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Volume continues to remain sluggish

VST Industries reported dismal set of numbers with ~13% decline in cigarette volumes given demand conditions still remained weak due to continue work from home culture. Moreover, the company faced stiff competitive pressure with peers increasing trade discounts & schemes. Gross revenues witnessed a growth of 3.3% led by 18% increase in cigarettes sales. The increase in sales was largely on account of price increase taken last year after the excise duty increase in budget & change in product mix. High priced cigarettes brands ‘Total’ (| 7/stick) & ‘Edition’ (|11/stick) contributes 45% to volumes. Tobacco sales was down to | 60 crore from | 100 crore in corresponding quarter due to sluggish demand of Indian tobacco in export market. The company paid | 93.5 crore excise duty as against | 24.7 crore in corresponding quarter. Gross margins were higher by 674 bps mainly due to increase in cigarettes prices & change in product mix towards the high priced cigarettes. Operating profit dipped by 7.8% to | 100 crore. Net profit witnessed de-growth of 9.5% to | 73.7 crore.

Stability in taxation is key to growth

Cigarette Industry faced stiff challenges of excise duty increase & pandemic induced lockdown in FY21. This resulted in significant declined in cigarettes volumes for the Industry. In similar lines, VST also witnessed 22% cigarette volume decline in 9MFY21. Work from home culture & still some restrictions on large celebratory gatherings has been one of the major reasons for continued volume de-growth. We believe stable taxation is key for recouping lost volumes in next two years. We have seen two years of stable taxation between FY18-20 resulted in double digit growth in cigarettes volumes. We expect 2.6% revenue CAGR during FY20-23 with 6% & 3% volume growth in FY22E & FY23E. Considering continuous increasing contribution of premium priced cigarettes, we expect operating margin improvement & subsequent earnings CAGR of 6.1% in FY20-23E.

Strong free cash flows; high dividend pay-out

VST is generating ~| 300 crore (on an average) free cash flow every year from FY18 onwards. Despite, severe impact on volumes, it has been able to maintain similar profitability & continuation of strong free cash flows in FY21E. Moreover, it has consistently paid ~65% dividend in last five years (except 52% in current year due to uncertainty over pandemic). We believe pay-out would increase to 70% given company is holding more than |700 crore of cash & equivalent & doesn’t have any capex requirement in future. Despite, expected subdued earning, we expect RoCE & RoE to improve to 52.8% & 39% respectively by FY23E

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