Rating Rationale
September 24, 2020 | Mumbai
Godfrey Phillips India Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.167 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.100 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper of Godfrey Phillips India Limited (GPIL).
 
GPIL's operating performance is expected to be moderately impacted in fiscal 2021 due to business disruption on account of Covid-19 pandemic. Non-essential nature of tobacco products had resulted in stringent restrictions and extended closure of manufacturing plants, however, the retail stores of the company were operational during the lockdown. For fiscal 2021, CRISIL expects the revenue to be around 15% lower than fiscal 2020 with moderate impact on profitability. In Q1 FY2021, the net revenue de-grew by 49% while the operating margin dropped to 14.3% from 24.8% as compared to corresponding quarter last fiscal.
 
In fiscal 2020, revenues grew by around 15% to Rs. 2855 crore (Rs. 2479 crore in fiscal 2019) driven by strong growth in revenue from cigarettes and unmanufactured tobacco while operating margin improved to 20.8% from 16.3% in fiscal 2019.
 
The financial profile of the company is expected to remain strong with nil term debt, superior liquidity and moderate capex plans to be funded primarily through internal accruals.
 
The ratings continue to reflect the GPIL's healthy market position in the Indian cigarette industry and a strong financial risk profile. These strengths are partially offset by geographical concentration in revenue, exposure to intense competition, and susceptibility to changes in regulations.

Analytical Approach

For arriving at its ratings, CRISIL has considered the standalone financial and business risk profiles of GPIL because operations of wholly owned subsidiaries - International Tobacco Company Ltd and investment companies - do not have a material bearing on its financials.

Key Rating Drivers & Detailed Description
Strengths:
* Comfortable market position
GPIL has been in the cigarette business in India for over seven decades. It has a portfolio of established cigarette brands including Four Square, Red & White, and Cavenders, which enjoy strong customer loyalty. The company also has a strong distribution network, which helps it promote its other products such as chewing products and confectionery.
 
* Strong financial risk profile
Capital structure and debt protection metrics are healthy. As on March 31, 2020, gearing was comfortable, at 0.01 time. Interest coverage and net cash accrual to total debt ratios for fiscal 2020 were healthy, at over 19.65 times and 29.32 times, respectively. Interest cover adjusted for finance costs on account of lease liabilities was 443.77 times for fiscal 2020. Liquidity was strong, with liquid surplus of over Rs 1,200 crore and negligible utilisation of bank lines.
 
Weaknesses:
* Geographical concentration in revenue, and exposure to intense competition
GPIL's operations are concentrated in northern and western India, which account for majority of its cigarette sales. GPIL is a distant second in the Indian tobacco industry, accounting for 12.9% of volume share, and faces intense competition from ITC Ltd ('CRISIL AAA/Stable/CRISIL A1+'), the dominant player.
 
* Susceptibility to regulatory changes
The cigarette industry continues to be highly vulnerable to changes in government policies and regulations. On one hand, the industry faces a high tax structure, and on the other hand, there are limitations on promotion, consumption, and packaging of cigarettes, constraining growth.
Liquidity Superior
Liquidity is superior, driven by expected cash accrual of over Rs.300 crore per fiscal in fiscals 2021 and 2022 and cash and cash equivalents of over Rs.1,200 crore as on March 31, 2020. Average utilisation of the fund-based bank limit of Rs 148 crore was negligible during the past 12 months ended August 2020. Long-term debt is also nil. Cash accrual should be sufficient to finance any capex and working capital requirement over the medium term.
Outlook: Stable

CRISIL believes GPIL will continue to benefit from a strong market position and financial risk profile.
 
Rating Sensitivity Factors
Upside factors
* Substantial and sustained increase in market share to over 25%.
* Significant and sustained improvement in operating margin
 
Downside factors
* Weakening of operating performance with operating margin falling below 10%
* Substantial decline in market share to less than 8%.
* Large, debt-funded capital expenditure (capex) or acquisition
* Any adverse regulatory change in the cigarette industry
* Considerable decline in cash and liquid investments

About the Company

GPIL is an associate of the KK Modi group of companies and Philip Morris Global Brands Inc (Philip Morris; a subsidiary of Altria Group Inc [rated 'BBB/Stable/A-2' by S&P Global Ratings]). The KK Modi group owns 47.09% of the company's equity shares, and Philip Morris owns 25.10%. GPIL primarily manufactures cigarettes. It has diversified into segments such as mouth fresheners, paan masala, and zarda, and retail. It has retail stores, named Twenty Four Seven (TFS), in the National Capital Region and Chandigarh.

