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Obsessed with innovation-penetration led growth

We attended FY22 AGM for VST Industries to understand its future plans. Chairman said, despite a challenging year, VST delivered good performance in FY22 with revenue/PAT growing at 6%/3%. Importantly VST is committed to deliver long term sustainable growth through product innovation and not using cheap product quality to shore up volumes. Its strategy revolves around, (a) expanding direct coverage – 1.1mn, (b) focus on premium brand positioning – launched demi-slim king size cigarette Total-T3 with finger-fresh technology in addition to Royale Twist, and (c) better trade visibility. We note with enhanced consumer mobility in key states, resulting in improved OOH consumption. We expect VST to continue benefiting from value-for-money cigarette (Rs8-10 price point) gaining further inroads to enhance its volume market share. We retain BUY, with a DCF-based TP of Rs4,048.

VST choosing innovation and penetration led volume growth

In past six years, innovation has become strategic lever to achieve its goals creating a distinct brand positioning under ‘Total’ franchise. In FY22 it added Royal-Twist with Kesar and Saunf now contributing 10% volumes to Total brand. Yet another tech-led innovation was launched in Apr’22 with finger-fresh-rod technology, adding king-size - Total-T3, a demi-slim cigarette priced at Rs10 promising no tobacco smell on the fingers. With this launch VST now offer six brands – Total, Royal Twist, Editions, Moments, Special, and Charms. Further in past six years VST has increased its direct coverage to 1.1mn. It is now ramping up its presence in the Western region, investing on brand visibility and feet-on-street supporting distribution expansion. Management expect with economic situation improving gradually, VST is hopeful of sustaining its operating performance on all metrics. Chairman alluded, in past 5-years VST has added 1.1% volume and 1.6% value market share.

Strong strategy investing in tech-led innovation to improve product quality

VST is executing capex of ~Rs500mn since last three years on replacing old machines which are obsolete and can’t be refurbished. Moreover, the intended capex is targeted to improve product quality delivering defect-free products with superior smoking experience to consumers. Though consumers perceive Total as a premium brand, the trade opportunistically sells products with higher discounts; with this premise VST chose to strengthen brand image using quality plank. We reckon structural changes could favor market share gains as ‘Total and Edition’ are fastest growing brands for the company in the capsules segment.

Valuation and risks

We note today, VST is credited with 50% board members are independent directors and 17% are female. Though market uncertainty pushed VST to hold more cash and cut dividend pay-out to 68% is a concern for investors, we expect the pay-out/ buy-back picking up steam. We believe growing demand for value segment could provide strong tailwinds to VST. We largely retain BUY rating with revised DCF-based TP of Rs4,048 (16.8x FY24E EPS). Risks to our call include sharp increase in any form of taxation and disruption in supply chain due to lockdowns.

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