Introduction of the IndustryIndia is the world’s 2nd largest producer of Tobacco with an annual production of over 800 million kg of tobacco. Tobacco is a chief commercial crop in India which grows well in the states of Andhra Pradesh, Karnataka & Gujarat. Tobacco & Tobacco related products are one of the main contributors to the Government’s tax revenue. The total tax collected from Tobacco products is more than Rs 34,000 cr. annually. India exported tobacco & tobacco products worth Rs 5,950 cr. in the financial year 2018-19. Out of the total unmanufactured tobacco exports, 80% was Flue Cured Virgina(FCV) tobacco which is used in the Cigarettes. Legal Cigarettes amount to over 10% of the total Tobacco consumption in India, while the rest is represented by traditional products which are in the form of ‘Bidi’, ‘Khaini’, ‘Chewing tobacco’ and ‘Illegal cigarettes’. Just by constituting 10% of the total tobacco products, Legal Cigarettes contribute 86% to the Government’s tax revenues. Despite being one of the world’s largest producers of Tobacco & tobacco related products, the per capita consumption of cigarettes in India is one of the lowest in the world at just 89 cigarettes per annum. This is because tax on cigarettes (on a per kg basis) is 55 times more than other tobacco products, which increases their prices. The Indian Legal Cigarette Industry primarily comprises of three companies that is ITC Ltd, Godfrey Phillips & VST Industries.
Companies discussedVST Industries and Godfrey Phillips are discussed in this article with qualitative factors in comparative format.
Godfrey Phillips India Ltd.The company was originally incorporated as “Godfrey Philips Ltd.’ in London in the year 1844 by entrepreneur Godfrey Philips. In 1967, Godfrey Phillips Ltd. of London made an arrangement with International Tobacco Co. who opened a factory in Northern India to manufacture on the company’s behalf. In 1967-68, Philip Morris International Financial Corporation acquired a substantial holding in Godfrey Philips Ltd (UK) and Godfrey Philips Investment Corporation, which further held substantial stake in Godfrey Philips India Ltd and all these companies became the official associates of Godfrey Philips. In the year 1979, Philip Morris entered into a joint venture with KK Modi group for its Indian operations. In June 2009, KK Modi group acquired stake of 10.83% in GPI from Phillip Morris International Finance Corporation. This led to a decline in the stakes of Phillip Morris to 25.10% and an increase in the stake of the KK Modi group to 41.83%. GPI is the second largest manufacturer of Cigarettes in India after ITC Ltd. It entered the Pan Masala segment in the year 2010 with its brand ‘Pan Vilas’.
VST IndustriesVST Industries founded by Mr Vazir Sultan in 1916 in the city of Hyderabad. The company over a period of time has become an Associate company of the world’s largest publicly traded tobacco company ‘British American Tobacco Company’ (BAT). BAT holds 32.16% stake in the company. Post acquisition of the stake, the name of the company was changed from Vazir Sultan & Sons to Vazir Sultan Tobacco Company Ltd & further to VST Industries in the year 1984. VST is the third largest cigarette manufacturer in India & the product niche is focussed towards the lower income segment and the first time smokers. The company has its registered office in Hyderabad. A comparison of both the companies on various qualitative parameters is given below:
1. Shareholding Pattern (March 2019)The promoters of GPI hold 72.19% in the company and amongst the promoter 47.09% is held by the Indian promoters that are the ‘K.K. Modi’ group, while, the foreign promoters that is the ‘Philip Morris Global Brand’ holds the balance promoters’ stake of 25.10% in the company. Apart from the promoters, Institutions hold 14.41% and Non-Institutions hold 13.40% in the company. Whereas, in VST industries the promoter is the British American Tobacco PLC which holds 32.16% through its companies that is ‘The Raleigh Investment Company’, ‘Tobacco Manufacturers (India) Ltd’ & ‘Rothmans International Enterprises Ltd’. Other than the promoters, Institutions hold 26.75% & Non-Institutions hold 41.09% stake in the company.
