VST Industries: Analysts remain bullish, despite continuation of poor performance

The March quarter performance of tobacco firm VST Industries has been the worst in the last three quarters. The company’s net sales dropped 18% - with cigarette sales impacted by aggressive price increases taken by the company to pass on the additional tax burden. At 27.5%, the operating profit margin dropped almost 200 bps y-o-y. The net profit dropped over 5% from the year ago level.

According to a report by Anand Rathi after the results, the company’s cigarette volumes in the March quarter fell 15% y-o-y and for FY13 they were down 12%. The company has rolled out 64mm cigarettes at Rs 2 and Rs 2.50. There has been no change in excise duty on cigarettes of less than 65mm.

With aggressive price hikes in all premium cigarettes, 64mm cigarettes are expected to gain market share. According to the report, VST’s brands Charms and Charminar, which are at low end of the cigarette market, may gain market share in 64mm cigarettes on any down-trading from premium cigarettes.

According to a post-results report by ICICI Securities, the 64 mm category of cigarettes contributed ~8% to the company’s volumes. The volume share of this category is expected to increase considering the second consecutive year of excise hikes in Budget 2013.

The company has a strategy to pass on any excise hikes and concentrate on low price cigarettes with those categories, which do not attract high duty. VST fetches similar margins in 64 mm and 69 mm categories. The company has increased its payout to 76%, which yields a dividend of 4% at current price.

With the strong balance sheet and healthy return ratios, analysts believe the stock is trading at attractive valuation multiples.