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Stock Note April 27, 2011

HDFC Sec Scrip code Industry CMP

(Rs.) Recommended

Action Averaging Price

Band (Rs.) Sequential

Targets (Rs.) Time

Horizon

GODPHIEQNR Cigarettes 1935.6 Buy at CMP & add on dips 1755-1835 2234 & 2394 2 quarters

Business Profile Incorporated in 1936, the K. K. Modi group promoted Godfrey Phillips India Ltd. (GPIL) is the second largest player in the Indian cigarette industry. The company owns some of the most popular cigarette brands in the country like Four Square, Red and White, Jaisalmer, Cavanders and Tipper. Over the years, GPIL has set its own benchmarks in innovation with revolutionary brands like Stellar, the first slim cigarette and I-gen, the first euro norm cigarette in India. The company’s products are distributed over an extensive India wide network of more than 500 distributors and 800,000 retail outlets. With the Corporate Office in Delhi, the Company has offices over 8 locations in India. GPIL has two major stakeholders, one of India's leading industrial houses - the K. K. Modi Group, which holds 46% stake and one of the world's largest tobacco companies, Philip Morris Inc, US, which holds 25%. Nationally, GPIL enjoys ~12-13% market share in cigarettes in terms of volume and 11-12% share in value. K. K. Modi Group The K. K. Modi Group is part of a US $ 2.4 bn Modi Enterprises that was founded by Rai Bahadur Gujarmal Modi in 1933. The group spans a diverse range of businesses’ which include agro-chemicals, tobacco, tea and beverages, education, entertainment, direct selling, network marketing and gourmet restaurants. These businesses further include steel, sugar, textiles, chemicals, tyres, computers, copiers, cosmetics, telecommunications, entertainment, homecare, pharmaceuticals and on line lottery. GPIL’s Partners Philip Morris Inc (PMI) Philip Morris Inc. joined hands with the K. K. Modi Group in 1979. Philip Morris, the owner of some of the world's most respected brands including Marlboro, is one of the largest shareholders in GPIL and has an agreement with the Company to provide technological services and assistance in all areas of business. In 1968 Philip Morris International Finance Corp, a wholly owned subsidiary of Philip Morris Inc., U.S.A. acquired full ownership of Godfrey Phillips Ltd., London, U.K., which was the Holding Company of Godfrey Phillips India Ltd. till the issue of shares to the Indian public during 1975. As a result of acquisition of Godfrey Phillips Ltd., London, U.K. as above, Philip Morris Inc. through its wholly owned subsidiary, Philip Morris International Finance Corporation became the Holding Company of GPIL. After the public issue in 1975, offer for sale to Indian public in 1979 and a rights issue in 1981 the shareholding of Philip Morris International Finance Corp in GPIL came down to 35.93% & further to 25% post the alliance of GPIL with Philip Morris. Altadis In December 2002, GPIL became the exclusive distributor for the brands of the world's largest cigar manufacturer, Altadis in India, Nepal and Sri Lanka. Altadis the world’s largest cigar manufacturer has three major areas of activity, which are blond and dark cigarettes, distribution and cigars. Blond and dark cigarettes are manufactured and marketed by the group itself, under well-established brand names in France and Spain. It is a market leader in its segment. Altadis's value-added logistical expertise in tobacco and consumer-product services is extended to retailers to new sectors. Altadis ranks 3rd in Western Europe in cigarettes and 1st in the world in cigars. Altadis group is the undisputed leader in three of the largest cigar markets namely United States, Spain and France. Some of the well known cigar brands of the Company are: Farias, Fleur de Savane, Phillies, Dutch Master, VegaFina, Pleiades, Don Diego, Longchamp, Antonioy Cleopatra, Santa Damiana, Meccarillos, Cruzeros, Montecristo, Partagás, Cohiba, La Gloria Cubana, H. Upmann, Picaduros, Ducados Mini, Van Holden, Entrefinos, Tampa Nugget, Hav-a-Tampa, Backwoods and yotras marcas. Subsidiary Companies: GPIL has four wholly owned subsidiaries namely International Tobacco Company Ltd, Chase Investments Ltd, City Leasing & Finance Co Ltd and Manhattan Credits Finance Ltd. These are direct subsidiaries. The other indirect subsidiaries include Kashyap Metal & Allied Industries Ltd (66.23%), Unique Space Developers Ltd. (66.67%), Gopal Krishna Infra & Real Estate Ltd. (66.67%) and Rajputana Infra Corp Ltd. (66.23%). All the direct & indirect subsidiaries have been incorporated in India. International Tobacco Company (which owns a plant at Guldhar, Ghaziabad) manufactures cigarettes on behalf of GPIL, which account for 57.6% of GPIL’s total sales quantity of cigarettes. GPIL pays manufacturing charges (Rs. 362.4 mn in FY10) to International Tobacco for manufacturing on its behalf, which is netted off in the consolidated accounts. None of the other subsidiaries have started generating the revenues.

Godfrey Phillips India Ltd. (GPIL) (CMP: Rs. 1935.6)

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Facilities: GPIL’s plants are situated at Andheri (Mumbai) and Baramati and the plant located at Guldhar (Ghaziabad) is owned by GPIL’s wholly owned subsidiary, International Tobacco Company Ltd. Product Profile: The company’s business can be categorized into two segments, i) Cigarettes & Tobacco products and ii) Tea & Related Products. The cigarettes & tobacco products segment accounts for 91.3% (in 9MFY11) of GPIL’s total revenue. The balance is contributed by diverse businesses like Tea, Confectionery, Chewing Products, Cosmetics and Retail (included under Tea & Related products). The table below gives a brief overview of GPIL’s businesses & its brands.

Product Category Brands Description Cigarettes Stellar It is India’s first slim cigarette. It has been specially engineered to deliver low

nicotine without a compromise in taste and flavor. Four Square This is GPIL’s flagship brand. GPIL has different brands in this category

namely; Four Square Kings, Four Square Lights, Four Square Premiums, Four Square Special Filter, Four Square Fine Blend, Four Square Rich Gold.

Red & White One of the most renowned brand names of the nation, it has been rated in the top 50 brands in the FMCG sector.

Jaisalmer A Premium King Size brand. It is a luxurious blend of finest sun dried Virginia tobaccos, which deliver a smooth mellow flavor.

Cavanders Filter variant of cavanders, which acts as an economical upgrade option to non-filter smokers.

Tipper Under the new excise regime, Tipper was introduced in the filter genre at an extremely affordable price.

North Pole North Pole is the largest selling menthol cigarette in India. Tea Symphony

Premium Teas A premium assortment of original brews and flavours is available in three variants, Assam Tea, Darjeeling Tea and Green Tea.