2. Business SegmentsThe main segments of Godfrey Phillips are that of ‘Cigarette, Tobacco & related products’ and ‘Retail and other related products’. The company apart from selling Cigarettes also sells Tobacco leaves. The company’s Retail & other related products segment consists of revenue from Confectionery items like toffees, Chewing products like Pan Masala as well as chain of retail stores called as “24Seven” convenience stores. The retail business of the company ’24Seven’ is India’s first and the only 24 hours convenience stores. The company has more than 100 stores in Delhi/ NCR & Chandigarh location with an average footfall of 2000 people a day. The retail outlets host the best of the global brands in Wines, Beers, Liquor Chocolates & other products. While, VST Industries has no segment difference and deals in the manufacturing and selling of Tobacco & related products only. Their products include Cigarettes & Tobacco leaves.
3. Businesses ExitedIn the year 2017, GPI sold its package tea business, which contributed less than 3% to the company’s gross sales for Rs 20 Crores to Kolkata-based Goodricke Group Ltd. The company sold its tea brands of Tea City, SC Gold, Symphony, Samovar, SC Premium, Super Cup, Rangoli & Utsav.
4. About the ManagementGodfrey Phillips is being managed by the ‘KK Modi’ group. Mr K.K. Modi continues to be the President & the Managing Director of the firm. His younger son Mr Samir Modi is the Executive Director, his wife Mrs Bina Modi too is a director in the firm. In the year 2016, Ruchir Modi (son of Mr Lalit Modi) was appointed as an Additional director in the company. In VST Industries, the promoter is the Brtish American Tobacco Plc and the company is being run by a team of independent and professional managers. Mr Devraj Lahiri has been the Managing Director & the CEO of the company since November 2017, while he has been associated with the company as Whole Time Director since August 2011. The Board of Directors as well as the KMP of Godfrey Phillips drew a salary amounting to Rs 16.95 Crores which forms 0.59% of the consolidated revenues of the company & 9.33% of the consolidated Net Profit of the company; whereas VST Industries drew a total salary of Rs 7.63 Crores amounting to 0.57% of the total Revenues & 4.18% of the Net Profit in the financial year 2018.
5. Revenue BreakupThe revenue breakup of both the companies can be made on the following parameters:
A. As per segments:Godfrey Phillips has 2 operating segments – a) Cigarettes, Tobacco and related products and b) Retail and related products. The first segment forms the major portion of the revenues by contributing 88.7% to the revenues in FY19 which in FY 18 had contributed 90% to the revenues. While the company’s gross sales value increased by 6.7% to Rs 6,194 crore, the cigarette gross sales value increased by 8.7%. Out of the total cigarette sales, ‘Marlboro’ (world’s largest selling brand) accounted for around 13% in the period ending December 2018. Marlboro is manufactured and distributed under exclusive procurement and supply agreements with Philip Morris International. Godfrey Phillips has tied up with Altadis of the US, wherein Godfrey Phillips imports Cigars and markets Altadis cigars in India. On the other side, VST Industries only has one operating segment – manufacturing & selling of the Tobacco & Tobacco products. However, the Cigarettes contribute towards 82% whereas tobacco leaves contribute the balance 18% to the revenues. For the period ending December 2018, 69mm category of cigarettes contributed 55% to the sales volume, while 64mm contributed 40% to the total volume & the king size category contributed 5% to total sales volume.
B. As per the Group Structure:Godfrey Phillips has 8 subsidiaries & step-down subsidiaries with 4 Associate companies. The standalone revenues of the company forms 99.23% of the total consolidated revenues of the company. In the case of VST Industries, the company does not have any subsidiary company & hence, 100% of the revenues of the company are earned on a standalone basis.
C. As per the Geography (Within India/Outside India):GPI earned 19% of its revenue from Outside India (largely constituted by the sale of Tobacco Leaf, Cut Tobacco & Cigarette brands of ‘Originals’, ‘Jaisalmer’, ‘Stellar’ & ‘Black Jack’) in FY19. VST earns around 11% of its revenues from outside India. VST Industries has a significant presence in the states of West Bengal, Andhra Pradesh, Telangana, Bihar & Uttar Pradesh.
