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Recommend to ACCUMULATE VST Industries with 1 Year
price target of `1600 at 16.2xFY13E EPS.
INVESTMENT ARGUMENT:
* Second largest player in Indian cigarette market by sales
* Shift from non-filter to filter cigarette improved realization
* Strong growth in leaf tobacco exports
Second Largest Player : VST Industries is the second largest player
in Indian Cigarette industry by sales. ITC has a market share of ~78%
while VST Ind. and Godfrey Phillips account for ~8% each. Balance
is made up by imports, unorganised sector & smaller players. VST
has positioned itself as the lowest cost filter cigarette provider with
market presence in south, south central, UP, north-east states.
Shift from non-filtered to filtered stands complete: GoI increased
excise on non - filter segment, which forced non - filter players to shift
to filter segment.VST shifted its product portfolio in favour of filter
cigarettes (95% of total volume) and grew volumes and price at CAGR
of 8% and 12% respectively since 2009 vs flat volumes for ITC. Steep
increase in excise duties on cigarette over the years has impacted
volume growth but net realization of large players have continued to
move up, which compensated for flat volumes over the last 5 years
for the industry as a whole.
Increased traction in premium products will be margin accretive:
The industry growth is faster in premium segment vs mass & mid
segment. VST's premium brands witnessed volume growth of 30%+
in FY11 and now account for 33% of its volume resulting in higher
realization besides giving phillip to volumes.
Exports present a promising opportunity: VST exports leaf
tobacco from India and accounts for 26% of its sales. During 2005-10
peiod, tobacco export from India has shown CAGR of 30%.VST's
export has also trebled in last 4 years to `150 Cr. It presents a promising
opportunity and will be a good earnings driver.
Valuations and View: VST is quoting at a P/E of 13.7x /12.5x on
FY12E/FY13E EPS. Its return ratios are ~50% with unleveraged
Balance Sheet and ~5% dividend yield. There are upside risks to our
conservative volume growth estimates of 2% in FY13E, which we
have estimated due to expectation of excise duty hikes in budget. In
the case of moderate or no hike volume growth may surprise positively.
Recommend ACCUMULATE on VST Industries with a 1 Year target
price of `1600 (16xFY13E EPS, discount of 30% to ITC's valuations)
ABOUT THE COMPANY
VST (the erstwhile Vazir Sultan Tobacco Company) was incorporated in 1930 at Hyderabad, AP,
and has a factory at Secunderabad, AP. It has a collaboration with the BAT Group, UK, which holds
a 32.16% stake in the company. VST's Plant Location is at Azamabad in Hyderabad. Prominent
brands are Charminar, Charminar Special Extra Filter, Charms Smooth Virginia, Charms Virginia
Filter and Moments.
CONCERNS
Challenges from Illegal trade: Cigarettes account for ~15% of tobacco consumption in India and
just 5.7% of Indian adults smoke cigarettes as against 35% consuming tobacco. The biggest concern
for the industry is the increasing illegal trade in cigarettes, which now accounts for 16% of industry
volumes as against 8% last year and 5% two years ago. India is now ranked sixth worldwide in illicit
cigarette trade with a growth rate of 58% over 2004-09.
Volatility in Leaf tobacco prices and increasing competition: Leaf tobacco prices in international
markets are volatile and are dependent on demand and supply. Competition is also intensifying in leaf
tobacco exports, which can hamper margins in this business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Recommend to ACCUMULATE VST Industries with 1 Year
price target of `1600 at 16.2xFY13E EPS.
INVESTMENT ARGUMENT:
* Second largest player in Indian cigarette market by sales
* Shift from non-filter to filter cigarette improved realization
* Strong growth in leaf tobacco exports
Second Largest Player : VST Industries is the second largest player
in Indian Cigarette industry by sales. ITC has a market share of ~78%
while VST Ind. and Godfrey Phillips account for ~8% each. Balance
is made up by imports, unorganised sector & smaller players. VST
has positioned itself as the lowest cost filter cigarette provider with
market presence in south, south central, UP, north-east states.
Shift from non-filtered to filtered stands complete: GoI increased
excise on non - filter segment, which forced non - filter players to shift
to filter segment.VST shifted its product portfolio in favour of filter
cigarettes (95% of total volume) and grew volumes and price at CAGR
of 8% and 12% respectively since 2009 vs flat volumes for ITC. Steep
increase in excise duties on cigarette over the years has impacted
volume growth but net realization of large players have continued to
move up, which compensated for flat volumes over the last 5 years
for the industry as a whole.
Increased traction in premium products will be margin accretive:
The industry growth is faster in premium segment vs mass & mid
segment. VST's premium brands witnessed volume growth of 30%+
in FY11 and now account for 33% of its volume resulting in higher
realization besides giving phillip to volumes.
Exports present a promising opportunity: VST exports leaf
tobacco from India and accounts for 26% of its sales. During 2005-10
peiod, tobacco export from India has shown CAGR of 30%.VST's
export has also trebled in last 4 years to `150 Cr. It presents a promising
opportunity and will be a good earnings driver.
Valuations and View: VST is quoting at a P/E of 13.7x /12.5x on
FY12E/FY13E EPS. Its return ratios are ~50% with unleveraged
Balance Sheet and ~5% dividend yield. There are upside risks to our
conservative volume growth estimates of 2% in FY13E, which we
have estimated due to expectation of excise duty hikes in budget. In
the case of moderate or no hike volume growth may surprise positively.
Recommend ACCUMULATE on VST Industries with a 1 Year target
price of `1600 (16xFY13E EPS, discount of 30% to ITC's valuations)
ABOUT THE COMPANY
VST (the erstwhile Vazir Sultan Tobacco Company) was incorporated in 1930 at Hyderabad, AP,
and has a factory at Secunderabad, AP. It has a collaboration with the BAT Group, UK, which holds
a 32.16% stake in the company. VST's Plant Location is at Azamabad in Hyderabad. Prominent
brands are Charminar, Charminar Special Extra Filter, Charms Smooth Virginia, Charms Virginia
Filter and Moments.
CONCERNS
Challenges from Illegal trade: Cigarettes account for ~15% of tobacco consumption in India and
just 5.7% of Indian adults smoke cigarettes as against 35% consuming tobacco. The biggest concern
for the industry is the increasing illegal trade in cigarettes, which now accounts for 16% of industry
volumes as against 8% last year and 5% two years ago. India is now ranked sixth worldwide in illicit
cigarette trade with a growth rate of 58% over 2004-09.
Volatility in Leaf tobacco prices and increasing competition: Leaf tobacco prices in international
markets are volatile and are dependent on demand and supply. Competition is also intensifying in leaf
tobacco exports, which can hamper margins in this business.
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