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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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