6. Manufacturing FacilitiesGodfrey Phillips as on March 2018 had a total of 8 manufacturing facilities. The company also has two captive Threshing plants which enables the company to manufacture composite leaf blends & cut tobacco for domestic and export markets. Godfrey had its earlier production facility at Andheri (Mumbai), which was relocated to Rabale (Navi Mumbai) in June 2013. The company announced voluntary retirement scheme for its workers at the earlier Andheri plant. VST Industries has 2 manufacturing facilities that are in Azamabad (Hyderabad) & Toopran (Telangana) for the manufacturing of tobacco & tobacco related products.
7. BrandsGodfrey Philips launched ‘Cigaroma-The Cigar Shop’ in a luxury mall in Bangalore in 2012. The shop was first of its kind shop for Cigars, Cigarettes and Cigar Smoking Accessories. The outlets are in two formats – one is the shop/exclusive outlet which are bigger and the smaller is Express shops which are present at shopping malls across various cities. Cigaroma offered well known premium brands in varied types and flavors of cigar including Habanos SA from Cuba, Oettinger Davidoff from Switzerland, Altadis and Scandinavian Tobacco Group from Holland and smoking accessories like Humidors, Cigar Cutters, Humi Pouches, Cigar Lighters, Ashtrays, Cigar cases etc from Coiba Brand (Spain) of Habanos SA, and Siglo Brand from Pacific Cigar company, Hong Kong. In VST industries, the contribution of premium brands of ‘Total’ and ‘Edition’ increased to 20% of the sales volume of the company. The increasing contribution of these value added products has been able to aid the operating margins of the company.
8. International BrandsApart from having an array of products & brands for its Domestic users, Godfrey also has a host of brands specifically for the international markets. A list of the same is given below:
9. Key MarketsThe key markets of Godfrey Phillips are the Northern & Western parts of India. The company has identified West Bengal & South India to be the new markets in focus, which have the potential of further driving up the sales. On international front, Godfrey Phillips has significant presence across Latin America, Middle East, South East Asia & Eastern Europe. Godfrey’s North Pole & Tipper have significant presence in the markets of South India. Godfrey’s chewing product Pan Vilas is available all over India and is immensely popular in Gujarat with a sizeable market share, it has also developed significant presence in the states of Madhya Pradesh, Uttar Pradesh, Rajasthan, Odisha & Delhi. The company’s 24Seven retail outlets are spread across Delhi/NCR and Chandigarh. VST Industries key focus is on the lower income segment and the 1st time smokers. The company’s major products are low priced within the range of Rs 4-6 per cigarette stick except its ‘Edition’ brand which is priced at Rs 6 per stick.
10. Market ShareThe legal cigarette forms around 10% of the total cigarette industry in India. Amongst the listed players, ITC Ltd is the largest manufacturer of cigarettes in India and is the market leader with around 80% of the market share of the legal cigarette industry. ITC is followed by Godfrey Phillips which had a market share of ~11.9% as on December 2018. The third largest manufacturer of Cigarettes in India is VST Industries with a market share of over ~8%.
11. Competitive AdvantageGodfrey Phillips is the only company in India with exclusive procurement & supply agreement with Phillip Morris International, which allows it to contract, manufacture & distribute ‘Marlboro’ in India. VST industries are well known for developing high nicotine tobacco products.
12. Distribution NetworkGodfrey Phillips has a strong distribution network of 800 exclusive distributors in the Chewing products & confectionery segment. Apart from the above, the company has its own chain of Convenience stores by the name of 24 Seven. The total number of stores as on 31st March 2019 is 104 outlets, which have been increased from the levels of 61 stores in the previous year. The company opened all its new outlets in the region of Delhi NCR & Chandigarh. Overall the company boasts of having 800 + distributors, presence in over 800,000 Retail outlets and an efficient team of more than 9000 salesmen.