Key Financial Indicators
As on / for the period ended March 31 Units 2020 2019
Operating income Rs crore 2855 2479
Profit after tax Rs crore 388 241
PAT margins % 13.6 9.7
Adjusted Debt/Adjusted Net worth Times 0.01 0.02
Interest coverage Times 19.65* 472.12
*Interest cover adjusted for finance costs on account of lease liabilities was 443.77 times

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate Maturity date Issue size (Rs Cr) Complexity level Rating assigned with outlook
NA Commercial Paper NA NA 7-365 days 100.00 Simple CRISIL A1+
NA Cash credit* NA NA NA 44.00 NA CRISIL AA+/Stable
NA Cash credit$ NA NA NA 10.00 NA CRISIL AA+/Stable
NA Cash credit# NA NA NA 31.00 NA CRISIL AA+/Stable
NA Proposed long-term bank loan facility NA NA NA 47.00 NA CRISIL AA+/Stable
NA Short term loan^ NA NA NA 15.00 NA CRISIL A1+
NA Letter of credit and bank guarantee** NA NA NA 3.00 NA CRISIL A1+
NA Bank Guarantee** NA NA NA 17.00 NA CRISIL AA+/Stable
* Fund-based facility; interchangeable with other fund-based facilities
$Fund-based facility; interchangeable with other fund-based/non fund based facilities with a cap of BG of Rs.3.50 crore
#Fund-based facility; interchangeable with other fund-based and one way interchangeable with non-fund based facilities
^ Fund-based facility; interchangeable with PCFC
**Non-fund-based facility; interchangeable with other non-fund-based facilities.
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1+      14-10-19  CRISIL A1+  12-11-18  CRISIL A1+    --  -- 
                31-07-18  CRISIL A1+       
Short Term Debt (Including Commercial Paper)  ST                  22-08-17  CRISIL A1+  CRISIL A1+ 
                    30-01-17  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  147.00  CRISIL AA+/Stable/ CRISIL A1+      14-10-19  CRISIL AA+/Stable/ CRISIL A1+  12-11-18  CRISIL AA+/Stable/ CRISIL A1+  22-08-17  CRISIL AA+/Stable  CRISIL AA+/Stable 
                31-07-18  CRISIL AA+/Stable  30-01-17  CRISIL AA+/Stable   
Non Fund-based Bank Facilities  LT/ST  20.00  CRISIL AA+/Stable/ CRISIL A1+      14-10-19  CRISIL AA+/Stable/ CRISIL A1+  12-11-18  CRISIL AA+/Stable/ CRISIL A1+  22-08-17  CRISIL A1+  CRISIL A1+ 
                31-07-18  CRISIL A1+  30-01-17  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee** 17 CRISIL AA+/Stable Bank Guarantee** 17 CRISIL AA+/Stable
Cash Credit* 44 CRISIL AA+/Stable Cash Credit* 44 CRISIL AA+/Stable
Cash Credit$ 10 CRISIL AA+/Stable Cash Credit$ 10 CRISIL AA+/Stable
Cash Credit# 31 CRISIL AA+/Stable Cash Credit# 31 CRISIL AA+/Stable
Letter of credit & Bank Guarantee** 3 CRISIL A1+ Letter of credit & Bank Guarantee 3 CRISIL A1+
Proposed Long Term Bank Loan Facility 47 CRISIL AA+/Stable Proposed Long Term Bank Loan Facility 47 CRISIL AA+/Stable
Short Term Loan^ 15 CRISIL A1+ Short Term Loan^ 15 CRISIL A1+
Total 167 -- Total 167 --
*Fund-based facility; interchangeable with other fund-based facilities
$Fund-based facility; interchangeable with other fund-based/non fund based facilities with a cap of BG of Rs.3.50 crore
#Fund-based facility; interchangeable with other fund-based and one way interchangeable with non-fund based facilities
^Fund-based facility; interchangeable with PCFC
**Non-fund-based facility; interchangeable with other non-fund-based facilities.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Fast Moving Consumer Goods Industry
CRISILs Criteria for rating short term debt

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