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Cigarettes volume nearly back to pre-Covid levels…

About the stock VST Industries (VST) is among the oldest cigarette players in India, involved in manufacturing and marketing cigarettes as also trading unmanufactured tobacco.

* The company has two cigarettes manufacturing facilities in Hyderabad, AP. It has five major brands, which includes, ‘Total’, ‘Charms’, ‘Moment’, ‘Special’, & ‘Edition’ and a direct distribution reach of over 1.1 million outlets

Q3FY22 Results: VST reported a steady set of numbers with 11% volume growth.

* Sales were up 14.5% YoY with cigarettes volumes growing 11% YoY

* EBITDA was at | 109.1 crore, up 9.1% YoY, with margins at 33.2%

* Consequent PAT was at | 82.7 crore (up 12.2% YoY)

What should investors do? VST industries’ share price has underperformed the market with mere 32% return in the last five years (from | 2413 in January 2017 to | 3175 in January 2022).

* Though cigarette industry volumes have reached pre-Covid levels, we believe excessive duties, emergence of e-cigarettes, regulatory framework would keep volume growth in low-single digits in a stable tax scenario

* We continue to maintain our HOLD rating on the stock

Target Price and Valuation: We arrive at a revised target price of | 3425, valuing the business at 14x FY24 earnings

Key triggers for future price performance:

* Cigarette Industry volumes have reached pre-Covid levels but the company’s volumes are slightly lower than in the pre-Covid period

* High priced cigarettes ‘Total’ & ‘Edition’ contributed 46% to volumes. The contribution of high priced cigarettes is expected to continue rising

* Duties & taxes on cigarettes are expected to remain stable given increasing prevalence of illicit & contraband cigarettes

* We expect dividend payout to increase to ~70% by FY23, which would translate into dividend yield of ~5% at the current price

Alternate Stock Idea: We like TCPL in our FMCG coverage.

* Strong innovation & premiumisation strategy in salt, tea, Sampaan & Soulful in the Indian market are expected to drive sales & margins

* We value the stock at | 910 with a BUY rating

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