Godfrey Phillips India Ltd. ANNUAL REPORT REVIEW FY2017-18

Godfrey Phillips India Limited, a flagship company of the Modi Enterprises, is one of India’s largest cigarette manufacturers. The company makes some of the best cigarette brands in the country including Four Square, Red & White, and Cavanders. Godfrey Phillips also has an exclusive procurement and supply agreement with Philip Morris International to manufacture and distribute Marlboro in India.

The company also manufacture mouth freshener and confectionery segments with Pan Vilas pan masala, Pan Vilas Silver Dewz, and Funda Goli candies.

Annual Report Review FY17-18.

Disclaimer: This is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered analyst.



WB Letter 1993

Dexter Shoe

H.H.Brown shoes (Purchased by Berkshire) has made an acquisition of Dexter Shoe in the year 1993, which is in the business of manufacturing of popular-priced men’s and women’s shoes. Buffett & Charlie admire Dexter as a business. Dexter’s has a 77 retail outlets and company is a leading manufacturer of golf shoes which is producing 15% of U.S. output.

WB 1993 01

Example – Good player into the worst industry matrix




We can see in above example of three real estate companies where Company – 1 having a good matrix compared to the other two companies. Also equity dilution into the company – 1 is increased by 1% CAGR in last 10 years compared to 12% CAGR and 5% CAGR in last 10 years respectively for the company – 2 and company – 3. We can see that debt and equity both has increased into the second and third company whereas company – 1 has maintained balance sheet strength. During a good period, the company – 1 has the least inventories as a % of sales and other 2 companies has higher inventory as a % of sales. Sales of a company – 1 has increased by 10% CAGR in last 10 years compared to -7% CAGR and -6% CAGR in last 10 years respectively for the company – 2 and company – 3. We can see stock performance then company – 1 has given 53% CAGR in last 17 years compared to -9% CAGR and 15% CAGR in last 11 & 17 years respectively for the company – 2 and company – 3.




We need to focus on the good player into the worst industry matrix for making an investment. Generally, the good player will gain the market share compared with the worst players in the industry and able to survive for the longer period of time. Also our invested capital get protection with the creation of wealth. The similar pattern we can able to find at infra, telecom, power sectors, etc.

Many of us misunderstood that insurance business of Berkshire get float as a free of cost but it is not true. When insurance business incurring underwriting losses then such losses need to take for consideration as a cost of float.

WB 1993 02

Mr. Buffett and Mr.Munger believe that they are not smart enough to make many right decisions. But they like to hold good business forever and avoid to make many decisions. We should consider “Risk” as a loss, not the academic definition of “Beta” as a volatility of the portfolio.

WB 1993 03

We should focus on what the company produces, what competitors are doing, how much borrowing company has taken rather than focusing on the price history of the company and the daily price movement of the stocks.

Criteria for focusing during investment evaluation –

WB 1993 04

Mr. Buffett has explained three scenarios of management and owners of the company which impacts to the performance and corporate governance of the company.

First scenario where no controlling authority and company managed by directors

WB 1993 05

The second scenario where controlling owner also work as a manager

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The third scenario where controlling owner who is not involved in the management

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WB 1993 08

Warren Buffett’s Letters 1957 – 2012


WB Letter 1992

Mr. Buffett has written that they own a collection of business which is exceptional and also a run by an exceptional manager which has resulted in the higher returns.

Nowadays I have experience that everyone is becoming a market expert and providing their view on the short-term direction of the market. For such people, Mr. Buffett has given a good quote –

WB 1992 01

The Salomon Interlude

In 1991, Salomon Brothers caught for bond trading scandal and Mr. Buffett has performed as a chairman of Salomon for the ten months to resolve a problem at Saloman. At Salomon, they have been submitting false bids in an attempt to purchase more Treasury bonds than permitted by one buyer during the period between December 1990 and May 1991.

Five authorities – the SEC, the Federal Reserve Bank of New York, the U.S. Treasury, the U.S. Attorney for the Southern District of New York, and the Antitrust Division of the Department of Justice – had important concerns about Salomon.


Many acquisition-hungry managers made an acquisition with the hope that they will transform business which will provide them with a good opportunity to earn. When a manager gets failed, they learn a lesson but shareholders pay fees for selecting them as an investment candidate. Mr. Buffett has accepted that during his earlier career, he also has made an acquisition but he able to achieve success due to cheapness into acquisitions and some of the acquisition got failed also. And due to such mistakes to get a failure, he revised his strategy to make an investment.

TATA Steel 01

TATA Steel 02

WB 1992 02

Berkshire has made an investment into the Central States Indemnity which is an insurance company provides an insurance to the credit-card holders who are unable themselves to pay because they have become disabled or unemployed.

H.H.Brown, a Subsidiary of a Berkshire has made an acquisition of Lowell Shoe Company which is into the manufacturing of the shoes for nurses, and other kinds of shoes as well.