Super Cup A mid premium segment brand of Tea City is a blend from sprawling tea gardens of Assam which gives a full bodied brew. It is for them who like their tea ‘strong’. Super Cup comes in two formats: Leaf & Dust

Samovar Samovar Green tea is a special blend of pure long leaves. Super Cup Duet Along with strong granular CTC one can enjoy the aromatic Darjeeling tea,

which comes in a pouch inside. Utsav An economy brand that comes in leaf as Utsav Chai & dust variant as Utsav

Dust Chai. Rangoli It is an economy brand that comes in two variants to suit all taste palates –

Leaf and Dust. Chewing Products [Pan Masala]

Pan Vilas Launched in January 2010. Magnesium Carbonate-free pan masala which is compliant to the stringent requirements of PFA rules

Confectionery Funda Mint & Funda Goli

Funda Mint available in four flavours saunf fresh, double thanda, Kaccha Aam and Rasili Lychee. Funda Goli available in two flavours viz; Kaccha Aam & Rasili Lychee.

Cosmetics ColorBar ColorBar is a brand from USA and is marketed and distributed by ColorBar Cosmetics Pvt. Ltd., a part of the K. K Modi Group of Companies. The products have premium international formulation and the range consists of lip sticks, lip glosses, retractable lip liners, long stay lipsticks, kajal etc.

Retail 24X7 24X7 Stores are 24-hour convenience chain of stores located in the central areas of the city of Delhi offering wide variety of products and services to customers. Providing international shopping experience, the store stocks packaged foods & beverages, personal & home care items, has a pharmacy & other service counters where one can pay bills or courier documents.

Shareholding Pattern: (As on March 31, 2011)

Particulars No of Shares (In Mn) % Holding Institutions 0.01 0.10 Non Promoter Corporate Holding 0.12 1.15 FIIs 1.35 12.98 Promoters 7.39 71.06 Public & Others 1.53 14.71 Total 10.40 100.00

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Investment Rationale Cigarette business doing well despite the regulatory hurdles GPIL is the second largest player (after ITC) in the Indian cigarette industry. The company owns some of the most popular cigarette brands in the country like Four Square, Red and White, Jaisalmer, Cavanders and Tipper. Nationally, GPIL enjoys ~12-13% market share in cigarettes in terms of volume and 11-12% share in value. The business is a major growth driver for GPIL, accounting for 91.3% of its total net revenues (in 9MFY11). The company continues to channelize its efforts and resources towards consolidating its presence in existing markets & expanding in new markets in the eastern and southern regions, i.e. West Bengal and Tamil Nadu, and is confident of achieving the desired growth targets. GPIL constantly endeavours to benefit from inherent capabilities to introduce innovative products suited to customer preferences and its products in new markets have been widely appreciated by its consumers and trade partners. Leveraging the advancements in technology, Four Square introduced a Limited Edition Series in FY10 with an innovative pack design that had, for the first time in India, a complete tactile look and feel. In the eastern front, Four Square Fine Blend gained strong momentum post launch in FY09. Further, in FY10, GPIL launched Cavanders Gold and Cavanders Special. Cavanders Gold was launched in the existing markets whereas Cavanders Special was introduced in the new market of Tamil Nadu. Both these launches have been successful. Besides this, the company has also maintained its arrangement with Philip Morris [PMI] (alliance with PMI entered into in 2009) to manufacture and distribute several of their brands, including the iconic ‘Marlboro’ cigarette brand. It is available pan-India in about 65,000 retail outlets. The brand has seven variants including the newly launched ‘Marlboro Gold Advance’ & ‘Gold Advance Compact’ (GPIL launched Compact in May 2010 thus foraying into larger regular-filter market in May 2010). Escalating taxation and constraining regulations have continuously restricted the Cigarette Industry’s growth. On top of that, the Goods and Services Tax, expected to be implemented in 2011, would be an unfair ‘tax on tax’, as it is proposed to be levied ad-valorem, instead of on product cost net of excise duty. The increase in excise on cigarettes by 18% in the Union Budget FY11, coupled with rise in VAT to 20% in some States resulted in shifting consumer segments and affected costs. However, GPIL has successfully responded by reiterating collective representation, product customization, diversification and geographical expansion. Despite the influence of various environmental factors, GPIL has maintained its growth momentum. The company has been able to generate robust revenue streams over the years despite onerous tax structure. Also the government ban on smoking in public and pictorial warnings on the cigarette pack in the recent past has shown a minimal impact on the cigarette revenues of the company. Over the last four years, GPIL’s domestic cigarettes sales have grown at a CAGR of 13.2%.

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Future growth in cigarettes is dependent on future income growth of the population at large. A large portion of India is set to emerge from “Deprived” and “Aspirers” to the “Seekers” and “Strivers” class in the next twenty years, raising the number of potential cigarette smokers, as consumers switch from bidis to cigarettes. While we do not expect an inspiring growth in the cigarettes business on the back of higher tax incidence and regulatory hurdles like ban on cigarettes advertising, government ban on smoking in public and pictorial warnings on the cigarette pack, the structural shifts in the Indian economy of rising disposable income, improvements in standard of living, rising urbanisation and aspiration needs will lead to a decent rise in consumption of cigarettes over the next few years. Further the compulsion of pictoral warnings on the cigarette packets have

