Smoking Kills – No worries as far as business is flourishing

This article I had compiled a long back after 3 months rigorous study but I was just waiting to post it just on the eve of release date for much awaited 5th and last season of Money Heist. ?

One of the two big corporate Czars is now planning to come in to tobacco business. Even if the health of people is getting affected due to Covid-19 and doctors’ advice that cigarette smoking is not only injurious to health but the chances of getting caught by Covid-19 strain is more in people who smoke. Despite of this warning, if you notice, there is an upward rise in smokers whatsoever the various newspapers or studies claim that smokers have declined. In fact, it is the 3rd largest business worldwide allowed legally post illegal businesses like drugs and the very obvious business for which few are still behind the bars due to violations of OTT (you know who I mean, obviously!)?

The corporate house, who is planning to come in to this cigarette and Pan Masala manufacturing business wants to start it with a big bang with a tough fight not only to ITC but also wants to take over the market share of number 2 in India. So, their highly professional management with an elite league of advisory CA people wanted to know what is the market potential, demand, production cost, selling cost, running cost, future demand and growth and any threats to this business.?

I prepared a below case study and submitted my extensive report. It took me almost 3 months to study and gather and workout the data but the report is 100% full proof and that’s the reason it is accepted by client without any big doubts challenging my calculations. ?

During 1st month, I simply used to walk down to various nearby areas’ Pan Tapri (local terminology for a place where one can buy betel leaves, “flavored stuff” and mainly the cigarettes. I used to notice and observe that which are the top most cigarettes brand that are sold out daily. I was particularly interested in knowing the sales figures of Marlboro and Four Square brands (Godfrey Phillips) as I concluded that most of the people prefer those brands though Gold Flake, Wills are the most popular ITC’s brand. Though I am not a smoker, I had to be a passive smoker standing near the Tapri to authenticate the sales report and finally confirmed that Marlboro and Four Square have more demand. The funny thing I noticed is that people who are from lower or middle class normally go with Four Square and those from upper middle class go for Marlboro, bang on!?

Let me explain the chronology of number 2 here who holds 20% market share for cigarettes business in India. 1st is off course ITC which I am not going to talk about as I could anticipate that it will come down soon just like BSNL, the moment?this corporate Czar starts it with a big bang grand entry. The number 2 I am talking about is obviously Godfrey Phillips India which is a flagship company of Modi Enterprises (US $2.8 Billion). Godfrey Phillips India (GPI) mainly manufactures elite cigarette brands like Marlboro, Cavanders, and Stellar. While Marlboro has the most domestic as well as international market, Cavanders and Stellar have comparatively less sale being costly. But along with Marlboro; Four Square and Red & White are more popular. Lalit Modi, the world famous fellow who started IPL and now stays in UK for the reasons known to all, still heads it and is a President and Managing Director of Modi Group while his mother Bina Modi is a President and MD of GPI. Some more interesting stats as below –?

• India is the second largest tobacco producer in World after China.
• 43% Indians use tobacco products, 23.5% out of those are the actual smokers.
• In India, only 10% cigarettes are produced legally and Govt gets a revenue of 80% out of that.
• India is the 4th largest market of illegal cigarettes in World causing a revenue loss of over 15,000 crore p.a. to the Exchequer.
• During last 10 years, legal cigarette industry volumes have declined by about 10% and illegal cigarette volumes have grown by 36%.
• 89% revenue of GPI is via tobacco based products only, mainly cigarettes. 68% via domestic market, 21% via international markets.
• Annual turnover of Godfrey Phillips is Rs. 7000 Crore.

Godfrey Phillips has a main cigarette manufacturing company unit located in Rabale Industrial estate of Navi Mumbai area.?They have one R&D centre in Mumbai region and source their main raw material for their production unit in Rabale from Guntur district of Andhra Pradesh. ?

Ok, so till this time, you may have got fair idea about the Corporate Czar I am talking about wants to enter cigarette manufacturing business and whether it is value return business for him. So as a baseline to this study, I chose to go with Godfrey Phillips and not ITC. Both ITC and GPI have the same cost of production though market share of ITC is larger.

The cost of Marlboro cigarette packet is Rs. 260 per 20 sticks and that of Four Square is Rs. 96 per 10 sticks. As per the insider information from the factory at Rabale, they mostly produce large volume of Marlboro cigarettes. They are producing 1950 million cigarette sticks per month. Hence per cigarette stick retail cost is = 19500000000 x (260/20) = Rs. 253500000000 i.e. 23350 Crore Indian Rupees.

For this, they use mainly raw material as cut tobacco; almost about 900MT/month. The market cost is Rs.124 per KG for this tobacco. It works out to be 11.16 Crore Indian Rupees

Salaries of all workers/managers at Rabale factory unit who are involved in production of 1950 million sticks per month = 18 Lakh Indian Rupees.

I could not get the middleman cigarette distributors and packagers exact cost but according to few people I spoke with, they said that it is very minimal as they have mixed distributors similar to that of ITC, few are with GST bill and some not. So let’s neglect this cost. I am assuming that Godfrey Phillips must be paying some cost to distributors, also they must be paying small vendors to keep their stock and some for transportation and a tax portion to Government for most of the cigarettes they produced in their factory if not all are accounted for tax. Hence, for the time being lets ignore this cost.

The major production cost is that of Electricity. The good thing is that, few months back I had worked on facilitating the Open Access system for Godfrey Phillips, so I know what was the billing amount they were paying to MSEDCL when they were not on Open Access system and now what they pay to MSEDCL with Open Access system. Since I was not having Godfrey Phillips’s billing details without Open Access, I just put the monthly consumption figures in my SAP billing system and following is the would be billing amount, if they would not have been on Open Access and entirely souring their power from MSEDCL.

Had they not been on OA, it would have been Rs. 73,86, 183 for Jul’21.

Ever since I facilitated the OA system for them, they are sourcing power with short terms OA access agreements from various intra state wind and solar power generators. Their latest month actual OA bill details are as follows and have a tariff applicable as HT I (A) (i): HT – Industry as per MSEDCL MERC approved tariff.

You can see that there is already a 16% saving on electricity cost with OA. So, I have recommended the corporate Czar to go with Open Access facility in place right from inception as they are setting up a plant in Pune area. This would bring down their electricity cost same as that of Godfrey Phillips.

So electricity production cost for 1950 million sticks for a month = Rs. 6196124

Let’s summarise –

So, how does it sound a net profit of 24233 Crore Indian rupees per month??Even if you exclude 10% transport, packaging, distribution cost and another 5 or 10% tax portion on entire 1950 million sticks, still one can have countless money to give to another Govt like UK or allied countries who offers lifelong permanent residence ship and stay their without any fear being caught in future. One can argue that I haven’t included the cost of machinery and initial investment for the plant. Well, that’s correct! All P minus E will not be the entire profit to manufacturer. Even if you deduct the Government taxes from that, you still have mammoth amount in “HULK” like hands. Godfrey Phillips have a precision world class machinery in place imported from Japan for which they already have their ROI recovered long back. The important point is that a people like you or me or any MSME would not like to have the loans from market or Govt and set-up cigarette manufacturing industry. If one has a money earned by “Thanos” way in previous undisputed past, he or she can put that money in such kind of business.

Does it makes sense? I mean, hell yes….it makes a lot of sense, if I have that much of money to invest in cigarette factory, I would have definitely invested in it, no matter how many times a warning message comes on movies screen or OTT screen that “Cigarette smoking is injurious to health” or “Smoking Kills”?