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About the stock VST Industries (VST) is a cigarette company in India, involved in manufacturing, marketing cigarettes & trading of unmanufactured tobacco.

• The company has two cigarette manufacturing facilities in Hyderabad, AP. It has five major brands, which includes, ‘Total’, ‘Charms’, ‘Moment’, ‘Special’, & ‘Edition’ and a direct distribution reach of over 1.2 million outlets

Q4FY23 Results: VST reported dismal numbers with 7% de-growth in cigarettes sales mainly due to 10% volume decline.

• Sales were flat YoY; cigarette volume dip was offset by higher tobacco sales

• EBITDA was at | 82.1 crore, down 22.8% YoY, with margins at 27.2%

• Consequently, PAT de-grew 21.2% to | 68.7 crore

What should investors do? VST industries’ share price has underperformed the market with mere 7% return in the last five years (from | 3061 in April 2018 to | 3276 in April 2023).

• We remain cautious on cigarettes volume growth prospect; the company is losing market share given its limited presence in higher price cigarettes

Target Price and Valuation: We maintain our HOLD rating with a revised target price of | 3300 valuing the business at 13x FY25 earnings.

Key triggers for future price performance:

• VST saw flat cigarette volume growth in FY23 with market share loss mainly due to limited presence in high-priced cigarettes (| 10 price point and above). VST has brand ‘Edition’ at | 11 price point, which only contributes 5% to sales. It has only recently launched the variant of ‘Total’ at | 10/stick

• Duties & taxes on cigarettes to remain stable given high prevalence of illicit & contraband cigarettes. Moreover, crackdown on illicit & contrabands recently helped the cigarette industry gain volumes

• Dividend pay-out is expected to remain at ~70% in future as well. We estimate dividend per share of | 175 & |190 in FY24E & FY25E, respectively, which translates to dividend yield of ~5%

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

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

• We value the stock at |980 with BUY rating

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