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had / likely to have a minimal impact on the sales volumes largely due to India having significant sales of single stick purchases of cigarettes and also because smoking is an addiction and not easy to quit. Being one of the leading players in the Indian cigarettes industry, GPIL is expected to benefit from the expected rise in the consumption of cigarettes in India. Moreover, the addition of PMI’s Marlboro to its cigarettes portfolio is expected to further boost its turnover. The Marlboro portfolio has seen a steady growth of over 30% since the strategic alliance with PMI. We expect GPIL’s overall cigarettes sales to grow at a decent rate going forward. Leveraging its position by diversifying into other business In order to reduce its dependency on its highly Government regulated cigarettes business, GPIL has been leveraging its position by diversifying into other businesses like Tea, Confectionery, Cosmetics, Retail and Chewing products. All these businesses are classified under the segment “Tea & Related Products”. The segment accounts for 8.6% to GPIL’s total net revenue (in FY10; 8.7% in 9MFY11) and has grown at a CAGR of 23.2% over FY05-10. The tea business has been a major contributor to the segment’s revenues. The company has some of the well-known tea brands in its portfolio like Symphony Premium Teas, Super Cup, Samovar, Super Cup Duet, Utsav and Rangoli. The tea segment has been marked with continuous growth, riding on the overall corporate strategy of consolidation and expansion along with new portfolio development and product innovations. The business saw several new initiatives and remarkable growth in FY10. Tea City (original brand launch) continued its progression in portfolio development, brand launches, packaging makeovers and format introductions in FY10 too. The domestic business sustained the trend with a volume growth of 7.8% at 6,271 tons (as compared to 5,815 tons in FY09) and value growth of 30% at Rs. 950 mn (as compared to Rs. 730.7 mn in FY09), ahead of overall industry performance. Retail audit (AC Nielsen) figures place Tea City in the top 10 national packaged brands and it has been rated in the top 5 contributing players in modern trade. In FY10, GPIL launched Super Cup Duet, an extension of Super Cup, in a new avatar of premix of granular and Darjeeling tea leaves. Clutter breaking festive packs in Samovar for Eid and Super Cup for Pongal were introduced. All these developments and continued initiatives led to a positive growth of all portfolio segments. The company plans to increase its tea business four-fold in Gujarat aiming to increase consumption of its “Super Cup” brand products. GPIL also has presence in the cosmetics (Color Bar brand) & confectionery category (Funda Mint & Funda Goli brands). With its strong distribution strength in the paan plus channel and impactful brand building initiatives, Funda Mint has achieved a decent share of the paan plus channel over the last two years. Buoyed by Funda Mint’s success, GPIL also entered into the hard-boiled confectionery market with the launch of Funda Goli, in ‘Kaccha Aam’ and ‘Rasili Lychee’ flavours. GPIL diversified into retail segment a few years back with the launch of Twenty Four Seven Stores. Open round-the-clock selectively, these convenience stores serve as a one-stop destination that offers a variety of products and services, including groceries, ready-to-eat world cuisine, wide assortment of beverages, pharmaceuticals, cosmetics and personal care, music and movies, magazines, domestic and international courier services, kodak instant photo development, credit card and utility bills payment, prepaid mobile phone recharge facility, movie tickets etc. The stores, currently located in the central areas of Delhi, have already found wide acceptance. The company has plans to expand this business over the next few years. With a view to achieve its growth objectives, GPIL entered into Chewing Products category in Jan 2010 with the launch of Pan Masala brand “Pan Vilas”. The brand was test launched in four towns of Jaipur, Ahmedabad, Indore and Meerut in Q4FY10. This new entrant, which is targeted at the discerning premium pan masala consumer, will make GPIL the biggest player to penetrate into the pan masala category. This brand has set the benchmark for the Pan Masala Industry in many ways. Firstly, it is free of Magnesium Carbonate, a banned substance and replaces the same with a natural alternate and it is India’s first pan masala, which is made fully compliant with the stringent requirements of PFA (Prevention of Food Adulteration) rules. Secondly, it is manufactured in a state-of-the-art plant setup at Baramati, near Pune, which employs some of the world’s best food processing technologies - imported multi-stage cleaning unit which removes finest of impurities, cutting edge Supari roasting unit which ensures uniform crispness of supari and high speed packaging machines. Finally, the sales and marketing strategies are based on in-depth consumer, competitor and trade understanding, which has raised the bar in the manner this category has been traditionally marketed. The success in meeting the strict test launch metrics and the overwhelming response to Pan Vilas from both consumers and trade has given GPIL the confidence for a national rollout in 2010-11. At present, the Indian chewing tobacco industry is estimated to be EUR 2.92 bn (~Rs. 189 bn), which consists of three categories, namely, pan masala, zarda and gutka. The premium chewing industry is ~20-25% out of which the premium pan masala market is estimated to be ~50% (of 20-25%). GPIL aims to leverage its sales and distribution network of cigarette category for the pan masala business through 8 lacs retail centers. The company is planning to invest Rs. 1-1.25 bn over the next three years for the aggressive marketing of the product and aims to corner 5% share of the premium pan masala market in one to two years of its launch. GPIL is also planning to launch zarda product in 2011 to synergise its Pan Vilas brand. We expect the chewing products category to generate decent revenue for GPIL going forward. As per the company, the category is expected to break even in the next three years. While the tea & related products segment’s revenues have grown at a robust rate over FY05-10, the segment has struggled on the profitability front and has not yet achieved a break even level. GPIL is posting losses for quite some years, which is a

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cause of concern. This could be due to higher ad spends being incurred to scale up the business size rapidly. While we expect the segment to continue to report robust turnover growth, it could take some more time to breakeven. While the timing of the same is uncertain, once the segment starts adding to the bottomline, GPIL margins could improve significantly. The company is looking at making its tea and Pan Vilas products the new growth drivers going forward. Alliance with PMI has helped to have an access to the flagship brand “Marlboro” and PMI’s technology GPIL has an arrangement with Philip Morris Inc (PMI), US [alliance entered into somewhere in April 2009] to manufacture and distribute their brands, including the iconic Marlboro brand of cigarettes. In 2003, PMI had launched Marlboro, its largest selling cigarette brand, in India on its own, through an arrangement with a local distributor, Barakat Foods & Tobacco (BFT). Philip Morris directly imported the product, which was then distributed by BFT under a non-exclusive agreement. The company wanted to retain control over its flagship brand (Marlboro) due to which PMI sidelined its partner GPIL and formed an alliance with BFT for distributing its Marlboro brand in India. This alliance between the PMI and BFT had created a rift between the PMI and GPIL, which was affecting both the companies. However, in 2009, PMI and its Indian JV partner, the KK Modi group settled their dispute over the sale of Marlboro cigarettes in India, which we feel is a tactical retreat by both companies keen on gaining market share. As per the current alliance between GPIL & PMI, GPIL has taken up manufacturing, distribution and sales of Marlboro while PMI has kept the marketing duties. We feel there are two main reasons behind the stepping down of PMI and forming a cordial alliance with GPIL viz; i) The Union health ministry’s push for certain curbs on cigarette imports. Under current regulation, cigarettes can be imported but companies pay substantial import duties. Manufacturing in India will help PMI save costs and give it GPIL’s sales and distribution network, which will help Marlboro to gain the desired market share; ii) The second reason accounts for the smuggled cigarettes, which are making entry in India, especially Marlboro. GPIL would provide cushion to PMI from all these factors, which entails the breaking of the ice between two partners. GPIL manufactures the brand in India by utilizing idle capacity at its plants in Mumbai and Ghaziabad and pays royalty to PMI for using the manufacturing technologies. PMI and K.K Modi group were earlier having 36% share each in GPIL. However, post the new alliance, K.K Modi holds 46% in GPIL & PMI holds 25%. The brand has given GPIL an access to PMI’s technology & has added to GPIL’s portfolio a high-end brand with strong consumer pull, which it always lacked. The brand is available at selected cities in India in approximately 65,000 retail outlets and has 7 variants including the recently launched Marlboro Gold Advance and Gold Advance Compact. The Marlboro portfolio has seen a growth rate of over 30% since the strategic alliance. With the expansion of retail outlets and launch of new variants, we expect this brand to continue to grow at a decent rate over the next few years, which would boost GPIL’s revenues & profits. Strengthening its presence in the export market Striving towards its vision to become a leading tobacco player in India and beyond, GPIL is fast strengthening its presence in the export markets with successful new business ventures. Today, GPIL is partnering with some of the top most players in the international tobacco industry in marketing their products and providing various professional and expert services, which include contract manufacturing, consultancy services, cut tobacco and smoke analysis. Already present in the Middle East, West Africa, South East Africa and South East Asia, GPIL wishes to strengthen its position as an international player by entering new markets. In FY10, the company’s international division also opened five new markets in East Europe, Australia, South America and Central America adding to their significant areas of operations. The table below gives an overview of GPIL’s export performance since FY08:

(Rs. in Mn) Commodity / Product FY08 FY09 VAR [%] FY10 VAR [%]

Cigarette 222.7 387.5 74.0 711.5 83.6Unmanufactured Tobacco 688.3 1667.1 142.2 2068.6 24.1Cut Tobacco 206.2 305.8 48.3 337.6 10.4Tea 57.2 83.5 46.0 34 -59.3Total Exports 1174.4 2443.9 108.1 3151.7 29.0 The noticeable improvement in the Company’s export performance over FY08-10 is visible from the above table. Proactive measures and various initiatives to boost export performance have been yielding encouraging results. The unmanufactured tobacco, which accounts for a major portion of GPIL’s exports (65.6% in FY10) has grown at a robust rate over the last two years. Even cigarette exports have done well. While the cut tobacco exports growth has moderated, the tea exports declined in FY10.

