Buy VST Industries- Key takeaways from call with management: Anand Rathi

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VST Industries
Key takeaways from call with management
Management, in its telecall, indicated that 3QFY11 revenue and
margin were driven by the strong volume growth in Cigarettes.
However, decline in leaf tobacco exports resulted in only 9%
overall revenue growth. We maintain Buy on the stock with
target price of `819/share.

 Reduction in exports impacts revenue. VST’s exports of leaf
tobacco dropped 30% yoy, although Cigarettes revenue increased
33%. Overall revenue growth was 9% yoy. Cigarettes volume was
up 9% yoy. The company increased prices of Charms (15% of
sales) by 15% in Dec ’10.
 Presence at the `2 price-point aiding market share gain. VST
derives ~75% of its revenue from Cigarettes at price point of `2.
Product positioning at this unique price point has helped the
company gain market share. VST indicated that it is also looking
increasing revenue at the price point of `2.5.
 Quarterly variations in margin to continue. Management
indicated that as the tobacco-exports business in order based and
depends on international tobacco prices as well, it will continue to
report volatile revenue growth; also, with change in revenue mix,
margin will remain volatile.
 Valuation and risks. We value the stock at target price of `819
based on DCF methodology. At our target price, the stock trades
at target PE of 16x on FY12e earnings. Key risks are increase in
excise duty and raw material prices.