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VST Ind.: Strong profitable growth continues - Views on News from Equitymaster
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VST Ind.: Strong profitable growth continues
Oct 14, 2011

VST Industries has declared its results for 2QFY12. The company has reported a 5.9% YoY growth in sales and a 40.5% YoY growth in profits. Here is our analysis of the results.

Performance summary
  • Sales for VST Industries grew by 5.9% YoY during 2QFY12. Other operating income fell short of expenses by Rs 5.9 m compared to Rs 43.2 m earned in the year-ago quarter. Thus the overall income during the quarter was up by a subdued 2.7% YOY. For the half year ended September 2011 (1HFY12), sales were up by 10% YOY.
  • Operating margin expanded by 600 basis points (YOY) to 28.7% as a result of decline in raw material and staff costs (as a percentage of sales). The operating profitability for 1HFY12 jumped to 31% as compared to 19.7% registered in the year-ago quarter
  • The net profits grew by 40.5% YoY as a result of higher operating income as well as other income partly offset by increase in effective tax rate. For the half year ended September 2011, the company's earnings leapfrogged by 64.3% YOY.

Financial performance: A snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Income 1,604 1,648 2.7% 2875 3120 8.5%
Expenditure 1240 1175 -5.2% 2308 2154 -6.7%
Operating profit (EBIDTA) 365 472 29.5% 567 966 70.3%
EBDITA margin (%) 22.7% 28.7%   19.7% 31.0%  
Other income 31 69 126.9% 100 118 17.7%
Interest (net) (0) (3)   (4) (9)  
Depreciation 47 50 4.7% 100 93 -6.5%
Profit before tax 345 492 42.7% 564 982 74.2%
Extraordinary inc/(exp) -   - - -  
Tax 108 159 47.6% 157 315 99.9%
Profit after tax/(loss) 237 333 40.5% 406 668 64.3%
Net profit margin (%) 14.8% 20.2%   14.1% 21.4%  
No. of shares (m)         15.4  
Diluted earnings per share (Rs)         78  
Price to earnings ratio (x)*         17  

What has driven performance in 2QFY12?
  • Sales for VST Ind grew at a modest 5.9% driven by reasonable growth in volumes and price hikes. Favorable taxation and increase in the cost of competing tobacco products such as pan masala and chewing tobacco aided the sales growth during the quarter.

    Cost break-upů
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw materials 854 799 -6.4% 1495.1 1415 -5.4%
    % sales 53.2% 48.5%   52.0% 45.4%  
    Staff cost* 158 146 -7.5% 302.00 300.5 -0.5%
    % sales 9.8% 8.8%   10.5% 9.6%  
    Other expenditure 233 269 15.4% 476.30 526.6 10.6%
    % sales 14.5% 16.3%   16.6% 16.9%  

  • Operating margin appreciated by 600 basis points during 2QFY12. The steep jump in profitability was an outcome of lower raw material and employee costs. As a proportion of sales, raw material costs were down by 470 basis points and staff costs declined by 100 basis points on a YOY basis. However, other expenditure increased by 15.4% compared to the year-ago quarter.

  • The company's net profit clocked a steep rise of 40.5% backed by 29.5% jump in operating income and a 127% surge in other income earned during the quarter on a YOY basis. The effective tax rate was marginally higher at 32% compared to 31% in the year-ago quarter.

What to expect?

At a price of Rs 1349, the stock is trading at 17 times its trailing twelve months earnings. Under the government's new safety guidelines, chewing tobacco like gutkha and pan masala have been included under banned food products. The Food Safety and Standards Authority of India under the health ministry has prohibited tobacco to be used as an ingredient in any food products. The non-tobacco industry, which was already reeling under ban of plastic pouch packaging, will be further impacted by the latest ruling. This is likely to benefit the cigarette industry. In addition, the government's move to issue less gory pictorial warnings on cigarette packs is not likely to significantly affect its future sales. Thus given favourable taxation policy as no excise duty hikes on cigarettes were affected in the recent budget coupled with other favourable factors, the company's earnings are expected to be robust in future. 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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