VST Industries - Cigarettes driving growth ::Anand Rathi,

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VST Industries
Cigarettes driving growth
We expect VST’s strong earnings growth momentum in
cigarettes to lead to 15.6% earnings CAGR in FY11-13e. We raise
our price target to `1,152 from `819 and our FY12e and FY13e
earnings estimate by 46% and 42% respectively. We retain a Buy.
 Cigarette division to see strong volume growth. With no
excise hike in Budget 2011, VST’s cigarette segment is expected to
see strong growth. Besides, volumes have benefited; VST’s range
of cigarettes, priced at a low `2/stick, has little competition since
ITC (Goldflake and Wills) and Godfrey Phillip (Marlboro) focus
on the mid-premium segment.
 Price hikes to improve margins. Price hikes in Dec ’10 and Jan
’11 (in anticipation of an excise hike that did not take place) are
expected to spur margin growth: we estimate FY12e EBITDA
margin at 23.7%. VST expects no major rise in tobacco prices.
 Upward revision in revenue estimates. We raise FY12 and
FY13 revenue estimates 22% and 17% respectively, to factor in
volume growth in cigarettes and price hikes. We expect 46% and
42% increase in FY12e and FY13e earnings respectively, owing to
better revenues and margin expansion.
 Valuation and Risk. We value the stock at a DCF-based price
target of `1,152, reflecting a target PE of 14x FY13e earnings. The
current dividend yield of 5.6% supports our target price. Key risks:
rise in raw material prices and keener competition.