Hold VST Industries Ltd For Target Rs.3725 - ICICI Direct
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Market share loss continues…
About the stock: VST Industries (VST) is cigarette company in India, involved in manufacturing, marketing cigarettes & trading of unmanufactured tobacco.
* The company has two cigarettes manufacturing facilities in Hyderabad. It has five major brands, which includes, ‘Total’, ‘Charms’, ‘Moment’, ‘Special’, and ‘Edition’ and a direct distribution reach of over 1.1 million outlets
Q2FY23 Results: VST reported muted results with 10.9% dip in operating profit.
* Sales were up 26.6% YoY led by high tobacco exports
* EBITDA was at | 93 crore, down 10.9% YoY, with margins at 27%
* PAT grew 15.4% as other income includes | 17.5 crore tax write-back
What should investors do? VST Industries’ share price has underperformed the market with mere 6% return in the last five years (from | 3433 in November 2017 to | 3636 in November 2022).
* We slightly change our numbers for VST Industries. However, premium cigarettes need to gain traction to re-capture market share
* We maintain our HOLD rating on the stock
Target Price and Valuation: We revise our target price to | 3725 valuing the business at 15x FY24 earnings.
Key triggers for future price performance:
* VST saw 9% cigarette volume growth in H1FY23. However, it is still below pre-Covid-19 levels. The company is focusing on brand building through higher spends at point of sale, consumer promotions & product innovation
* High priced cigarettes ‘Total’ & ‘Edition’ contribute ~50% to volumes. The contribution of high priced cigarettes is expected to continue to rise. The company is looking to introduce new brands at higher price points
* Duties & taxes on cigarettes are expected to remain stable given increasing prevalence of illicit & contraband cigarettes
* Dividend payout is expected to remain ~70% in future as well. We estimate dividend per share of | 160 and | 180 in FY23E & FY24E, respectively, with dividend yield of ~5%
Alternate Stock Idea: We like TCPL in our FMCG coverage.
* Strong innovation & premiumisation strategy in salt, tea, Sampann & Soulful in the Indian market expected to drive sales & margins
* We value the stock at | 950 with BUY rating
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