Volume decline continues… • VST Industries :: ICICI Securities

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Volume decline continues…
• VST Industries’ Q3FY15 results were in line with our estimates on the
topline front witnessing 6.8% decline to | 196.4 crore (I-direct
estimate: | 197.3 crore). However, PAT dipped 21.6% to | 30.4 crore
(I-direct estimate: | 33.3 crore)
• Cigarette volumes were down 13% YoY in Q3FY15 and 7.5% YoY in
9MFY15. Volumes even dipped 4% sequentially. Tobacco sales stand
at | 70 crore for the quarter and | 190 crore for the nine months
• Revenue contribution from the 64 mm category remains at ~65% in
Q3FY15. We expect this mix to change to 56% and 43% in FY16E
and FY17E, respectively
• Operating margins witnessed a contraction by 525 bps to 24.6%
from 29.9% in the corresponding quarter
Changing mix to weather excise pain
VST Industries (7.5% volume market share in FY12), a prominent player in
the low priced cigarette (| 2.5-4.5/stick) segment in India (brands:
Charms, Charminar, Moments) 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 VST
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 and ~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 remaining stable in spite of a change in the
sales mix, we expect the payout to increase marginally to ~78% 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 ~44% and 62%, 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 a revival in earnings growth in FY17E to 14.0% YoY. Hence, we
value the stock at 18x FY17E EPS of | 109 (30% discount to ITC) arriving
at a target price of | 1962/share and maintain our HOLD recommendation.

LINK
http://content.icicidirect.com/mailimages/IDirect_VSTInds_Q3FY15.pdf