetration #

• Domestic: Operations across 25 states. The “24Seven” retail chain has more than 150 stores/kiosks, primarily in Delhi NCR, Punjab, and Telangana.
• International: International operations contributed Rs. 1,343.4 crores, showing an increased customer base and exports to new geographies, particularly in unmanufactured tobacco.

Operational Efficiency Metrics #

• Debtors Turnover Ratio: Improved to 69.92 in FY24 from 61.68 in FY23 (based on gross value).
• Inventory Turnover Ratio: Decreased to 4.7 in FY24 from 5.24 in FY23.
• The company is using IT tools for Green IT, cloud adoption and consolidation.

Growth Initiatives and Challenges #

• Growth Initiatives:

  • Focus on improving brand equity and pricing power of core cigarette brands.
  • Cost efficiency measures across the business.
  • Innovation to gain market share and consumer mindshare.
  • Expansion into untapped markets.
  • Developing new confectionery products.
  • Strengthening relationships with non-FCV tobacco farmers.
  • Leveraging technology for operational efficiencies, including digitization of core processes, modernization of ERP and Data Lake platforms, and a digital supply chain planning platform.
  • Green initiatives

• Challenges:

  • Sharp escalation in tobacco and other input costs.
  • Increasing impact of global geopolitical tensions on the supply chain.
  • The company is combating illicit trade.
  • Exiting its retail business division.

Risk Assessment: Godfrey Phillips India Limited (FY 2023-24) #

Cigarettes Segment #

Strategic Risks #

• Severity: High (95% of Gross Sales Value).
• Likelihood: Medium (Declining social acceptance, shifting preferences).
• Trend: Increasing (Social pressure, health awareness).
• Mitigation Strategies: Brand equity leveraging, market share regain, KSFT segment expansion (Stellar), spends efficiency, innovation.
• Control Effectiveness: Partially effective (Growth in specific variants, foothold in KSFT).
• Potential Financial Impact: Significant, but market share recovery and diversification offer some risk reduction.

Operational Risks #

• Severity: High (Supply chain disruptions, input cost escalation).
• Likelihood: High (Geopolitical tensions, global supply chain strain).
• Trend: Increasing (Sharp escalation in tobacco prices).
• Mitigation Strategies: Improving cost efficiency, alternative sourcing, strategic inventory management.
• Control Effectiveness: Partially effective (Operations maintained, but cost pressures evident).
• Potential Financial Impact: Negative impact on profit (Profit before tax lower by 15.29%).

Financial Risks #

• Severity: Medium.
• Likelihood: Low (Highest credit ratings).
• Trend: Stable.
• Mitigation Strategies: Maintaining a strong financial position.
• Control Effectiveness: Effective.
• Potential financial impact: Nil

Compliance/Regulatory Risks #

• Severity: High (Stringent regulations, taxation, advertising restrictions).
• Likelihood: High (Higher taxes can stimulate illicit trade).
• Trend: Increasing.
• Mitigation Strategies: Compliance with existing regulations (COTPA), engagement with government, collaboration to combat illicit trade.
• Control Effectiveness: Partially effective (Regulations navigated, but illicit trade remains a challenge).
• Potential Financial Impact: Negative impact on profit.

Emerging Risks #

• Severity: Medium.
• Likelihood: Medium (Advances in alternative nicotine delivery systems, shifts towards healthier consumption).
• Trend: Increasing (Growing global focus on health and wellness).
• Mitigation Strategies: New product development of alternative and reduced harm products.
• Control Effectiveness: To be determined (Strategies in development/early implementation).
• Potential Financial Impact: High if the segment does not adapt to changing consumer demands.

Confectionery Products Segment #

Strategic Risks #

• Severity: Low (Smaller segment, growth potential).
• Likelihood: Medium (Competition in the confectionery market).
• Trend: Positive (Gross sales grew by 30%).
• Mitigation Strategies: Focus on flagship brand (Naturalz Imli), distribution network expansion.
• Control Effectiveness: Effective (Growth from Naturalz Imli, strong distribution).
• Potential Financial Impact: Moderate positive; potential for revenue growth, but limited impact due to smaller segment size.

