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VST Ind.: Operating cost affects bottomline
Jul 16, 2010

VST Industries has announced its 1QFY11 results. The company has reported a 1.4% YoY growth in sales and a 25% fall in profits. Here is our analysis of the results.

Performance summary
  • Sales for VST Industries were flat during 1QFY11 growing by 1.4%.
  • Operating income (EBITDA) fell by a 29% YoY as a result of higher advertisement expense and higher other expenditure. The fall could have been sharper but for lower raw material costs.
  • The net profits fell by 25% YoY as a result of lower operating income.


(Rs. m) 1QFY10 1QFY11 Change
Net sales 1,261 1,279 1.4%
Expenditure 978 1,077 10.1%
Operating profit (EBDITA) 284 202 -28.9%
EBDITA margin (%) 22.5% 15.8%  
Other income 94 70 -25.3%
Interest (net) (3) (4)  
Depreciation 39 46 18.3%
Profit before tax 342 230 -32.8%
Extraordinary inc/(exp)      
Tax 101 50 -50.9%
Profit after tax/(loss) 241 180 -25.2%
Net profit margin (%) 19.1% 14.1%  
No. of shares (m) 15 15  
Diluted earnings per share (Rs)*   36.2  
Price to earnings ratio (x)   14.9  
* trailing 12 month earning

What has driven performance in 1QFY11?
  • Sales for the company remained flat as a result of flat demand for cigarettes and benign tobacco prices.
    Cost break-up...
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials 701 631 -10.1%
    % sales 55.6% 49.3%  
    Staff cost 129 144 12.2%
    % sales 10.2% 11.3%  
    Advertisment cost 31 127 310.0%
    % sales 2.5% 9.9%  
    Other expenditure 117 175 49.6%
    % sales 9.3% 13.7%  

  • Operating margin fell by 6.7% during the quarter. This fall was due to higher advertisement costs and higher other expenditure as a percentage of sales. Advertisement costs increased from 2.5% in 1QFY10 to 9.9% in 1QFY11 as a percentage of sales. However, the company benefited from a fall in raw material costs. During the quarter, raw material costs fell by 10% YoY.

  • The net profit margin of the company fell by 25% YoY during the year as a result of increase in operating costs. However, the company benefited from a lower effective tax rate during the quarter which helped prop the bottom line.

What we expect?
At a price of Rs 538, the stock is trading 12 times our estimated FY11 earnings. We believe that the stock is not very overpriced at these levels and in light of its decent dividend yield and stable business model, continue to maintain our HOLD view.

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