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For cigarette and cut tobacco exports, GPIL is actively looking at new markets and has recruited new managers for prospecting business in new geographies. Apart from continuous focus on CIS and Russian Federation, efforts are on to increase number of markets. The major regions where GPIL is currently exporting include South East Asia, Africa, Middle East and Latin America. For unmanufactured tobacco exports, the measures taken by GPIL include broadening the customer base and opening of new markets for direct exports in Middle East and Europe. Decline in the tea exports in FY10 was mainly on account of loss of business in Kazakhstan due to their Government raising import duty on packet tea rendering the imports unviable. Efforts are being made to forge new international contacts, attain cost and quality efficiencies and meet Multi Original Blend Standard requirements of International Buyers. The exports have grown at a CAGR of 41% over FY07-10. The company currently exports the cigarettes and tobacco to more than 20 countries and it has plans to increase the number to 30 by 2011-12. With these significant efforts to expand the overseas reach, we expect the exports business to grow at a robust rate going forward. Capacity Expansion to boost the revenues GPIL is setting up a new unit in Rabale with a capacity of 65-mn cigarettes/day. The facility was expected to be operational in Q3FY11. However, till now, no announcement has been made regarding the commencement of the operations. Work is also on for setting up a state-of-the-art cigarette manufacturing facility at Thane in Maharashtra having a capacity of manufacturing 1.5 bn sticks per month (investment estimated to be Rs. 2 bn). The robust and vast manufacturing and marketing base is expected to throw open growth opportunities for GPIL in times to come. We expect the capacity expansions to boost GPIL’s revenues & profits going forward. Decent growth expected in Topline, Margins to improve GPIL’s net sales have grown at a CAGR of 21.5% over FY07-10, largely driven by robust performance from both cigarettes and other businesses like Tea, Cosmetics, Confectionery & Retail. The company also benefited from the incremental revenues generated from sale of Marlboro brand in FY10. In FY10, the cigarettes sales increased by 12.6% in value terms & 7.7% in volume terms. However, in 9MFY11, the net sales growth (in value terms) slowed down to 10.8% (Cigarettes & Tobacco products grew by 10.9%, while Tea & Related Products grew by 14.7%) largely on the back of substantial hike in the excise duty on cigarettes imposed by the Government in Union Budget 2011 (on an avg. 18% rise). Also the gross sales grew by 15.2% in 9MFY11 (which was lower than last three years CAGR growth). The growth could have been much lower than this, but for better Q3FY11 results, wherein the gross & net sales grew by 21.9% & 21.5% respectively. Since there was no hike in the excise duty on cigarettes in Union Budget 2011-12, we expect decent volume growth in Q4FY11 & FY12. We expect GPIL’s net sales to grow at a CAGR of 12.9% over FY10-12. The growth would be slower than 3 year CAGR growth reported over FY07-10 mainly on the back of elevated base. PMI’s Marlboro brand would continue to do well. Tea & Related products segment is also expected to do well on the back of decent revenues expected from its businesses like Tea, Confectionery, Cosmetics & Retail. Further, the new category Chewing Products is also expected to do well going forward. The chart below gives an overview of GPIL’s net sales since FY08 along with our future projections:

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GPIL operating profit & PAT have grown at a CAGR of 6.2% & 9% respectively over FY07-10. OPM fell from 16.3% in FY08 to 11% in FY10, while PAT fell from 13.8% in FY08 to 8.3% in FY10. Decline in the operating margins was on the back of higher material cost. This coupled with higher depreciation expense pulled down the PAT margins. However over FY10-12, we expect the margins to improve on the back of significant decline expected in the material cost as a % to net sales, since we expect the contribution from high end cigarettes & high margin Marlboro brand to increase. Also we expect the losses of non-cigarette businesses to reduce (in Q3FY11, the non-cigarette business reported positive PBIT of Rs. 1.7 mn vs. loss of Rs. 4.6 mn in Q3FY10). Also it should be noted that the amount of traded goods (purchase for resale) have declined by 45.1% in 9MFY11 (over 9MFY10) and that has also contributed to significant expansion in GPIL’s operating margins, which have improved from 11.6% in 9MFY10 to 13.4% in 9MFY11. The focus seems to be shifting from trading to manufacturing, which fetches higher margins. OPM is expected to improve to 13.6% in FY11 & further to 14.8% in FY12. We feel that 18.2% OPM delivered by GPIL in Q2FY11 was exceptionally high and is unlikely to sustain in the coming quarters. Operating profit is expected to grow at a CAGR of 30.6% over FY10-12. Further we don’t expect a very significant jump in depreciation cost over the next two years. This coupled with higher OPM is likely to improve the PAT margins to 8.9% in FY11 & 9.4% in FY12. PAT is expected to grow at a CAGR of 20.1% over FY10-12. The charts below give an overview of GPIL’s operating profit & PAT growth since FY08 along with our future projections:

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Recent organizational restructuring could lead to faster decision-making and better valuations KK Modi Group, on April 15, 2011, announced an organizational restructuring with the setting up of a family council to ensure promoter interests in its businesses while roping in ex-IOC Chairman Sarthak Behuria to steer the corporate functioning. The move is part of its strategy to become a $5bn group in terms of market capitalisation in the next 5 years to be fuelled by growth in domestic & global markets. After the re-organisation, there will be three major governance bodies to help manage the group & promoters interests, Corporate Management Council (CMC), Corporate Executive Committee (CEC) & Family Council. The CMC will be the apex decision-making body for the group and will be chaired by KK Modi. His wife Bina Modi will lead the family council, while Behuria will be leading the CEC. The CMC will act as a forum to make strategic business decisions pertaining to the group, in consultation with other promoters. The CEC under the stewardship of Behuria will be responsible for driving the group's portfolio strategy, support growth aspirations of the various operating companies. It will also work to make transformational moves and accelerate GPIL’s international expansion via organic and inorganic means. This organisational restructuring could lead to faster decision-making and GPIL could get better valuations going forward. Industry Outlook TOBACCO INDUSTRY The Economic Survey 2009-10 indicated that with growth in private expenditure on food, beverages and tobacco falling behind the overall growth in private consumption expenditure, the share of expenditure on food items has gradually been declining over the years. As per the CSO (Central Statistical Organisation) data, the share of private expenditure on food, beverages and tobacco was 35.3% (2008-09) of the total private consumption. This is a decline from 39.6% in 2004-05. After registering a growth of around 14% annually in the eight-year period ending 2008-09, the category of beverages and tobacco products experienced a decline of 2.2% in 2009-10 (Apr-Nov). Cigarette production has not shown any significant growth since 2007-08. The cigarette industry continues to reel under burdensome taxation and an increasingly restrictive regulatory environment.