Operational Risks #

• Severity: Medium (Dependency on supply chain for raw materials and distribution).
• Likelihood: Medium.
• Trend: Stable.
• Mitigation Strategies: Maintaining a robust distribution network.
• Control Effectiveness: Effective
• Potential Financial Impact: High impact on operating profit margin

Financial Risks #

• Severity: Low.
• Likelihood: Low.
• Trend: Stable.
• Mitigation Strategies:
• Control Effectiveness: Effective.
• Potential Financial Impact: Nil

Compliance/Regulatory Risks #

• Severity: Medium (Compliance with food safety standards (FSSAI)).
• Likelihood: Low (Assuming good manufacturing practices).
• Trend: Stable.
• Mitigation Strategies: Adherence to FSSAI regulations.
• Control Effectiveness: Effective, no issues are reported in the context of compliance
• Potential Financial Impact: Moderate, fines, penalties or reputational damage are possible.

Emerging Risks #

• Severity: Medium.
• Likelihood: Medium.
• Trend: Increasing.
• Mitigation Strategies: Continuous product development and innovation.
• Control Effectiveness: Currently Limited.
• Potential Financial Impact: Impact on profit and revenue.

Exports Segment #

Strategic Risks #

• Severity: Medium (Dependence on global market conditions and relationships with international partners).
• Likelihood: Medium.
• Trend: Positive.
• Mitigation Strategies: Diversification of customer base and geographic reach, strengthening relationships with non-FCV tobacco farmers.
• Control Effectiveness: Effective (Highest-ever export revenue, 55% increase).
• Potential Financial Impact: Positive (55% increase).

Operational Risks #

• Severity: Medium (Efficiency in tobacco buying and processing, maintaining quality standards).
• Likelihood: Medium.
• Trend: Improving.
• Mitigation Strategies: Bringing efficiency in both tobacco buying and processing processes.
• Control Effectiveness: Appears effective (Based on revenue growth).
• Potential Financial Impact: Positive.

Financial Risks #

• Severity: Medium (Exposure to foreign exchange fluctuations).
• Likelihood: Medium.
• Trend: Stable.
• Mitigation Strategies: Natural hedging policy (forex inflows exceeding outflows).
• Control Effectiveness: Effective (Forex earnings exceeded outgo).
• Potential Financial Impact: Moderate (Natural hedging may mitigate large losses).

Compliance/Regulatory Risks #

• Severity: Medium (Adherence to international trade regulations and varying tobacco regulations in different countries).
• Likelihood: Low to Medium.
• Trend: Stable.
• Mitigation Strategies: Continuous monitoring and compliance with the import laws of target countries.
• Control Effectiveness: Effective.
• Potential Financial Impact: Negative impact on profit.

Emerging Risks #

• Severity: Medium (Geopolitical risks).
• Likelihood: Medium.
• Trend: Increasing.
• Mitigation Strategies: Diversification of client base.
• Control Effectiveness: To be determined.
• Potential Financial Impact: High.

Strategic and Management Analysis of Godfrey Phillips India Limited (GPIL) #

Long-Term Strategic Goals and Progress #

• Tobacco Segment: Strengthen core brands (e.g., Four Square), expand into King Size Filter-Tipped (KSFT) segment, and improve cost efficiency. Progress evident in market share gains and the introduction of new variants like Stellar. Exit from Retail business to focus more on Tobacco.
• Exports: Expand global presence and customer base. Substantial growth in unmanufactured tobacco exports (55% increase in FY24) demonstrates significant progress.
• Confectionery: Expand the distribution network of Naturalz Imli and increase the customer base, with a 30% growth in gross sales.
• ESG: Sustainability is a core area. Targets were set in Energy & Emission, Water Management, Waste Management and Biodiversity.
• CSR: Ensure 100% of GPIL contracted farmers have access to drinking water within 3 kms.

Competitive Advantages and Market Positioning #

• Tobacco Segment: Strong position in the Regular Size Filter-Tipped (RSFT) segment. Leveraging established brand equity and distribution network.
• Exports: Benefits from low production costs and diverse product offerings, providing a competitive edge in the global tobacco trade, particularly in unmanufactured tobacco.
• Confectionery: Flagship brand, Naturalz Imli, coupled with a widening distribution network is providing a competitive advantage.

Innovation Initiatives and R&D Effectiveness #

• Tobacco Segment: Focused on new product development and launching new products in different formats. Continuous work on new methods in analytical testing is supporting product development, especially around smoke.
• Confectionery: Continuous product development endeavors are being undertaken to create innovation in this sector. Introduction of chewing gum to expand its range.
• Technology Absorption: Upgraded in-house machinery and developed new measurement modules, demonstrating a focus on operational efficiency and quality improvement.
• R&D Spending: Total R&D expenditure increased to Rs. 1303.06 lakhs in FY24 from Rs. 1214.47 lakhs in FY23.