13. Technology CollaborationGodfrey Phillips’ Cigarette manufacturing plants at Rabale & Guldhar have technological support from Philip Morris, G.D., Comas, SMC, Luwa, Forbes Marshall, Honeywell, Miebach, Nefab, Kaesar and Haulotte Group. The company’s chewing product facility at Ghaziabad has technology tie up with Swiss company- Buhler, ACG_Palm Glantt & Japan based FFS Topack.
14. Controversies/AllegationsA. Godfrey Phillips’ director – Mr. Lalit Modi: Lalit Modi, an Ex- Executive director of the company has been absconding from India. He has various charges of money laundering on him. Lalit Modi quit from the post of director of Godfrey Phillips on 28th May 2015. This was done when Lalit Modi was disqualified as a director as per the provisions of the new Companies Act, wherein, a director becomes disqualified if he does not attend a board meeting for 12 months. Modi continued to draw his pay & remuneration from the company although he was living in London since the year 2010. B. Alleged violations of FDI norms by Godfrey Phillips: The Indian Government in the year 2010 had prohibited FDI in cigarette manufacturing, thus limiting any foreign-funded expansion. The internal documents related to the company, however, revealed that Philip Morris paid around Rs 45.5 million dollars for items that ranged from large cigarette-making machines to smaller equipments which were deployed in Godfrey’s factories. One invoice of January 2018 sent from Godfrey to Philip Morris showed that the Indian company had spent 206 million rupees ($3 million) on capital expenditure for Marlboro-related manufacturing activities since 2009, though it was not clear how much of that was paid by Philip Morris. However, the company denies all such charges and the matter is being investigated by the Enforcement Directorate.
15. InputsA. The raw material of Godfrey Phillips vary a little because the company is also manufacturing products other than cigarettes in the category of Pan Masala & Candies. The inputs of Godfrey Phillips are unmanufactured & blended tobacco, Cigarette paper, Cardboard, Filter rods, Aluminium Foil/Metallised paper, Cellulose paper, Flavours for chewing products, Betel Nut, Katha, Lime & bulking agent, Paper & laminate pouches for chewing products.Godfrey Phillips sources highest quality ingredients like Areca Nuts from Karnataka, Cardamom from Kerala, Catechu from Himachal Pradesh apart from sourcing the best quality of tobaccos from Guntur area in South India. B. The inputs of VST Industries include Unmanufactured Tobacco, Board, Hinge Lid Packs, Cigarette Paper, Foil/ Metalized Paper, Filter Rods etc. The exposure of VST’s inputs to foreign exchange is 12.43% of the total raw material consumption.
16. ClientsAlthough the cigarette business of both the companies is a B2C business but Godfrey Phillips supplies Tobacco to some of the biggest manufacturers in the industry like Philip Morris, ITG Brands, JTI, Eastern Company, European Tobacco, Libyan Tobacco Company & RNTA. The company manufactures and customizes cigarettes, leaf & cut rag for prestigious clients across countries in the Middle East, West Africa, South East Africa, South East Asia, Eastern Europe, Australia, South America and Central America.
17. Research and DevelopmentGodfrey Phillips has its own R&D facility and the company spends around 0.34% of the revenues from operations into research & development activities. While VST industries also actively engages in research activities for developing blends for new brands which match to the consumers taste in the market place. The company spends 0.45% of the revenue from operations on research & development activities.
18. Dividend PaymentGodfrey Phillips has been regular in paying dividend but the dividend pay-out ratio lies between the range of 20-30%. VST Industries has been paying consistent dividends with a dividend pay-out ratio of above 70% from the past decade.
19. Corporate ActionsGodfrey Phillips last announced splitting of shares from 1 share of face value of Rs 10 each to 5 shares of face value of Rs 2 each. The record date for the split was 28th November 2014. While VST Industries has not undergone any corporate action involving split or buy-back of shares.
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References: Annual Reports, News Publications, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews.
Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. The report & references mentioned are only for the information of the readers about the industry stated.