Godfrey Phillips's 24SEVEN Deal: Spin-Off To Create $10 Billion Market Cap

By AltG Innovation Centre On Behalf Of Taponeel Mukherjee & Poornima Vardhan

Key Takeaways:

1. Our APEXX Formula tells us that there is a massive value-unlocking opportunity for Godfrey Phillips by spinning out the 24Seven business and focusing on growing the convenience store chain via an aggressive asset-light franchising strategy.

2. 24Seven is a high-quality business that can leverage the great Indian consumer market trend. Marking its earnings at a P/E ratio of 13.4 of Godfrey Phillips is a massive value-unlocking opportunity for what should be trading at a P/E closer to Indian QSR businesses of 100 and not that of an old-school cigarette maker.

3. 24SEVEN with a clear business structure and focused management has the opportunity to create at least $10 Billion in market cap in the next decade by doing the following

4. Unlock Financial Engineering and growth via franchising through switching from an asset-heavy Company Owned Company Operated model to a Franchise Owned Franchise Operated model.

5. Use current assets to deliver additional revenue lines.

6. Drive higher sales by using effective membership and partner programs, focusing on more profitable product lines and creating scale to leverage wholesale transfer pricing power.

Introduction To Godfrey Phillips

Godfrey Phillips is a leading cigarette manufacturer in India with leading brands and an approximately USD 1.3 Billion market capitalization. 24SEVEN - The company in discussion sits within the company.

About 24Seven

Retail 24Seven is India’s organized retail chain in the ‘round the clock‘s convenience store format with more than 145 stores/kiosks spread across Delhi NCR, Punjab and Telangana. Gross sales during the FY23 increased by 19% to Rs. 482 crores from Rs. 405 crores in the previous year. Operating performance was also better than FY22 due to sustained cost saving initiatives and improvement in product mix and therefore, margins.

24SEVEN is a chain of convenience stores in India and a business that needs great focus given its inherent value in the face of the upcoming Indian consumer market boom!

How Can Godfrey Phillips Unlock Value From 24Seven?

So, let’s look at the details of the value unlock:

1. Spin-Off 24SEVEN For Value Unlock

   1. According to the company’s 2022-23 report, 24SEVEN did $58 Million in annual sales from 145 stores and kiosks. The bottom line is it’s still early days. Most importantly, with Indian consumer-facing assets rightly seeing massive valuations with QSR chains leading the way, we don’t see why 24SEVEN earnings need to be valued at the multiple of a cigarette business. Our Local Market Intelligence Research team views convenience store businesses as much closer to QSR business multiples than a mature cigarette/tobacco business.

   2. To understand the above better, let’s compare the P/E multiples of Restaurant Brands International (NYSE: QSR) at 20.94 versus a large convenience store business Alimentation Couche-Tard at 17.33, roughly the convenience store trades at 80% of the QSR multiple. Given that the average P/E multiple for a QSR business in India is 100, we see 24SEVEN as having a multiple of around 80. That’s 6X Godfrey Phillips’ P/E of 13.4.

2. Growth via franchising: Switch from an asset-heavy Company Owned Company Operated (COCO) model to a Franchise Owned Franchise Operated (FOFO) model

24SEVEN needs to switch to an aggressive but structured franchise owned franchise-operated model and grow via working with franchisee capital and partners. The key is moving to a business model that manages its brand, IP and systems and facilitates the growth of the store network. The key is looking to earn a 6-8 per cent licence fee on the $400,000 revenue that each store earns on average currently for an annual payout of around $24,000-32,000 and work with franchise partners to free up the balance sheet.

The aim is to grow the 145 shops to 1,000. With 1000 outlets, we anticipate a $32 million revenue with extraordinarily good operating margins growing at an annual rate of 8-10%. With an 80 P/E, we have a $2.6 billion company, which is double the present market worth of Godfrey Phillips. The essential message here is the chance for value generation.

Most Critical point here is the Financial Engineering that switches the company to an asset-light model and allocates capital with a 20% hurdle rate.

3. Using Current Assets To Deliver Additional Revenue Lines - The stores and the brand is the CAPEX that’s already done. The key questions we need to be asking are:

1. How do we further leverage the assets to drive greater cash flows,

2. How do we get more lunch and evening-snack-focused consumers?

3. Can battery swaps for EVs work at the stores? Alimentation Couche-Tard is experimenting with EV charging at the sites.

4. What more can be done to leverage fixed assets to drive free cash flows? More revenue per store and consumers buy more as footfalls increase.

4. Loyalty Accrual Program - With scale, focus and exclusive management we see significant value creation via tapping into a 24SEVEN Rewards Card via an acquisition and partnerships that help drive customer loyalty and higher ticket sizes, driving higher margin product sales and with scale creating wholesale transfer pricing of power.

In summary, 24SEVEN is the hidden jewel in Godfrey Phillips. When you look at the Indian consumer market over the next two decades, 24SEVEN and the likes will have 1000s of stores serving the 100s of millions of Indians that will enjoy unprecedented prosperity and rapidly rising incomes. Financial Engineering and Strategy can unlock Billions in value from 24SEVEN.