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Godfrey Phillips India LtdCompany Analysis
INDUSTRY ANALYSIS OF THE CIGARETTE INDUSTRY
Industry Trends:
Global Perspective:
The world No Tobacco Day was celebrated on 31st
May by WHO to remind the world
of the tobacco industrys efforts to weaken the WHO Framework Convention on Tobacco
Control (FCTC). The overwhelming response all over the world necessarily came as an eclipse
to the Industry. There are approximately one billion smokers all over the world and the revenue
generated is hundreds of millions USD. WHOs 14th
World Conference was the very first firmstep to curb the rising monopoly of the industry. In contradiction to this, we can see how much
the industry contributes to the GDP via taxes. It is also a source of employment. Also they have
been constantly striving to lessen the wastes, tar and nicotine level, reduce the tobacco per
cigarette. But then most of the governments all over the world want that lesser number of people
smoke cigarettes & so they are levying heavy taxes, they are creating awareness among people
with help of media, NGOs, etc. So, the social & economic atmosphere is becoming tougher for
them to sustain. Today there are reports even taking an objection on the packing style & design
of the cigarette packets (Source:http://www.guardian.co.uk/commentisfree/2012/jul/17/tobacco-
packets-children-plain-packs). At the same time it has been made compulsory that they give
cautionary warnings in written on the packets in a legible fashion. So, the companies undertake
organization of music concerts and allied activities for marketing purpose, for which they are
criticized. So, overall the picture is grim for the industry as the only source of marketing is word
of mouth, to add, the social & economic factors are strenuous.
Indian Perspective:
The condition is the same for the industry in India, but the explanation is a bit different.
Putting forth the statistics, India is the second largest producer of tobacco in the world. As well
as it is one of the leading exporters of tobacco in the world. Agriculture contributes 24% to the
GDP & 13.5% of it is tobaccos share. It provides employment to nearly 4 million persons. Here,the taxes on cigarettes are high, however, the taxes on bidis & other forms of tobacco is very
less. So, the effort of the government will not bear any fruit as the market for bidis is 85% of the
total number of smokers. The industry is reeling under ever increasing taxes, thus, the
competitiveness of the industry is been negatively affected. In such a scenario, they are going in
for unrelated diversification.
http://www.guardian.co.uk/commentisfree/2012/jul/17/tobacco-packets-children-plain-packshttp://www.guardian.co.uk/commentisfree/2012/jul/17/tobacco-packets-children-plain-packshttp://www.guardian.co.uk/commentisfree/2012/jul/17/tobacco-packets-children-plain-packshttp://www.guardian.co.uk/commentisfree/2012/jul/17/tobacco-packets-children-plain-packshttp://www.guardian.co.uk/commentisfree/2012/jul/17/tobacco-packets-children-plain-packshttp://www.guardian.co.uk/commentisfree/2012/jul/17/tobacco-packets-children-plain-packs -
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PEST Analysis:
Political: Following the increasing health concern about tobacco consumption, the
Central Ministry of Agriculture has not launched any development scheme for the crop since the
completion of the Seventh Five-year plan. The political impact of the decisions made by the
policy makers is inter twined with the economic impact of these policies, this has been discussed
further.
Economic: The non-smoking tobacco products, commonly used among rural masses, are
not taxed. Bidis, which are used by people in lower economic strata of the society, are not taxed
or are lightly taxed. The prices of certain tobacco products cheaper for low-income groups, those
products which forms the major 85% market of the tobacco industry, ignores the potential higher
occurrence of tobacco related diseases. Thus, the government taxation system is a fiscal policy.
Many arguments are put forth, like the employment, income generation etc., but the policy
makers have to understand that this a myopic judgment. Thus, lesser investments in R&D &
affecting the exports and thus, the competitiveness of the industry.
Social: The advertisements have been banned; smoking has been banned in public places,
government offices; awareness has been brought about by every possible mean about the harmful
effects, lawsuits have been designed, increased government regulation and public litigation has
created gloomy situation for the industry. It has been observed that there are some pediatric
problems as well. Since, the industry needs new persons to replace the old and dead ones; they
somehow influence the younger ones.
Technological: the cigarette industry in India has generally not kept pace technologically
with the developed countries, e.g. the cigarette making rate. But there are many things that have
improved: they have been modernizing their processing and manufacturing facilities, with new
or upgraded machines introduced for cigarette making to improve processing, reduce component
prices and improve quality and efficiency; they have reduced cigarette damage and waste;
reduced tar and nicotine levels through filterization; reduced usage of tobacco per cigarette;
improved cigarette paper and filter design; reduction in tobacco used per cigarette has been
significant.
Competitor Analysis:
Shares in Indian Market: ITC: 72%, Godfrey Phillips: 12%, GCT: 8%, VST: 8%.
However, the aim of Godfrey Phillips is to be the number one player in the market. So, let us
analyze the different parameters like pricing, quality, and distribution etc. of this company in a
precise matter
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Pricing: The pricing strategy of ITC includes provisions like increasing the prices of
items that are particularly meant for high paying strata of the society to meet with the tax levels.
The broader market is that of bidis. So, they are trying to explore that section as well. Bidis
market is either lightly taxed or not at all taxed.
Quality: There have been made consistent efforts made to improve the quality of the endproducts. New filter cigarette segment of less than 60mm size is being developed, the initiative
under progress. They have been awarded many prestigious awards like 'Best Manufacturer of
Cigarettes' for the year 2008 & 2007 and Best Exporter of Cigarettes for 2008. ITC's cigarettes
are manufactured in state-of-the-art factories with cutting-edge technology & excellent work
practices benchmarked to the best globally.
Distribution: Excellent distribution network.
(We will discuss Godfrey Phillips in detail in the later part of the analysis.)
SWOT Analysis:
Strengths: India is a country with huge population. So, there is a vast scope of increasing
the business. Addictive nature of cigarettes, Distribution Network
Weaknesses: Heavy taxes levied, awareness among people about the ill effects of
smoking, no chance for advertisement,
Opportunities: Bidis is an unexplored segment, international market penetration
Threats: e-cigarette, increased smuggling due to increase in taxes, Growing anti-tobacco
activities
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COMPANY ANALYSIS OF GODFREY PHILLIPS INDIA LTD
Company Description:
Godfrey Phillips India Ltd. is Indias second largest cigarette maker. It is number one
cigarette company in North India and Indias number one cigar marketing organization. GPI
owns FS1, Four Square, Red and White, Jaisalmer, Cavanders and Tippers.
General Information:
Headquarters: New Delhi
Manufacturing Units: Mumbai, Ghaziabad, Kolkata, Uttaranchal
Sales Division: Chennai, Delhi, Ahmadabad, Hyderabad, Mumbai, Kolkata
Establishment Year: 1946
Number of Employees: 1000
CEO: Surinder Seru
Share Holding Pattern: The major promoter is Modi group. The promoter held shares
have decreased drastically, which can be a negative sign. As far as the FIIs are concerned; they
have remained almost the same in the two consecutive quarters.
Financial Performance of the Company:
(Source:http://www.moneycontrol.com/financials/godfreyphillipsindia/ratios/GPI)Net Profit: Rs. 459 million on dec., 2011
Its profit has declined 25.44% in March 2012 quarter.
Net Sales: Rs. 4820 million on dec., 2011
Dividend per share is increasing, which implies that growth can be sustained.
Net operating profit per share is also increasing.
Earnings per share & book value are increasing steadily.
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Overall the company prospects seem bright