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Impact of Taxation Union Budget 2010-11 increased excise duties on cigarettes by about 18%, further pressurizing volume growth, affecting product pricing and impacting consumer behaviour. The continuously rising taxes are resulting in a shift in cigarette consumption to cheaper alternatives that have higher tar/nicotine levels. Coupled with the existing rise in VAT on cigarettes from 12.5% to 20% in state budgets, this was another discriminatory blow for the cigarette segment. Excise Duties on cigarettes since Union Budget FY03:

Rs. / 1000 sticks FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 75-85MM 1450 1450 1450 1595 1675 1759 1759 1759 1959 70-75MM 1090 1090 1090 1200 1260 1323 1323 1323 1473 <70MM 670 670 670 740 780 819 819 819 969 Non-Filter 60MM-70MM 450 450 450 495 520 546 1323 1323 1495 <60MM 135 135 135 150 160 168 819 819 669

Due to various issues remaining unresolved amongst various stakeholders, the earlier deadline of April 01, 2010 for GST implementation got extended to April 01, 2011 & now stands postponed till next year. The Empowered Committee of State Finance Ministers continues consultations on compensation to states, subsumation of state taxes, Constitutional amendments and model legislation for GST, amongst other issues. The Industry continues to interact with and impress upon policymakers the need for a rational and stable taxation structure, keeping in view the need to bridge the large differential in tax rates between cigarettes and other tobacco products. The Specific Duty structure for cigarettes has proven to be extremely beneficial and superior to the earlier ad-valorem structure and should be continued. GST on cigarettes is seen by the Industry largely as a ‘tax on tax’ and is recommended to be levied on ‘value’ net of taxes. The Industry continues to address all challenges by competitive strategies based on on-the-ground insights, detailed consumer interface and product innovation. Meanwhile one positive thing what happened in Union Budget 2011-12 was that there was no further hike in excise duty on cigarettes. This has provided huge relief to the cigarette companies. Regulatory Environment The Industry continues to be inundated with restrictive regulations. The present graphic health warnings on tobacco packages have become more impactful. The increasing influence of international guidelines pertaining to trade barriers, products, packaging and other related restrictions may present fresh challenges for the domestic cigarette industry. The Industry has faced ground-level issues regarding interpretation and enforcement of COTPA (Cigarettes & Other Tobacco Products Act) Rules, prompting successful representations for greater awareness of regulatory updates amongst implementation authorities. On its part, the Industry along with various stakeholders, is cohesively working towards generating momentum towards addressing related issues by engaging regulatory authorities at various levels and highlighting its self-regulated practices, law abiding and responsible behaviour. Despite higher taxation & regulatory hurdles, cigarette consumption in India could grow at a decent rate Future growth in cigarettes is dependent on future income. A large portion of India is set to emerge from “Deprived” and “Aspirers” to the “Seekers” and “Strivers” class in the next twenty years, raising the number of potential cigarette smokers, as consumers switch from bidis to cigarettes. While we do not expect an inspiring growth in the cigarettes business on the back of higher tax incidence and regulatory hurdles like ban on cigarettes advertising, government ban on smoking in public and pictorial warnings on the cigarette pack, the structural shifts in the Indian economy of rising disposable income, improvements in standard of living, rising urbanisation and aspiration needs will lead to a decent rise in consumption of cigarettes over the next few years. Further, in the past it has been proved that the imposition of smoking ban in public places by the Indian government has not affected the cigarette volume significantly and the impact has been only in the short to medium term. Moreover, the compulsion of pictoral warnings on the cigarette packets have also had minimal impact on the sales volumes mainly because of two reasons i) Firstly, India has significant sales of single stick purchases of cigarettes, which reduces the impact of these pictorial warnings as many smokers never actually see them; ii) Secondly, it is very difficult to quit smoking, as it is an addiction and even though people are aware about the pictoral warning they generally don’t care about it.

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Competitive Profile: In the cigarettes business, which accounts for 91.3% to GPIL’s total revenues, GPIL faces stiff competition from other established Indian cigarette players like ITC, VST & GTC. At CMP, GPIL trades at 14.4xFY11E EPS & 12.1xFY12E EPS, which is at a huge discount to ITC and at a marginal discount to VST. The discount to ITC could be justified due to GPIL’s relatively much smaller business size & market share and lower operating & PAT margins as compared to ITC. Further ITC’s dependence on cigarettes is lower, as the business accounts for ~43% to the total revenue. ITC has presence in other businesses like FMCG, Hotels, Paper Board & Packaging & Agri Business, which are not prone to frequent Government intervention. However, GPIL deserves to trade at a premium to VST due to GPIL’s relatively higher market share, lower tobacco leaf sales (which is volatile) and larger distribution network. GPIL used to trade at a premium to VST earlier but recently, the premium shrunk due to 45% rise in the stock price of VST Inds over the past three weeks. Further, GPIL also faces competition from other multinational cigarettes / tobacco players like British American Tobacco, Imperial Tobacco, Swedish Match, Reynolds American, Altria Group etc. GPIL trades at a discount to some of the global peers on TTM basis (GPIL’s PE: 16.2x TTM EPS; Global peers: Trading in the range of 13-18x TTM EPS) GPIL’s business model is very sound. The company has been able to generate robust revenue streams over the years despite onerous tax structure. Also the government ban on smoking in public and pictorial warnings on the cigarette pack in the recent past has shown a minimal impact on the cigarettes revenue of the company. Further considering its wide distribution network, strengthening overseas presence, diversification into other segments like Tea, Cosmetics, Chewing Products, Confectionery and Retail and access to high margin flagship brand “Marlboro” to its high-end cigarettes brand post the alliance with PMI, we feel that GPIL deserves to trade at higher valuations going forward. Further the Indian market offers better scope in terms of likely increase in cigarettes volume growth due to demographic factors and also due to the absence of consumer litigation in India. This makes us believe that GPIL should trade at a premium to all its global cigarette peers going forward. Peer Comparison: FY10:

Company Name FY10

OPM (%)

NPM (%)

EPS (Rs.) PE (x)

Net Sales(Rs. in Mn) Mkcap/Sales (x)

Book Value(Rs.)

P / BV(x)

ITC 33.5 22.4 5.3 36.2 181531.9 8.1 19.1 10.0VST 16.4 13.1 40.2 22.4 4721.7 2.9 162.5 5.5Godfrey Phillips 11.0 8.3 110.6 17.5 13838.7 1.5 655.2 3.1

(Company, HDFC Sec) FY11E:

Company Name FY11E

OPM (%)

NPM (%)

EPS (Rs.) PE (x)

Net Sales(Rs. in Mn) Mkcap/Sales (x)

Book Value(Rs.)

