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VST Ind.: Weak sales and margins dip - Views on News from Equitymaster
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VST Ind.: Weak sales and margins dip
Oct 19, 2012

VST Industries has declared its results for 2QFY13. The company has reported a 5.8% YoY growth in sales and a 17.8% YoY fall in profits. Here is our analysis of the results.

Performance summary
  • Revenues for VST Industries grew by 4.8% YoY during 2QFY13. During 1HFY13, total income was up by 5.2% YOY.
  • Operating margin contracted by 3.5% to 24.6% as a result of a steep jump in raw material costs. The operating profitability for 1HFY13 declined by 4.5% to 26.2% due to a faster rise in operating expenses.
  • Net profit tumbled by 17.8% YoY as a result of lower operating income coupled with slump in other income earned. For 1HFY13, the company's earnings were down by 14%.


Performance Snapshot
(Rs. m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Income 1,681 1,762 4.8% 3151 3314 5.2%
Expenditure 1,209 1,329 9.9% 2185 2446 12.0%
Operating profit (EBDITA) 472 433 -8.2% 966 868 -10.1%
EBDITA margin (%) 28.1% 24.6%   30.7% 26.2%  
Other income 72 25 -65.3% 126 92 -27.0%
Interest (net) - -   - -  
Depreciation 50 54 8.3% 100 107 -7.0%
Profit before tax 495 405 -18.2% 993 853 -14.1%
Extraordinary inc/(exp) - -   - -  
Tax 159 129 -19.0% 315 272 -13.5%
Profit after tax/(loss) 336 276 -17.8% 678 581 -14.3%
Net profit margin (%) 20.0% 15.7%   21.5% 17.5%  
No. of shares (m)         15.4  
Diluted earnings per share (Rs)*         86  
Price to earnings ratio (x)         21  
*On a trailing 12-months basis

What has driven performance in 2QFY13?
  • VST Ind reported a subdued 4.8% rise in topline.

    Cost break-up...
    (Rs m) 2QFY12 2QFY13 Change
    Raw materials 761 906 19.0%
    % sales 45.3% 51.4% 615.65
    Staff cost 146 158 8.2%
    % sales 8.7% 9.0% 27.92
    Other expenditure 303 265 -12.4%
    % sales 18.0% 15.0% -295.04

  • VST's profitability was hit by the escalation in raw material costs during the quarter. The raw material-to-sales ratio rose to 51.4% from 45.3% in the year ago quarter. Although, the company's other expenditure fell by 12.4% but it was not sufficient to plug the 3.5% slide in operating margin.

  • Earnings fell by 17.8% on account of a 8% fall in operating profit coupled with 65% slump in other income earned during the quarter.

What to expect?
At a price of Rs 1825, the stock is trading at 21 times its trailing twelve months earnings.

Since the start of FY13, the company's earnings have been under cloud due to steep rise in expenses, particularly raw material costs. Going forward, the company may find it difficult to pass on the incremental costs arising from a structural rise in taxation on cigarettes. The state government in Uttar Pradesh raised the value-added tax on cigarettes from 17.5% to 50% in July 2012. Other states like Karnataka and Kerala too have raised taxes on cigarettes. After the reclassification of gutka as a foodstuff, 12 states in India have banned its sale, production and distribution. As state governments try to make up for the revenue loss through higher taxes on cigarettes, the company's cigarette sales may be hit further. However, the company may keep paying out good dividends and hence, original investors can keep holding on to the stock.

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