Management’s Track Record in Execution #

• Financial Performance: Achieved significant financial milestones in FY24, including a 23.89% growth in gross sales value and a substantial increase in net profit. Dividend distribution demonstrates a commitment to shareholder value.
• Exports: Surpassed targets across multiple export categories. The substantial growth in unmanufactured tobacco exports indicates effective execution of export strategies.
• Operational Efficiency: Improved operations by installing new equipment, adopting a new ring main unit and developing quick conversion kits.
• Retail Business: Management has decided to exit the business in FY24, based on analysis of the long term performance, prevailing market conditions and the long term business strategy.

Capital Allocation Strategy #

• Dividend: Recommended a dividend of Rs. 56 per share.
• Investments: Surplus funds are deployed primarily in debt-oriented schemes of reputed mutual funds, emphasizing safety and liquidity.
• CSR: Significant investments are being made in CSR initiatives, particularly in water and soil conservation, environmental enhancement, healthcare access, and education.

Organizational Changes and Their Impact #

• Exit from Retail Business: The Board of Directors have decided to exit from carrying out the business operations of its Retail business.
• Employee Share Purchase Scheme: Implementation of ‘Godfrey Phillips Employees Share Purchase Scheme-2023’ (ESPS 2023) to provide long-term incentives to employees.
• ESG Committee: The Board has set up an Environment, Social, and Governance (ESG) Committee.

ESG Framework at Godfrey Phillips India Limited #

Environmental Metrics and Targets #

• Energy and Emissions: GPIL aims for carbon neutrality in operations (cigarette and reconstituted tobacco manufacturing plants) by 2030. Targets include sourcing 50% of electricity from renewables by 2030 and a 30% reduction in GHG emissions in manufacturing operations by 2030. Achieved 48% renewable energy share in manufacturing operations in the year of reporting. Operational changes, such as chiller plant improvements and variable frequency drives, contributed to the company’s energy efficacy.
• Water Management: GPIL aims to replenish 30% of water consumed by 2030 and each year thereafter and achieve a 5% reduction in water consumption per unit of production in cigarette manufacturing by 2030. Progress includes implementing water-efficient technologies and rainwater harvesting.
• Waste Management: GPIL’s target is zero waste to landfill across manufacturing operations by 2030. Initiatives include waste segregation and using biodegradable packaging materials.
• Biodiversity Management: The Company ensures that 100% of the tobacco purchased from their contracted farmers abides by the prohibition on the use of hazardous pesticides. They target zero net deforestation in the supply chain of paper used in cigarette sticks by 2030.

Social Responsibility Programs #

• Community Development: GPIL focuses on the well-being of non-FCV tobacco farmers, with programs in 170+ villages. Key initiatives include installing RO water plants, establishing biodiversity parks, constructing community sheds, creating awareness against child labor, and conducting health camps, impacting over 250,000 people. CSR amount spent and unspent for FY 2023-24: Rs 408.16 Lakhs spent, with Rs.634.84 Lakhs of unspent fund transferred to a seperate bank account which will be released in tranches during the project tenure.
• Human Capital Development: GPIL is recognized as a ‘Great Place to Work’ for the sixth consecutive year. The Company focuses on leadership and managerial capability building, skills enhancement, and maintaining a safe and inclusive work environment. Targets include zero accidents and a 20% increase in learning man-hours by FY'25.
• Human Rights: Initiatives focus on the eradication of child and forced labour, as reflected in the Company’s human rights policy.

Governance Structure and Effectiveness #

• Board Composition: The Board includes a mix of Executive and Non-Executive Directors, including Independent and Women Independent Directors. As of March 31, 2024, there were six Independent Directors and three Executive Directors.
• Board Committees: Key committees include Audit, Nomination and Remuneration, Stakeholders Relationship, Risk Management, Corporate Social Responsibility (CSR), and ESG. The composition, terms of reference, and meeting details of these committees are provided in the Corporate Governance Report.
• Code of Conduct: The Company has a Code of Conduct applicable to Directors and senior management, posted on the company website. Compliance is affirmed annually.
• Risk Management: GPIL has a Risk Management Policy and Committee that assesses and addresses risks in the internal and external environment, incorporating risk treatment processes in its strategy.

