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VST Ind.: Sales & profits zoom - Views on News from Equitymaster
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VST Ind.: Sales & profits zoom
Aug 20, 2014

VST Industries has declared its results for 1QFY15. The company has reported a 21% YoY rise in sales and a 59% YoY increase in profits. Here is our analysis of the results.

Performance summary
  • The company recorded topline growth of 21%.
  • The operating margin expanded sharply by 9.9% YoY to 32.4% backed by lower raw material costs and other expenses (both as a proportion of sales).
  • Profits grew by a relatively slower 59% YoY as compared to a 75% jump in operating profit. The muted performance has been on account of higher depreciation and tax charges coupled with lower other income earned.
Performance Snapshot
(Rs. m) 1QFY14 1QFY15 Change
Income 1,768 2,141 21.1%
Expenditure 1,370 1,447 5.6%
Operating profit (EBDITA) 398 694 74.6%
EBDITA margin (%) 22.5% 32.4% 9.9%
Other income 60 30 -49.6%
Interest (net) - -  
Depreciation 58 75 28.4%
Profit before tax 400 650 62.6%
Extraordinary inc/(exp) - -  
Tax 129 218 69.5%
Profit after tax/(loss) 271 432 59.4%
Net profit margin (%) 15.3% 20.2% 4.8%
No. of shares (m)   15.4  
Diluted earnings per share (Rs)*   108  
Price to earnings ratio (x)   14  
* trailing 12 month earning

What has driven performance in 1QFY15?
  • VST Industries posted a 21% YoY increase in income in June 2015 quarter.

    Cost break-up...
    (Rs m) 1QFY14 1QFY15 Change
    Raw materials 869 944 8.7%
    % sales 49.1% 44.1% -504.1
    Staff cost 165 191 16.2%
    % sales 9.3% 8.9% -37.6
    Other expenditure 337 312 -7.6%
    % sales 19.1% 14.6% -451.6

  • The company reported a steep rise in profitability on the back of savings in raw material costs. As a proportion of sales, raw material costs fell by 5% YoY during the quarter. Even an 8% drop in other expenses led to a 4.5% YoY drop in other expense to sales ratio. Resultantly, the company's operating margin expanded to 32.4% in 1QFY15 from 22.5% in 1QFY14.

  • At the net level, margin expanded by a mere 4.8% due to sharp rise in depreciation charges and tax outgo. The tax incidence jumped to 33.5% in 1QFY15 from 32.2% in 1QFY14. Even the other income earned has halved during the quarter to Rs 30 m.
What to expect?
Since the duty revisions in the Union Budget for 2014-15 were announced in July, VST Industries has been able to report better margins for the June 2014 quarter. The micro ( < 65 mm ) and regular (65-70 mm) filter segments were subject to the steepest duty hikes of 72% and 17%, respectively in the recent Union Budget. As the company has a major presence in these two segments, it is likely to be badly hit. Moreover, even the excise duty on unmanufactured tobacco was raised from 50% to 55%. Thus a steep rise in excise duty incidence is likely to exert pressure on the company's margins in future.

At a price of Rs 1530, the stock is trading at 14 times its FY17 earnings. We have recently upgraded our forecast model with FY14 financials and duty hikes and as a result the target price of the stock has been revised downwards from Rs 2200 to 1945. Our target price of Rs 1,945 implies average annual returns of 9% over 2-3 years time frame. This coupled with dividend yield of at least 4% translates into an overall expected return of 13%. Therefore we recommend investors to buy the stock from a perspective of around 2-3 years. However, investors with a lower risk appetite, who are not comfortable with the said returns, can choose to invest in the stock once it corrects by about 10% from current levels.

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Feb 22, 2018 03:37 PM


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