P / BV(x)

ITC 34.7 24.0 6.4 30.0 211937.2 7.0 22.3 8.6VST (Actual) 23.6 16.4 61.6 14.6 5784.3 2.4 159.5 5.6Godfrey Phillips 13.6 8.9 134.3 14.4 15658.2 1.3 760.2 2.5

(Consensus, HDFC Sec Estimates) FY10 Comparison of Cigarette business (Sales, PBIT & Capital Employed) with ITC’s cigarette segment:

Cigarette Business (Rs. in Mn) GPIL ITC Net Sales 12869.0 93211.5 PBIT 1414.6 49381.2 PBIT Margin 11.0% 53% Capital Employed 5631.7 30765.5

(Company)

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Risks and concerns The cigarette industry is regulated by high excise duties and multiple state taxes accompanied with a ban and restriction on

promotions and consumption of cigarettes, limiting the growth of the industry. GPIL, along with other cigarette manufacturers are vulnerable to these regulatory changes. After ~18% hike in excise in Union Budget FY11, the Government left the excise rates unchanged in FY12 Union Budget, which has provided huge relief to the cigarette manufacturers. However, significant hikes in excise and other taxes like VAT going forward could pose a negative effect on GPIL’s volumes & margins. In order to reduce its dependence on Cigarettes business, which is largely Government regulated, GPIL diversified into

other businesses like tea, confectionary & cosmetics. However, these businesses (in totality) have not yet achieved a break even level. GPIL is posting losses for quite sometime, which is a cause of concerns as it could impact its profitability. Average trading volume of the company in BSE and NSE is very low, which can create hurdles for the trader to exit from the

stock once the stock starts correcting. GPIL’s exports account for 22.9% of its total net sales (in FY10). The company is also looking to strengthen its overseas

presence, which is likely to increase the exports share going forward. Further, the company imports only 10.2% of its input requirements, which takes care of just 2.7% of its net sales. Hence any significant rupee appreciation could impact GPIL’s realisations and margins going forward. It should be noted that the PAT growth of 6% in FY10 included forex gain of Rs. 121 mn. In FY09, the company had incurred a forex loss of Rs. 278 mn. Cigarette industry is highly competitive, with players vying to increase market share. GPIL faces stiff competition from other

established Indian cigarette players like ITC & VST. Further, it also faces competition from international cigarettes & tobacco players like British American Tobacco, Imperial Tobacco, Swedish Match, Reynolds American, Altria Group etc. To remain in competition with domestic & global players, the company will have to continue to launch new brands and constantly expand its distribution network. GPIL does not have a steady & consistent operating margins. Over the last few quarters there has been a very wide

variation in its margins (OPM - Q3FY10: 10.8%, Q4FY10: 6.5%, Q1FY11: 8.8%, Q2FY11: 18.2% & Q3FY11: 13.1%), which makes it difficult to make future projections. Recently in March 2011, the Supreme Court banned the sale of tobacco, gutka & pan masala in plastic pouches from March

01, 2011. While this could impact GPIL’s production & sales of pan masala (in Chewing Products category) in near term until the company is ready with new packaging, the non-availability of chewing tobacco products could indirectly encourage more smoking of cigarettes, thus boosting its cigarettes business. Cigarette manufacturers (including GPIL) had stopped production of cigarettes on December 1, in view of uncertainty over

the sort of pictorial warnings that needed to be carried on tobacco products. Nearly one month's stock of cigarettes was available and hence there was no supply disruption or a price rise. The production was resumed on Dec 20 after getting directions from the government on what kind of pictorial warnings should be displayed on the packets. The Union Cabinet has decided to retain the current pictorial warnings for one more year, after which it will be reviewed in December 2011. The existing pictorial warnings, a scorpion on bidi packs and a cancer affected lung on cigarette packs, were to be replaced by a cancer-affected mouth, from December 1 after a notification by the Ministry of Health and Family Welfare in May 2010. While this concern has been abated for an year, such event in future could affect the financial performance of GPIL. On a consolidated basis, GPIL incurred a loss of Rs. 49.6 mn in FY10 pertaining to Loss of its Associate company “IPM

India Wholesale Trading Pvt. Ltd.” (became an associate in FY10, cost of investment Rs. 49.6 mn, GPIL’s stake in the company is 24.8%). The amount was debited to P&L, restricted to the cost of original investment. This is a cause of concern since if IPM continues to incur losses going forward, then it could restrict the expansion of GPIL’s consolidated PAT margins going forward. If we exclude the loss of Rs. 49.6 mn, then GPIL’s PAT margins would have been 8.7%, instead of 8.3%, an increase of 40 bps Y-o-Y.

Q3FY11 Result Update: (Standalone) Quarterly Y-o-Y: GPIL’s net sales grew by 21.5% to Rs. 4169.3 mn [Q3FY10: Rs. 3430.7 mn], mainly driven by strong performance from

cigarettes and tobacco products business divisions, which grew by 21.8% Y-o-Y during the quarter. The division contributed 90.6% to GPIL’s net revenues. Tea and other retail products also reported robust growth of 24.5% Y-o-Y. Operating profit rose significantly by 47.7% to Rs. 545.6 mn [Q3FY10: Rs. 369.3 mn], while the OPM improved by 233 bps

Y-o-Y to 13.1%, mainly due to relatively lower growth in the material costs (up marginally by 4.6% Y-o-Y). The Material Cost as a % to net sales fell from 45.5% in Q3FY10 to 39.2% in Q3FY11. Other expenses rose 18.1% Y-o-Y, while employee cost increased by 32.4% Y-o-Y. However, selling & admin expenses jumped up by 57% Y-o-Y (up from 13.5% in Q3FY10 to 17.5% in Q3FY11 as a % to net sales), which restricted further margin expansion. Though interest cost & tax expense increased by 54.3% & 48.3% Y-o-Y respectively, this was offset by higher other

operating income (up 61.7% Y-o-Y) & decline in the depreciation cost (down 1.5% Y-o-Y). PAT grew by 51.8% Y-o-Y to Rs. 375.5 mn [Q3FY10: Rs. 247.4 mn]. PAT margins improved by 180 bps Y-o-Y to 9%. The EPS for the quarter stood at Rs. 36.1 vs. Rs. 23.8 in Q3FY10.