Mr. Buffett has initial thought of purchase General Dynamics for the tendering stocks to the buyback and earns a small profit in short term. But Mr. Buffett began to study the company and he found that Bill Anders, CEO of the company has performed a decent job to run a business. Mr. Buffett has dropped the idea of buyback opportunity and decided to become a long-term investor of the company.

Investing strategy of Berkshire has been little change and also Mr. Buffett has made some compromise on the price to purchase a business’s due to market condition and their increased size.

WB 1992 03

Now, how to know an attractive price? Mr. Buffett has explained that we look attractive price with the framework of value or a growth investor – what we consider to ourselves. He explained that growth is always a component of the calculation of the value of any company. He mentioned that people using value investing term everywhere with the paying higher price then calculated the value in the hope that someone pays higher to purchase an asset from them. But such activities do not consider as an investment, it is a speculation.

People consider value investing where attribute such as low Price – to – Earnings ratio, low Price to Book Value ratio or high dividend yield or combination from mentioned and not consider value investing where reverse attributes are available. Many a time, business growth also tell us little about the value but it is also true that often growth has a positive impact on the value. We have to analyze that whether a business can able to generate a good return on the incremental invested capital or business generating a low return on incremental capital. Former one provides the benefit of growth to the investors and latter one hurts to the investment.

Ex – Value Trap

Taken from Thoughts on Thoughts blog


The company looks very cheap on the basis of the financial metrics, but if someone who does not have paid attention to the business of the company then—

MTNL Chart

An investor has lost his capital also. So, that in value investing also, we cannot escape from the future. (For detail article, Kindly visit – http://neerajmarathe.blogspot.in/2010/04/mtnl-value-trap.html)

Value Trap – One of the educational providing company which fall under the criteria of value investing


The company is not able to generate good growth in sales and in the profitability but investment and cash have grown well. Also currently the company is available below cash + investment which fall under the criteria of the value investing. But what about the growth into the business or on the survival of the business. Will be cash & investment remain with the company in the future? Lower sales, higher expenses, lower profitability and for last 3 years the company has stopped paying a dividend. Should we consider such investment as value investing or value trap?

Ex – Growth at the low return on capital companies

The company which is generating a good sales growth but they is not able to generate a higher return on capital they employed then those companies require to take debt or dilute an equity (in-short they need external funding). Investors in such companies will face difficult to create wealth or sustain wealth.

High growth with low return

We can see that companies having a higher sales growth but cannot able to generate a higher return on capital then they require to bring external finance to fund the growth. The growth of such companies will extend for the long period but investors face difficult to create wealth.

High growth with low return chart

Ex – Growth at the higher return on capital companies

Reverse to above if company having a good growth with having a higher return on employed capital then company does not require to bring external financing (if they having a borrowing or a dilution of capital then the size of it is very small in proportion) to fund the growth of a company and also investors of such a company can create a good wealth.

High growth with high return

High growth with high return c 1

Ex – Higher growth but no value

If we just focus on the growth of the company and not on the quality of the growth then we need to lose our capital also.

High growth but no value

A company having good growth but does it have a quality of growth?

High growth but no value C 2

More dangerous balance-sheet quality after FY2010 –

High growth but no value 1

Every time does not value investing or growth investing provides a better investment opportunity but a rational combination of the both can be good investment opportunities.

Mr. Buffett has explained valuation matrix given by Mr. John Burr Williams which is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset. He has given matrix which similarly uses for bond and stocks. But bond involves fixed future cash inflow in-terms of coupon received by us and in equities such coupon is not fixed, we cannot say with surety about future cash inflow and outflow for business. Cash inflow and outflow into equities are highly dependence on the nature of a business, quality of management. For overcoming such problem Mr. Buffett uses two rules at Berkshire –

WB 1992 04

WB 1992 05

According to Mr. Buffett, new issue market is controlling by the stockholders and institution; also new issues come during favorable market conditions and we need to pay a higher multiple. Here, we are not going to get any bargain whereas in the secondary market, many a time, we get x value business at the 1/2x.

Warren Buffett’s Letters 1957 – 2012


WB Letter 1990

Mr. Buffett mentioned that we need to thoroughly analyze earnings and accounting numbers; we should not focus on the big auditor names.

WB 1990 01

Low prices and low cost of operations for their Jewelry and furniture business creates huge volume growth. Such a low cost of operation is difficult to adopt by competitors.

While we are analyses an insurance company then we check combined ratio for the measuring profitability of the insurance company but with it, we need to check –

WB 1990 02

WB 1990 03

Mr. Buffett mentioned that the majority of the companies follows what their peers are doing though they seem foolish.

WB 1990 04

Example of PSUs & Private Bank

i) PSU Bank


ii) Private Bank


We should not focus on the buying an only a cheap companies without knowing the quality of assets on which they seem cheap. We can see that PSUs banks have majorly traded at discount compare too few private banks which have a quality of books. PSUs banks seem cheap on the basis of Price to Book Value but the quality of books is questionable, which we have already experienced.

