The Hindu Business Line : Godfrey Phillips: Hold

Though the company is in a non-cyclical consumer business, which is at a near-mature stage, its cigarette segment is likely to maintain a consistent 20 per cent earnings growth over the long term.

Besides, a healthy and sizeable investment book adds confidence to the stock.

Tobacco products

Godfrey Phillips has a strong presence in the northern and western markets. Threat from competition is low, as consumers tend to stick to brands. Restrictions on advertisements also work to the advantage of such large players as Godfrey Phillips.

To garner a larger share of the domestic market, the company launched a new brand and refrained from passing the higher excise duties to consumers.

However, with ban on smoking in public, the scope for volume growth may be limited.

Consecutive hikes in excise duty are also a dampener as consumers of low-end cigarettes are likely to move to other forms of tobacco consumption.

Godfrey Phillips in recent years has ramped up activity in the relatively untapped cigar segment. The company is among the larger players in this industry.

Although this product line contributes only marginally, it provides an additional stream of revenue.

Tea

The company also has a presence in the tea packaging industry. Godfrey Phillips has a small basket of brands, which it markets in certain pockets of the country.

Though the tea business contributes only about three per cent of its revenues, this division has been growing at about 15 per cent annually over a three-year period.

This division is a dampener to Godfrey Phillips' growth prospects as intense competition in the branded tea market hampers potential for a turnaround in the medium term.

Financials

The company, which is the second largest player in the domestic cigarette industry, operates on lower margins compared to its peers owing to its manufacturing tie-up model.

Profitability of its cigarettes division is, however, higher than that of its smaller peers at about 55 per cent.

The company, stranded for avenues to deploy its funds, disburses a chunk of its earnings.

At current levels the stock has a dividend yield of about two per cent, Godfrey Phillips is likely to maintain similar payouts in the medium term.

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