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Q-o-Q: Sequentially, the results were decent on revenue front, but disappointing in terms of profitability. Net Sales grew by 12.8%,

mainly on the back of decent growth reported by Cigarettes & Tobacco segment (up 12.2% Q-o-Q). Even Tea & Related products segment reported healthy sequential growth of 18.3%. However, operating profit declined by 18.9%, while the OPM fell by 512 bps Q-o-Q from 18.2% in Q2FY11 mainly on the

back of higher material cost & selling & admin expenses, which rose 26.6% & 39.2% respectively. Decline in the other income (down 35.3% Q-o-Q) put further pressure on PAT, which fell by 24%. PAT margins fell by 437

bps Q-o-Q from 13.4% in Q2FY11. Conclusion & Recommendation: We expect GPIL’s net sales & PAT to grow at a CAGR of 12.9% & 20.1% respectively over FY10-12. Despite regulatory hurdles like pictoral warnings, ban on smoking in public places and burdensome tax structure, the company has maintained its growth momentum in cigarettes business. This is evident from the fact that GPIL’s domestic cigarettes sales have grown at a CAGR of 13.2% over FY06-10. The company has successfully responded by reiterating collective representation, product customization, diversification and geographical expansion. We feel that going forward, pictoral warnings are unlikely to impact cigarette volumes. Further, cigarettes demand being largely inelastic, GPIL would not find it very difficult to pass on the excise hikes to the consumers and the impact on volumes could be only for short term. Further, in Union Budget FY12, there was no hike in excise duty on cigarettes, which is a positive thing & could improve the cigarette volumes in FY12. The alliance with PMI has enabled GPIL to have an access to the flagship brand “Marlboro” and PMI’s technology. The Marlboro portfolio has seen a growth rate of over 30% since this strategic arrangement. With the expansion of retail outlets and launch of new variants, we expect this brand to continue to grow at a decent rate over the next few years, which would boost GPIL’s revenues & profits. To reduce its dependance on cigarettes business, which is largely government regulated, GPIL has diversified into other business like Tea, Cosmetics, Confectionery, and Retail. The company has also forayed into Chewing products category by launching Pan Masala brand ‘Pan Vilas’. GPL is scaling up these businesses rapidly by making huge investments and expects Tea and Pan Vilas products to be the new growth drivers over the next few years. While we expect the topline of other businesses to grow at a robust pace, they could take some more time to breakeven. While the timing of the same is uncertain, once the segment starts adding to the bottomline, GPIL’s margins could improve significantly. It should be noted that in Q3FY11, the non-cigarette business reported positive PBIT of Rs. 1.7 mn vs. loss of Rs. 4.6 mn in Q3FY10. However, it would be too early to comment on whether the business has started to breakeven. Exports have grown at a CAGR of 41% over FY07-10 and with the significant efforts of GPIL to expand the overseas reach, we expect the exports business to grow at a robust rate going forward. We expect the margins to improve on the back of lower raw material cost as a % to net sales over the next two years. This is mainly because of GPIL’s increasing focus on mid to high-end cigarette brands and foray into larger regular filter market. At CMP, GPIL trades at 14.4xFY11E & 12.1xFY12E EPS, which is at a huge discount to ITC and at a marginal discount to VST. Further GPIL trades at a discount to some of its global peers like British American Tobacco, Imperial Tobacco, Swedish Match, Reynolds American, Altria Group etc on TTM basis (GPIL’s PE: 16.2x TTM EPS; Global peers: Trading in the range of 13-18x TTM EPS). Considering its sound business model, its ability to generate strong cash flows in cigarettes despite regulatory hurdles & high tax burden and diversification into new business, which are not prone to government intervention, we feel that GPIL deserves to trade at better valuations. Further the Indian market offers better scope in terms of likely increase in cigarettes volume growth due to demographic factors and also due to the absence of consumer litigation in India. This makes us believe that GPIL should trade at a premium to its global cigarette peers going forward. The company has been able to generate strong cash flows (PAT + Depreciation) of around Rs. 1.4-1.5 bn p.a. over the last three years and is expected to improve it going forward. The company’s cash earnings per share in FY10 stood at Rs. 146.8 and is expected to increase to Rs. 184.7 in FY11 & Rs. 212.2 in FY12. GPIL also has encouraging return ratios (FY10: ROCE - 22.2%, ROE - 17.6%), which are expected to improve steadily going forward. We expect ROCE & ROE to improve to 23.6% & 18.6% respectively by FY12. Moreover, GPIL’s Market Cap / Sales for FY11E & FY12E stand at 1.3x & 1.1x, which further makes the valuation attractive. We feel that GPIL could trade at 14-15xFY12E EPS, which gives us sequential price targets of Rs. 2234 & 2394. We recommend investors to buy this scrip at current levels and add it on dips in the price band of Rs. 1755-1835 (11-11.5xFY12E EPS) for the above mentioned price targets over the next two quarters.

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Quarterly Financial Performance: (Standalone) (Rs. In Million)

Particulars Q3FY11 Q3FY10 VAR [%] Q2FY11 VAR [%] (Q-o-Q) Q1FY11 Q4FY10

Net Sales 4169.3 3430.7 21.5 3694.7 12.8 3580.2 3505.9Other Operating Income 77.6 48.0 61.7 73.1 6.2 91.0 67.0Other Income 54.4 65.3 -16.7 84.1 -35.3 26.7 23.8Total Income 4301.3 3544.0 21.4 3851.9 11.7 3697.9 3596.7Total Expenditure 3623.7 3061.4 18.4 3021.8 19.9 3266.3 3278.0Raw Material Consumed 1094.3 938.3 16.6 1086.4 0.7 1084.5 942.9Stock Adjustment 72.6 -39.1 -285.7 -144.1 -150.4 9.7 2.8Purchase of Finished Goods 466.3 661.9 -29.6 347.3 34.3 415.4 744.0Employee Expenses 342.3 258.6 32.4 344.7 -0.7 329.0 232.4Selling & Administrative Expenses 731.5 465.8 57.0 525.4 39.2 589.3 599.0Provisions & Write Offs 0 0.0 - 65.0 -100.0 66.7 0.0Other Expenses 916.7 775.9 18.1 797.1 15.0 771.7 756.9PBIDT 677.6 482.6 40.4 830.1 -18.4 431.6 318.7Interest 27 17.5 54.3 25.9 4.2 19.7 15.1Depreciation 94.6 96.0 -1.5 98.9 -4.3 83.5 91.7PBT 556.0 369.1 50.6 705.3 -21.2 328.4 211.9Tax (DT & FBT) 180.5 121.7 48.3 211.0 -14.5 101.1 69.1Reported Profit After Tax 375.5 247.4 51.8 494.3 -24.0 227.3 142.8EPS (Rs.) 36.1 23.8 51.8 47.5 -24.0 21.9 13.7Equity 104 104.0 0.0 104.0 0.0 104.0 104.0Face Value 10 10.0 0.0 10.0 0.0 10.0 10.0OPM (%) 13.1 10.8 21.6 18.2 -28.1 8.8 6.5PATM (%) 9.0 7.2 24.9 13.4 -32.7 6.3 4.1 (Source: Company, HDFC Sec) Quarterly Segmental Financials: (Standalone) (Rs. In Million)

