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VST Industries: Excise duty woes take toll on profits - Views on News from Equitymaster
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  • Aug 22, 2015 - VST Industries: Excise duty woes take toll on profits

VST Industries: Excise duty woes take toll on profits
Aug 22, 2015

VST Industries declared results for the quarter ended June 2015. The company's net revenues de-grow by 11% YoY, while profits come in lower by 28% YoY. Here is our analysis of the results:

Performance summary
  • Net revenues were down by 11% YoY for 1QFY16.
  • Operating profits decline by 27% YoY as margins contract by 5.9% YoY due to higher overall costs during the quarter.
  • Net profits decline by 28% YoY led by a poor operating performance.

Financial performance summary
(Rs m) 1QFY15 1QFY16 Change
Gross sales 3,962 4,730 19.4%
Excise duty 1,835 2,829 54.2%
Excise rate 46% 60%  
Net sales 2,128 1,901 -10.6%
Other operating income 14 13 -3.0%
Total revenues 2,141 1,914 -10.6%
Expenditure 1,447 1,408 -2.7%
Operating profit (EBITDA) 694 507 -27.0%
EBITDA margin (%) 32.4% 26.5%  
Other income 30 49 63.0%
Interest  0 0  
Depreciation 75 81 8.7%
Profit before tax 650 475 -26.9%
Tax 218 166 -23.8%
Profit after tax/(loss) 432 309 -28.4%
Net profit margin (%) 20.2% 16.2%  
No. of shares (m) 15  
Diluted earnings per share (Rs)*   90.6  
Price to earnings ratio (x)   16.6  
* trailing 12 month earnings

What has driven performance in the quarter ended June 2015?
  • VST Industries' gross revenues were up 19% YoY. However, the sharp jump in excise duties led to a decline in net revenues. Excise duty during the quarter stood at about 60% as compared to 46% in the same quarter last year. In this year's budget, the government hiked excise duty in the sub-65 mm category of cigarettes (a major portion of VST Industries' cigarette volumes) by 25%. For other length cigarettes, the duty was hiked by 15%.

  • Operating profits declined by over a fourth as margins come in at 26.5% as compared to 32.4% in the same quarter last year. All of the costs heads rose as a percentage of net sales.

  • Net profits fall by 28% YoY, in line with the decline in operating profits.
What to expect?
VST Industries continues to bear the brunt of the sharp increase in excise duty. While passing on the hikes is a possibility for cigarettes manufacturers, they need to consider the damage in the form of sales volumes. The year on year increase in excise duties has become a trend in recent times. And volumes have been impacted in the process. For example, for the full year FY12, VST Industries sold 9.1 bn cigarettes. In FY15, the company's volumes were lower by about 18% since then; 7.5 bn sticks. Over these three years nevertheless, revenues grew by 7% YoY. EBIDTA grew by 4% YoY in this time. What the plans of the government are with regards to hiking duty rates in the future is anyone's guess. But the probability of the same increasing is higher given the government's stand on tobacco consumption in general and cigarette smoking in particular. While cigarette manufacturers have been talking about how the other relative harmful forms of tobacco are not being taxed as much. their pleas seem to be falling on deaf ears.

VST Industries' stock has declined substantially after peaking to Rs 1,900 odd levels early this year. At current levels of Rs 1,508, the stock trades at 14.5 times our estimated FY17 earnings. Given the very comfortable high dividend yield (of around 4.5%) at the moment, we maintain our hold view on the stock.

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