Sustainability Investments and ROI #

• The company increased share of renewable energy based power from 38% to 48%.
• The company installed EPR Code printing device on all cigarette packing machines.
• R&D and Capex: 14% of R&D and 2.6% of capex investments in FY 2023-24 were directed towards technologies to improve environmental and social impacts. Specific investments include quality testing equipment and energy-efficient machinery.

ESG Ratings and Peer Comparison #

• Dow Jones Sustainability Index: The Company’s score increased fourfold, reflecting improved integration of ESG into core operations.
• Certifications: Rabale factory recertified for Integrated Management System (ISO 50001, ISO 14001, and ISO 45001), certified for ISO 26000:2010 (Social Responsibility), received Green Tech Environment Excellence Award, and Green Tech Quality and Innovation Award.
• “Great Place to Work”: Certification received for the 6th consecutive year.

Regulatory Compliance and Future Preparations #

• Compliance: GPIL adheres to the Cigarettes and Other Tobacco Products Act (COTPA), Food Safety and Standards Act, 2006, and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
• Audit Trail (Edit Log): The statutory auditors reported an exception regarding the audit trail feature in the Company’s accounting software, noting it was not enabled for direct changes to the underlying database using privileged access rights in SAPS4 Hana during the rollout.
• Secretarial Audit: The Secretarial Audit Report for the year under report did not contain any qualification, reservation, adverse remark or disclaimer.
• Future Preparations: GPIL has a robust plan to achieve carbon neutrality in its operations by 2030 and continues to assess new technologies for effective waste management. The company is committed to ensuring that 100% of the tobacco purchased from the company-contracted farmers continues to abide by the prohibition on the use of hazardous pesticides.

Godfrey Phillips India Limited: Segment-Wise Financial Analysis #

Management Guidance and Assumptions #

• Cigarettes: Improving macro-economic indicators, prospects of a normal monsoon, and recent trends in rural demand recovery will propel volume growth. Focus on core brands and King Size Filter-Tipped (KSFT) segment.
• Confectionary: Growth driven by Naturalz Imli and strong distribution. Funda Gumshums gaining traction.
• Exports: Continued growth in unmanufactured tobacco exports, expanding customer base and geographies. Focus on relationships with non-FCV tobacco farmers and improving tobacco buying/processing.
• Retail: Exit from the Retail Business Division (‘24Seven’).

Market Growth Forecasts #

• Cigarettes: Domestic cigarette industry volume is expected to consolidate and remain largely stable.
• FMCG (Confectionary): Indian FMCG market projected to grow significantly (CAGR of 27.9% from 2021 to 2027).
• Tobacco Exports: Growth is expected to continue.

Planned Strategic Initiatives #

• Cigarettes: Regaining market share, strengthening Regular Size Filter-Tipped (RSFT) segment (Four Square), and expanding into King Size Filter-Tipped (KSFT) segment (Stellar). Focus on brand relevance and cost efficiency.
• Confectionary: Continued expansion for Naturalz Imli, product development and innovation in hard-boiled candies, soft chews, and chewing gums.
• Exports: Increased customer base and expansion into new geographies.
• Retail: Exit from the ‘24Seven’ retail business.

Capital Expenditure Plans #

• Overall: Continued investment in Green IT (cloud adoption, consolidation). Modernization of IT Infrastructure (SD-WAN).
• R&D: Increased capital expenditure (Rs. 162.58 lakhs in FY 2023-24 vs. Rs. 133.85 lakhs in FY 2022-23).

Efficiency Improvement Targets #

• Cigarettes: Cost efficiency and sales & distribution strength.
• Exports: Efficiency improvement in tobacco buying and processing.
• Technology: Increased digital footprint and operational efficiencies through digitization.
• Energy: Increased share of renewable energy and improved energy efficacy.

Potential Challenges and Opportunities #

• Challenges:
  • Cigarettes: Geopolitical tensions, supply chain strain, tobacco price escalation, and illicit trade.
  • Confectionary: Adapting to technological advancements, supply chain management, thin margins, rising real estate costs, and quick commerce.
• Opportunities:
  • Cigarettes: Improving macro-economic indicators, prospects of normal monsoon, and rural demand recovery. Innovation and expansion into untapped markets.
  • Confectionary: Growth potential driven by Naturalz Imli and strong distribution network.
  • Exports: Growing global demand, expanding customer base, and new geographies.
  • Overall: Leveraging technology for operational efficiencies, ‘People First’ policy for motivated manpower.

