Multi Baggers

Godfrey Phillips India

Time for margin expansion going ahead. Company likely to improve margins by over 200 bps.

Accumulate near zone of Rs 1400-1435 for target of Rs 1625-1830 with stop loss of Rs 1300.

A Rerating Story coupled with earning expansion

Though Tobacco is injurious to health but companies in sector are generating cash flows and are having premium brands to retain strong flows will continue to see momentum.

Godfrey Phillips India Ltd manufactures some of the most popular cigarette brands in the country like FS1, Four Square, Red and White, Cavanders, Tipper and North Pole. Additionally, Godfrey Phillips India also manufactures and distributes iconic brand Marlboro under a license agreement with Philip Morris. 

Outlook on Profit and Growth:

We considered two phase study and realized the Godfrey Philip has entered an inflexion point. It has many premium brands and thus margins likely to improve going forward. There is huge deviation between ITC and Godfrey Margins thus we feel the company can improve on margin front than can realize better EV/Sales . 

Strong Balance sheet and Land bank to compensate valuation for rerating: The Balance Sheet has inherent strength with good sign of cash flow generation going forward. Andheri Property and other properties  in Godfrey can be pegged at over 15% of market cap on conservatively.

No Succession Plan likely soft target for takeover to act as catalyst: Market speculators believe Godfrey can be a good deal for players looking to enter into the business. If one compares ITC valuation for Cig Biz GPI looks to trade at 30-35% discount on the parameter. And going through Family Tree of Promoter one can foresee either the company in the medium to longer term will be professionally managed or will be offered for sale, thus making a case of higher efficiency & return ratios.

Strong Brands and Distribution Channel: GPI over the years have created legacy of its brand and strong distribution channel helps in leveraging strength for its premium brands. The middle class and rising income makes tobacco user to switch to premium play and thus making a good casing point for GPI.

FDI window: The big Question? The Big Opportunity

Certain relaxations and flaws in FDI still gives GPI to sell it to international players as Philip Morris is still an opportunity for Godfrey to exit the business as reported by media and time slot is limited till Niti Ayog and FinMin don’t clearly define rules . Philip Morris owns 25% in company and as per media reports in Jan 2016 was likely to bid for higher stake. The window soon gets closed but market participants still eye on this angle too. We concluded a what if analysis on Premium Brands and how stocks got rerated post exclusion on Indian Partner be it Gillette , United Spirits and other players . These stock went on creating more wealth as soon as a professional management replaced the old system . Margins for Gillette rose substantially under new management and if the small chance of deal going through gets triggered . The stock will see a new rise.

Valuations:

We expect company margins to improve and expect company to do near about 190-210 crore in terms of PAT on conservative side and Cash EPS of near about 55. 

Key Risk: We have added a 8 percent premium to our derived target of 1850 thus raising range from 1850-2000 based on a small probability of Philip Morris still likely to get controlling stake in the company. Any strict FDI rule or government action can hurt vauation for entire sector thus valuation premium of entire sector can come down. 

Technical Update:

Accumulate near zone of 1400-1435 for target of Rs 1625-1830 with stop loss of Rs 1300. GPI looks to have make inverted h&s pattern from breakout zone of 1300.

We rate this as HIGH RISK stock as stock tends to be volatile and moves very sharply on either front. Our models suggest stock current breakout and today gap down can be a good entry point from short to medium term perspective.

Disclosure (SEBI Registration Number for Aashish Tater: INA300001206)

Stock Ownership - No

Stock traded in Last 30 days ( No trading or investment activities done) - No

Stock Recommended to Clients - Yes

Remuneration/Benefits received from company in 12 months - No

Merchant Banking Market Making activities / projects - No

Any arrangement with co. to affect the report write up - No