VST Industries Research Report By ICICI-Direct

Premium brands to aid profitability…

 VST Industries reported strong revenue growth of 26.5% to | 279.1 crore on a comparable basis with cigarettes and tobacco segments contributing | 209.6 crore and | 90 crore to revenues, respectively. Cigarette volumes were flat during the quarter and for FY18. The contribution of 64 mm and 69 mm category cigarettes to the topline was in the ratio of 50:50. Premium brands Total and Edition contributed 20% to overall volumes

 With the increasing contribution of premium brands, operating profit witnessed a considerable jump of 25.6% for the quarter YoY to | 79.6 crore (I-direct estimate: | 71.2 crore). EBITDA margin came in at 28.5%, similar to the corresponding quarter, as employee and other expenses were curtailed vs. the run rate of previous quarters. Net profit for the quarter, thus, jumped 35.9% YoY to | 48.3 crore (Idirect estimate: | 41.8 crore)

Realisation to lead growth, going ahead; volume growth to recover

In FY18, cigarette volumes remained flat on account of a steep rise in tax incidence. The company took a price hike to the tune of 10% in the year largely passing on the increase in the indirect tax incidence post GST implementation.

We estimate 9.0% and 10.0% realisation increase for FY19E and FY20E, respectively. Given the steep price hike in the current year resulting in flat volumes for FY18, we expect a volume recovery in 3% and 2% growth in FY19E and FY20E, respectively, largely on the back of a favourable product mix towards high priced cigarettes in the regular & king size category. Thus, we estimate net revenue CAGR of 11.4% in FY18-20E to Rs 1176 crore.

EBITDA/stick to improve with favourable product mix

VST Industries, with 7.5% volume market share, is a prominent player in the low priced cigarette (Rs 3.0-5.0/stick) segment in India (brands: Charms, Charminar, Kingston, Moments, premium: Total & Edition).

Over time, VST has shifted its product mix towards lower length cigarettes, which attracted lower tax (aiding volume) and also launched premium cigarettes – Total, under 69 mm at price point of Rs 6 (contributing ~15% to the total mix) and Edition, under King’s size at price point of Rs 10 (~5% contribution to total mix).

Currently, Charms remain the largest brand for VST contributing more than 20% of sales. With a favourable product mix and price hikes, we estimate the EBITDA/stick will increase from Rs 0.38 in FY18 to Rs 0.41 in FY19E and Rs 0.47 in FY20E. Dividend payout to remain encouraging VST’s dividend payouts increased from 52.9% in FY08 to 65.8% in FY18 on account of robust profitability and free cash flows over the same period.

The company’s profitability has increased at 12.1% CAGR in FY08- 18 while FCF has grown at 10.9% CAGR in FY08-18. Going ahead, with no major capex requirement, we expect the payout to remain elevated at 64.7% and 68.5% for FY19E and FY20E, respectively.

Favourable mix of premium cigarettes to drive profitability; maintain BUY

Increased tax incidence and, thus, the muted consumption environment is expected to restrict any significant volume growth. However, with the improving product mix towards high margin products (contributing ~20% currently to total volumes), EBITDA/stick is estimated to increase to Rs 0.47 per stick.

We reiterate BUY recommendation on the stock with a target price of Rs 3900/share, valuing it at 24.3x FY20E earnings.