Radhakishan Damani, who founded and steered Avenue Supermarts, has stepped up his stake in VST Industries. The market wonders what has driven the veteran investor to raise his stake in the company.
The company’s strong margins, improving operation efficiency by shifting base, and new capex are expected to drive growth, but the low growth outlook for cigarette sales, and falling earnings might play spoilsport for the stock.
Damani bought 2.33 lakh shares which is a 1.51 percent stake in the recent session. The veteran investor had picked up 1.44 percent stake in January as well. Damani now owns 35.84 percent stake in VST Industries which is higher than the promoters’ stake of 32.16 percent.
Before 2024, Damani bought stakes in the company back in December 2022.
New facilities and capex
Anuj Jain, co-founder and fund manager at Green Portfolio, said the company is set to advantage from its multinational parentage and Damani’s ownership in the company. Jain points out that the company is planning to shift their operations base to Toopran which will enhance their operational efficiencies.
Also Read | Radakishan Damani buys Rs 86.25 crore worth additional shares in VST Industries
“VST Industries is shifting the manufacturing operations from the Azamabad Industrial Area to Toopran. This shall bring operational efficiencies and value unlock from the land of Azamabad,” Jain added.
B&K Securities also said the shift in operations base will consolidate their manufacturing operations and will derive operational synergies.
Jain added that the company has been doing capex for an unrevealed project. “There is a Capital work in progress of ~52 crores as on 30.09.2023, details of which are not available to us. This new project/ capex could ensure some growth in future.”
Faltering cigarette growth
However, the falling earnings and slowing cigarette volume growth could throw a spanner in the works for the company.
In its Q3FY24 results, the company’s bottomline fell 32 percent YoY to Rs 53.72 crore, while revenue rose nearly 6 percent to Rs 468.42 crore.
The stock has gained only 8.68 percent in the last five years, underperforming its larger peers like ITC and Godfrey Phillips India as they rallied 40 percent and 166 percent.
“The topline CAGR is just 6 percent on a five-year basis.” Jain said. This is lower than ITC and Godfrey Phillips India’s 10 percent and 9 percent in the same period.
Amit Goel, co-founder and chief global strategist at Pace 360, said the stricter regulations on cigarettes and tobacco industry might affect the company’s fortunes.
“The tobacco industry faces constant regulatory pressure, including potential tax increases and stricter advertising laws. Additionally, anti-smoking campaigns and health concerns could lead to a decline in cigarette consumption over time. VST relies heavily on cigarettes, making it vulnerable to anything that negatively impacts that market,” he said.
Jain added that cigarette volumes of VST Industries has also been down contributing towards its underperformance. “From FY19 to FY23 there is slight degrowth in the cigarette volume from 8556 million units to 8253 million units. Rising awareness and apathy of regulators could be behind the drought.”
Should you buy?
Jain says the stock with its trailing PE of 20 and 4 percent dividend yield, is a good deal for an investor. He added that the stock is likely to remain as a low beta stock. “Investors who want to enjoy regular dividend along with a FD type return, may consider the share.”
Goel advised investors against further investing in the company at the moment as the markets are trading at expensive valuations and it is better to book profits.
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