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VST Industries: Hurt by tobacco prices - Views on News from Equitymaster
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VST Industries: Hurt by tobacco prices
Apr 25, 2009

Performance summary
  • Standalone topline grows by 12.1% YoY, presumably on the back of higher sales of filtered cigarettes.
  • Operating profits decline by 18.8% YoY, mainly on account of higher raw material costs, resulting into a 6.9% fall in EBDITA margins during the fiscal.
  • Bottomline grows by 6% YoY, aided by higher other income and exceptional items. Excluding exceptional, bottomline sees a decline of 16% YoY.
  • The board has recommended a dividend of Rs 30 per share (dividend yield of 9%)


Standalone financial snapshot
(Rs m) FY08 FY09 Change
Net sales 3,416 3,831 12.1%
Expenditure 2,565 3,140 22.4%
Operating profit (EBDITA) 851 691 -18.8%
EBDITA margin (%) 24.9% 18.0%  
Other income 127 194 53.0%
Interest (net) (20) (10)  
Depreciation 137 158 15.3%
Profit before tax 861 737 -14.3%
Extraordinary inc/(exp) - 126  
Tax 277 245 -11.5%
Profit after tax/(loss) 584 618 5.9%
Net profit margin (%) 17.1% 16.1%  
No. of shares (m) 15.4 15.4  
Diluted earnings per share (Rs)* 37.9 40.1  
Price to earnings ratio (x)**   8.1  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in FY09?
  • The standalone topline of VST Industries grew by around 12 % YoY during the fiscal. This growth could be owed to the increased proportion of filtered cigarettes in the portfolio. It may be noted that the company has been successful in reorienting its business model from non filter cigarettes to filter cigarettes so much so that more than 90% of the revenues now comes from the filter cigarettes category. Furthermore, the company has a well entrenched position in filter cigarettes in select regions, thus enabling the growth in topline.

  • The company’s operating margins have contracted by 6.9% during the fiscal. Greater than proportionate rise in raw material costs as well as other expenses have been responsible for the contraction in margins. Infact, the former has come in higher by as much as 32.2%, shaving off the company’s margins by 610 basis points. As per the recent newspaper reports, the tobacco prices have increased by around 50% during the past one year.

    Cost break-up…
    (Rs m) FY08 FY09 Change
    Raw materials 1,369 1,809 32.2%
    % sales 40.1% 47.2%  
    Staff cost 450 489 8.7%
    % sales 13.2% 12.8%  
    Other expenditure 746 841 12.7%
    % sales 21.8% 22.0%  

  • The bottomline growth for the company has come in at 5.9% YoY, despite the fact that operating profits declined during the fiscal. However, higher other income to the tune of 53% and an exceptional income saved the day for VST. On the latter, it received a refund of Rs 126 m from the excise department on account of winning a tax dispute. The company has accounted for the same by way of an extraordinary item in the profit and loss account. Excluding the same, net profits declined by 15.7% YoY during the fiscal.

What to expect?
At current price of Rs 325, the stock is trading at a multiple of 7x its expected FY11 earnings per share. Although the company performance has been below our earnings estimates for the fiscal, what gives us comfort is the fact that the underperformance has not been significant. We continue to remain positive on the stock.

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