Full impact of price hike to curb earnings growth • VST Industries:: ICICI Securities, PDF link

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
Full impact of price hike to curb earnings growth
• VST Industries’ Q2FY15 results were above our estimates on both
the topline and earnings front with the partial impact of the price hike
due to a steep 72% excise hike in the 64 mm category
• The company posted 3% decline in net sales to | 202.9 crore (I-direct
estimate - |186.1 crore) with volume seeing a ~4% decline. We
believe excise outgo would be much higher in the next two quarters
(| 266.4 crore & | 268.0 crore) with the full impact of price hike. The
company has taken ~22% price hike in 64 mm category post Budget
• Revenue contribution from the 64 mm category has seen a marginal
decline from ~70% in Q1FY15 to ~65% in Q2FY15. We expect this
mix to change to 56% and 43% in FY16E and FY17E, respectively
• Operating margins witnessed an increase of ~470 bps to 29%
resulting in a 17% jump in earnings to | 38 crore
Sales mix to change yet again!
VST Industries (7.5% volume market share in FY12), a prominent player in
low priced cigarette (| 2-3.5/stick) segment in India (brands: Charms,
Charminar, Moments) has posted an impressive volume CAGR of ~8%
(FY09-12) led by a shift in the company’s portfolio towards filter cigarettes
from non-filter cigarettes in 2009 (GoI increased excise by ~200% in non
filter cigarettes in 2008). However, volume growth for the company
declined drastically to -12.5% in FY13 and ~1% in FY14E following the
consecutive steep excise duty hikes (above 65 mm segment) of ~21%
and ~18% in FY13 and FY14E, respectively. Hence, led by the significant
increase in excise, VST has shifted its existing brands’ focus to the 64 mm
segment of cigarettes to curtail its excise liability. VST had just
successfully transformed ~50% (FY14) and ~70% (Q1FY15) of its
cigarette sales to the 64 mm segment when the government slapped the
less than 65 mm segment with ~72% excise hike in FY15E Budget. We
believe that after the FY15E Budget (July, 2014) VST would restrict further
expansion of its sales mix towards less than 65 mm segment. We expect
contribution of 64 mm segment to return to ~56% by FY16E & ~43% in
FY17E. Further, we believe the excise hike (especially for 64 mm) would
be passed on in a staggered manner through FY15E and FY16E.
High dividend payout, healthy returns ratios
With robust profitability and free cash flows CAGR (FY08-14) of 17.1%
and ~18%, respectively, VST’s average dividend payout increased from
~53% in FY08 to ~70% in FY14. Going ahead, with no major capex
requirement and earnings to remain stable in spite of a change in the
sales mix, we expect the payout to increase marginally to ~77% through
FY16E translating into DPS of | 70 (FY15E) and | 75 (FY16E). Higher
payout has also aided the company’s return ratios. VST’s RoE and RoCE
improved from 25.2% and 37.1% in FY08 to 45.8% and 58.4% in FY14,
respectively. Going ahead, we expect free cash flows to remain healthy.
Supported by higher dividend payout, we expect RoE and RoCE to
expand to ~42% and 59%, respectively by FY17E.
FY15E slightly painful; recommend HOLD
Though the steep increase in excise duty for less than 65 mm cigarettes would
keep volume under pressure in FY15E, a favourable rejig in sales mix to
absorb the excise hikes would revive EBITDA/stick for VST by FY16E,
aiding revival in earnings growth in FY16E to 16.9% YoY. Hence, we
value the stock at 18x FY17E EPS of |104.7 (30% discount to ITC) arriving
at a target price of | 1872/share and maintain our HOLD recommendation.

LINK

http://content.icicidirect.com/mailimages/IDirect_VSTInds_Q2FY15.pdf