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VST Ind.: Excise hike pulls down profits - Views on News from Equitymaster
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VST Ind.: Excise hike pulls down profits
Feb 9, 2015

VST Industries has declared its results for 3QFY15. The company has reported a 6.6% YoY fall in sales and a 21.6% YoY slump in profits. Here is our analysis of the results.

Performance summary
  • The company's topline fell by 6.6% YoY for 3QFY14. For 9mFY15, the revenues increased by 2.8% during 1HFY15.
  • The operating margin contracted by 5.2% YoY due to higher operating expenses for the quarter. For 9mFY15, the operating margin expanded by 3.1%.
  • Net profit grew slumped by 21.6% YoY on a 23% fall in operating profit. For 9mFY15, bottomline was up by 13.5%.

Performance Snapshot
(Rs. m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Income 2,122 1,981 -6.6% 6,001 6,169 2.8%
Expenditure 1,488 1,493 0.4% 4,458 4,394 -1.4%
Operating profit (EBDITA) 634 488 -23.0% 1543 1775 15.0%
EBDITA margin (%) 29.9% 24.6% -5.2% 25.7% 28.8% 3.1%
Other income 25 42 73.1% 117 130 11.4%
Interest (net) - -   - -  
Depreciation 78 76 -2.2% 195 228 17.4%
Profit before tax 581 455 -21.7% 1,466 1,677 14.4%
Extraordinary inc/(exp) - -   - -  
Tax 194 151 -22.1% 483 562 16.3%
Profit after tax/(loss) 387 304 -21.6% 983 1,115 13.5%
Net profit margin (%) 18.2% 15.3% -2.9% 16.4% 18.1% 1.7%
No. of shares (m)         15.4  
Diluted earnings per share (Rs)*         106  
Price to earnings ratio (x)         17  
* trailing 12 month earning

What has driven performance in 3QFY15?
  • VST Industries clocked a 6.5% YoY fall in revenues in December 2015 quarter.

    Cost break-up...
    (Rs m) 3QFY14 3QFY15 Change
    Raw materials 1,038 1,003 -3.3%
    % sales 48.9% 50.6% 173.2
    Staff cost 173 191 10.5%
    % sales 8.1% 9.6% 149.1
    Other expenditure 277 299 7.8%
    % sales 13.1% 15.1% 202.3

  • Falling sales have led to a decline in operating leverage. Therefore both staff costs and other expenditure fell by 1.5% YoY and 2% YoY, respectively as a proportion of sales. Even the fall in raw material costs is less as compared to sales. Resultantly, raw material to sales ratio increased by 1.7% YoY during the quarter. Thus the operating margin contracted by 5.2% YoY for the quarter.

  • Net profits fell by 21.6% YoY on a 23% YoY fall in operating profits. A 73% rise in the other income earned limited the downfall to some extent.
What to expect?
VST Industries' cigarette sales have been hit by steep hike in excise duty particularly in the micro( < 65 mm ) and regular (65-70 mm) filter segments where it has a major presence. As per Tobacco Institute of India, higher tax rates led to a double-digit decline in the sale of legal cigarettes in the second half of 2014. Going ahead, the government wants to maintain a tough stance against cigarette smoking with proposals such as ban on sale of loose cigarettes and raising the age limit of cigarette smokers being under consideration.

At a price of Rs 1778, the stock is trading at 16 times its FY17 earnings. Given the stable nature of the cash flow generation of the business and also taking into account a good dividend yield, we maintain our HOLD view on the stock.

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