WB 1990 05

Mr. Buffett has mentioned some of the qualities of management which we also can check when we make any investment.

WB 1990 06

As an investor, we need to always focus on the Margin of Safety which is mentioned by the Ben Graham. The margin of Safety provides us a safeguard against any errors occurs by us.

WB 1990 07

WB Letter 1991

In long run, our investment returns will occur through the stock prices but stock prices are derivatives of the future earnings of the business. If a business is not performing well, earnings not grown in future then stock prices also not given us return in long run. So that we need to keep a focus on the business performance, earnings growth driver of business rather keep a focus on the stock price performance.

WB 1991 01

When we talk about the strong franchise of business then we should focus on the criterion into the business which mentioned by Mr. Buffett. All businesses do not fall under the mentioned criterion but those businesses fall under mentioned criterion those can earn a higher return on capital for the longer period of time through price it’s product/services aggressively. If business having a strong franchise then we does not require a strong management to run the business.

WB 1991 02

Liquor is a desired of people and customers does not have any close substitute (legal) of it but in India, the price of liquor is regulated so that we cannot say that liquor business has a strong economic franchise. Watching movies at the multiplex is a desired of people, no close substitute is available for it and also a price of the ticket is not regulated.

Whereas those businesses which do not have strong franchises then those businesses can only earn decent from a low-cost production of products/services or a shortage of products/services. And shortage does not stay for a longer period of time. Shortage of particular product with huge industry size invite more players into the industry which reduces the profitability. Continuously remaining low-cost producer, business needs to be run by the strong management or else business will not sustain as a low-cost producer for the long period of time.

WB 1991 03

We generally provide difference valuations to the businesses where we can foresee constant earning with the lower capital requirement and where we cannot foresee earning with cyclical business nature. Mr. Buffett has explained this concept by mentioning Media business and steel business. He mentioned that we believe that media business having a constant revenue and steel business having a cyclical business nature but when media business has started to getting deteriorate then we revise our way to value media business.

See’s Candy

Berkshire Hathway had bought See’s Candy through Bluechip stamp in the year 1972. A company owned $7 million of tangible net worth with $10 million of excess cash. A seller had asked $30 million (cash adjusted) for the 100% ownership of See’s candy. Buffett and Charlie were ready to pay only $25 million for See’s. Buffett and Charlie have been experienced a pricing power to the business and they felt lucky that seller agreed to sell See’s at $25 million to Berkshire. See’s sales grown from $29 million to $196 million and pre-tax profit has grown from $4.2 million in the year 1972 to $42.4 million in the year 1990.


Berkshire has made an investment in the H.H.Brown company, which is a shoe manufacturing business. H.H.Brown is a leading manufacturer of work shoes and boots in North America. Mr. Buffett knows that shoe business is tough to perform due to higher inventories and receivables but he has experienced that H.H.Brown has done well in the leadership of Frank and Mr. Heffernan.

WB 1991 04

If we got a good business which is run by a good manager in the bad industry then we should check such business as an investment candidate.

Berkshire Hathway earns from holding policyholders fund which Mr. Buffett called as “Float”.

WB 1991 05

WB 1991 06

Berkshire Hathway has beat government bond in 20 years from 25 years till the year 1991 and cost of the fund remains satisfactory which help Berkshire Hathway to grow well. Insurance business of the company sustain well, increases float. Lower cost of float and Berkshire has compound it in a good manner which is a major strength of the company for being an out-performer.

Mr. Buffett has mentioned that they don’t like to trade business to business. He considers that He & Charlie are not as much smart to earn well by buying and selling businesses for a longer period of time. He likes to buy a business which has a long-term economic characteristic, run by quality people and available at a sensible price.

Mistake Du Jour

In this section, Mr. Buffett has written about the mistakes which he has incurred. He believes that people cannot able to see mistakes incurred by Berkshire, that does not reduce the cost associated with mistakes. Berkshire has missed few opportunities such as esoteric invention (such as Xerox), high-technology (Apple), or even brilliant merchandising (Wal-Mart) but they do not consider it as their mistake. Such type of the businesses does not fall under their competence area to understand so they have missed it. Few mistakes which they have occurred from their competence area.

In the year 1988, they decided to purchase 30 million shares of Federal National Mortgage Association (Fannie Mae). They owned stocks since earlier years and also understand the business. But when they have bought 7 million shares and the stock price has started moving upside and they have stopped buying it. They do not want to repeat mistakes which they occurred while buying shares of Coca-Cola, they have to keep on buying shares of Coca-Cola though the price has moving upward. But here, they sold 7 million shares which they hold due to a small position. Such a mistake has cost to Berkshire is about $1.40 billion.

Warren Buffett’s Letters 1957 – 2012