Particulars Q3FY11 Q3FY10 VAR [%] Q2FY11 VAR [%] (Q-o-Q) Q1FY11 Q4FY10

Revenue from Operations 4246.9 3478.7 22.1 3767.8 12.7 3671.2 3572.9Cigarettes & Tobacco Products 3846.4 3157.1 21.8 3429.2 12.2 3395.7 3248.2Tea and related products 400.5 321.6 24.5 338.6 18.3 275.5 324.7 Profit/Loss Before Interest and Tax 537.1 327.8 63.8 598.8 -10.3 380.8 206.9Cigarettes & Tobacco Products 535.4 332.4 61.1 608.8 -12.1 391.5 228.6Tea and related products 1.7 -4.6 - -10 - -10.7 -Less: Interest 27 17.2 57.0 25.8 4.7 19.7 15.1Other Un-allocable Expenditure 0 0 - 0 - 32.7 0Add: Other Income 45.9 58.5 -21.5 132.3 -65.3 0 20.1Net Profit/Loss Before Tax 556 369.1 50.6 705.3 -21.2 328.4 211.9 PBITM (%) 12.6 9.4 15.9 10.4 5.8Cigarettes & Tobacco Products 13.9 10.5 17.8 11.5 7.0Tea and related products 0.4 -1.4 -3.0 -3.9 -6.7 Capital Employed in Segment 6542.3 5882.5 11.2 7256.0 -9.8 6512.9 5913.4Cigarettes & Tobacco Products 6297.5 5607.2 12.3 7008.2 -10.1 6295.7 5631.7Tea and related products 244.8 275.3 -11.1 247.8 -1.2 217.2 281.7

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Unallocated Net Assets/Liabilities 1220 943 29.4 130.8 832.7 379.6 751.8Total Capital Employed 7762.3 6825.5 13.7 7386.8 5.1 6892.5 6665.2

(Source: Company, HDFC Sec) Yearly Segmental Financials: (Standalone) (Rs. In Million)

Particulars FY08 FY09 VAR [%] FY10 VAR [%] Revenue from Operations 9149.8 11548.0 26.2 14078.5 21.9Cigarettes & Tobacco Products 8425.8 10520.1 24.9 12869.0 22.3Tea and related products 724.0 1027.9 42.0 1209.5 17.7 Profit/Loss Before Interest and Tax 1357.7 1599.4 17.8 1347.0 -15.8Cigarettes & Tobacco Products 1447.6 1730.4 19.5 1414.6 -18.3Tea and related products -89.9 -131.0 - -67.6 -Less: Interest 36.1 57.2 58.4 68.0 18.9Add: Other Income 375.8 116.8 -68.9 394.9 238.1Net Profit/Loss Before Tax 1697.4 1659.0 -2.3 1673.9 0.9 PBITM (%) 14.8 13.9 9.6 Cigarettes & Tobacco Products 17.2 16.4 11.0 Tea and related products -12.4 -12.7 -5.6 Capital Employed in Segment 2713.7 4608.2 69.8 5913.4 28.3Cigarettes & Tobacco Products 2600.7 4387.1 68.7 5631.7 28.4Tea and related products 113.0 221.1 95.7 281.7 27.4Unallocated Net Assets/Liabilities 2285.9 1176.3 -48.5 751.8 -36.1Total Capital Employed 4999.6 5784.5 15.7 6665.2 15.2 (Source: Company, HDFC Sec) Financial Estimations: (Consolidated) Profit & Loss A/c

(Rs. In Million) YE March FY08 FY09 FY10 FY11E FY12E

Net Sales 9029 11321 13839 15658 17653Other Income 657 522 617 527 566Total Income 9686 11843 14456 16185 18220Material Cost 3298 4803 6451 6041 6691Employee Cost 949 1075 1191 1513 1695Advertising & Sales Promotion 1379 1461 1979 2563 2807Other Expenditure 1929 2476 2691 3417 3857Total Operating Expenses 7555 9816 12312 13534 15049EBITDA (incl. other inc) 2131 2028 2144 2651 3170EBITDA (excl. other inc) 1474 1505 1527 2124 2604Interest 37 59 69 103 122Depreciation 225 311 376 415 511PBT 1870 1659 1699 2133 2537Tax (including FBT & DT) 595 576 502 686 817PAT (bef minority interest) 1274 1082 1197 1447 1720Minority Interest 31 -3 47 51 60PAT (net of minority interest) 1243 1086 1151 1396 1660

(Source: Company, HDFC Sec Estimates)

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Balance Sheet (Rs. In Million)

YE March FY08 FY09 FY10 FY11E FY12E Share Capital 104 104 104 104 104Reserves & Surplus 5081 5863 6710 7803 9158Shareholders Funds 5185 5967 6814 7907 9262Minority Interest 32 29 26 26 26Secured Loans 1034 953 1146 2176 1959Unsecured Loans 0 0 0 0 0Loan Funds 1034 953 1146 2176 1959Deferred Tax Liability 26 0 22 22 22Capital Employed 6277 6948 8008 10131 11269Gross Block 3172 4139 4984 5980 6997Less: Depreciation 1519 1806 2115 2530 3041Net Block 1654 2333 2869 3450 3956CWIP 223 627 735 772 810Investments 3360 2155 1948 3604 3785Inventories 2414 3686 3654 3836 4258Sundry Debtors 231 304 493 518 585Cash & Bank 95 189 363 467 727Loans & Adv. & other current assets 746 790 806 862 905Total Current Assets 3486 4968 5315 5683 6476Current Liabilities & Provisions 2445 3136 2860 3378 3757Working Capital 1041 1833 2456 2305 2718Capital Deployed 6277 6948 8008 10131 11269 (Source: Company, HDFC Sec Estimates) Key Ratios

YE March FY08 FY09 FY10 FY11E FY12E FD EPS (Rs.) 119.6 104.4 110.6 134.3 159.6PE (x) 16.2 18.5 17.5 14.4 12.1Book Value (Rs.) 498.6 573.7 655.2 760.2 890.6P/BV (x) 3.9 3.4 3.0 2.5 2.2OPM (%) 16.3 13.3 11.0 13.6 14.8PBT (%) 20.7 14.6 12.3 13.6 14.4NPM (%) 13.8 9.6 8.3 8.9 9.4ROCE (%) 30.5 24.7 22.1 22.1 23.6RONW (%) 24.6 18.1 17.6 18.3 18.6Debt-Equity 0.2 0.2 0.2 0.3 0.2Current Ratio 1.4 1.6 1.9 1.7 1.7Mcap/Sales (x) 2.2 1.8 1.5 1.3 1.1EV/EBITDA 14.3 13.9 13.7 10.3 8.2 (Source: Company, HDFC Sec Estimates)

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Cash Flow Statement (Rs. In Million)

YE March FY08 FY09 FY10 FY11E FY12E Profit Before Tax 1870 1659 1699 2133 2537Net Opt Cash Flow 578 563 835 2220 2200Net Cash from Investing Activities -763 133 -601 -2690 -1235Net Cash from Financing Activities 126 -602 -60 574 -704Cash & Cash Equivalents 95 189 363 467 727Net Inc/(Dec) in Cash -58 94 174 104 260 (Source: Company, HDFC Sec Estimates) Analyst: Mehernosh K. Panthaki (Mehernosh.Panthaki@hdfcsec.com) RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office HDFC Securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com

Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation.This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or asolicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate orcomplete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securitiesreferred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in thisdocument. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, InstitutionalClients