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Losing market share with high competitive intensity

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 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

Q4FY22 Results: VST reported dismal results with 5% cigarette volume de-growth.

* Sales were up 8.8% YoY while cigarettes volumes saw 5% YoY dip

* EBITDA was at | 106.3 crore, up 8.2% YoY, with margins at 35.1%

* Consequent PAT was at | 87.2 crore (up 19.7% YoY)

What should investors do? VST’s share price has underperformed the market with mere 6% return in last five years (from | 3048 in April 2017 to | 3229 in April 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 digit in stable tax scenario

* We continue to maintain our HOLD rating on the stock

Target Price and Valuation: We maintain our Hold rating with a target price of | 3425 valuing the business 14x FY24 earnings.

Key triggers for future price performance:

* The company saw 6% cigarette volume growth in FY22 after 10% volume de-growth last year. VST is focusing on brand building through higher adspends at point of sale, consumer promotions & product innovation

* High priced cigarettes ‘Total’ & ‘Edition’ contributing 45% to volumes. The contribution of high priced cigarettes would continue to rise

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

* Dividend payout is restored at ~70% after two years of lower dividend due to liquidity concerns during Covid-19 disruption

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

* Strong innovation & premiumisation strategy in salt, tea, Sampaan & Soulful in Indian market expected to drive sales & margins We value the stock at | 910 with BUY rating

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