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VST: Days of glory

Feb 14, 2001

Yet another company has attracted the corporate raiders attention. This time it is the Hyderabad-based VST Industries (VST). VST manufactures and distributes cigarettes sold under the brand names "Charminar" & "Charms”. The company commands a 13% share of the Rs 80 bn domestic market. Cigarettes account for nearly 93% of its turnover while unmanufactured and cut tobacco accounts for the rest. The company is the largest exporter of cigarettes to the Middle East from India. The Damani brothers (BSE brokers) have offered Rs 112 per share for 20% stake of VST. The offer is at a 27% premium to yesterday’s closing price of Rs 88.6. The brothers already own 15% of the company through their investment company, Brightstar Investment Limited. The Damani Brothers have stated that they have no plans beyond hiking their stake in the company and their decision to up stake in VST is purely investment led.

British American Tobacco (BAT) owns 32% stake in VST. Interestingly, the Foreign Investment Promotion Board (FIBP) had refused BAT when it wanted to increase its stake both in VST and ITC, where it holds 34% stake.

VST has improved its performance in FY00. The company earned a net profit of Rs 157 m, on the back of a Rs 7.4 bn turnover. In the first nine months of FY01, the company has earned 167 m as profits. Based on that, the stock currently trades at a P/e multiple of 6.1 times its annualised nine month FY01 earnings.

Though the open offer is good to perk up the stock’s valuations, it is still marginally below the 52 week high (Rs 119) attained by VST. Even at Rs 112, the stock trades at 7.8 times its nine month annualised earnings. BAT is likely to cry foul over this situation, and is most likely to be given the permission to counter offer.

It is better for the retail shareholders to wait and watch how BAT responds to this offer and then take the plunge. The glory days have just begun for VST shareholders. No need to hurry on this.

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