Scenario Analysis and Sensitivity #

• Scenario 1 (Positive): Strong rural demand, favorable monsoon (cigarettes). Successful export expansion and strong Naturalz Imli performance.
• Scenario 2 (Negative): Geopolitical tensions, supply chain disruption, increased input costs. Increased regulatory scrutiny and taxation could further fuel illicit trade.
• Sensitivity: Sensitive to tobacco prices, input costs, and foreign exchange fluctuations.

Audit and Compliance Analysis #

Auditor’s Opinion and Qualifications #

• The auditors issued an unmodified opinion on the standalone and consolidated financial statements, indicating a true and fair view in conformity with generally accepted accounting principles in India.
• The auditors reported on the usage of two accounting softwares- Oracle EBS and SAPS4 Hana. For the year ended 31 March 2024, both the software used by the company for maintaining its books of account, have the feature of recording audit trail (edit log) facility. While the audit trail was enabled throughout the year for all relevant transactions in Oracle EBS, in SAPS4 Hana it was enabled during the course of the year, except that the audit trail was not enabled for direct changes to the underlying database using the privileged access rights in both the softwares.

Key Accounting Policies #

• The financial statements are prepared in accordance with Indian Accounting Standards (Ind AS).
• Revenue recognition follows Ind AS 115, recognizing revenue when control of goods or services is transferred to the customer.
• Leases are accounted for under Ind AS 116, with right-of-use assets and lease liabilities recognized.
• The company measures at fair value all investments in Mutual Funds.
• The company has complied to Ind AS 109.
• There were no new accounting standards that materially change the accounting policy for the current reporting period.

Internal Control Effectiveness #

• The auditors expressed an unmodified opinion on the adequacy and operating effectiveness of the Company’s internal financial controls over financial reporting, based on criteria established in the Guidance Note issued by ICAI.

Regulatory Compliance Status #

• The Company has complied with the provisions of Corporate Governance as specified in Regulations 17 to 27 read with Schedule V and 46(2) of the SEBI Listing Regulations.
• The Company has paid listing fees to the Stock Exchanges for the financial year 2023-24.
• During the Financial Year 2022-2023, a penalty of Rs. 1,90,000 each plus GST was imposed by BSE and NSE on the company due to interpretation of Regulation 17(1A) read with Regulation 17(1C) of the SEBI Listing Regulations.
• No other penalties or strictures were imposed by stock exchanges, SEBI, or other statutory authorities.
• The Company has complied with the provisions of Section 186 of the Companies Act, 2013.

Legal Proceedings and Potential Impact #

• The Company discloses pending litigations related to excise, income tax, goods and services tax, sales tax, and other authorities, with a total contingent liability of Rs. 7765.85 lakhs.
• The Company is involved in a land dispute where the land may have been previously acquired by the Delhi Administration, this is based on notification by the Honourable Supreme Court, the matter is still ongoing. The related assets remain in the Company’s balance sheet.
• A portion of the Company’s land was compulsory acquired by the government and the compensation received has been recognized.
• The company has received various show cause notices from various government authorities.

Related Party Transactions #

• The Company disclosed transactions with related parties, including subsidiaries, associates, key management personnel, and other related entities. These transactions were in the ordinary course of business and at arm’s length. Material Related Party Transactions disclosure (Form AOC-2) found no transaction not at arm’s length.
• Loans and guarantees have been provided to subsidiaries.

Subsequent Events #

• The Board of Directors decided to exit from the Retail Business Division (24Seven) operations, with a closure is subjected to the completion of the necessary formalities.
• A final dividend of Rs. 56 per equity share, totaling Rs. 291.16 crores, was proposed by the Board of Directors, subject to shareholder approval.

Analysis of Accounting Quality and Regulatory Risk #

• Accounting Quality: The unmodified audit opinion suggests high accounting quality. The Company adheres to Ind AS, and the auditor’s report indicates compliance. However, reliance on management’s representations regarding funding and investment activities adds a minor element of risk.
• Regulatory Risk: The penalty imposed by BSE and NSE in the previous financial year is the only instance of a possible violation. The regulatory risk appears moderate, mainly associated with ongoing legal proceedings and the potential impact of those proceedings. The Company’s compliance with listing regulations and timely filing of reports suggest a proactive approach to regulatory matters. The pending resolution of the land dispute, and adherence to regulations like Companies Act 2013, SEBI Listing Regulations adds a layer of risk.