Buy VST Industries; target of Rs 5200: ICICI Direct

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ICICI Direct's research report on VST Industries

Revenue (net of GST) for the quarter increased 17.3% YoY to Rs 343.8 crore. Cigarette sales increased 9% to Rs 268 crore led by ~8% YoY volume growth along with a change in the product mix. Tobacco sales witnessed splendid growth of 43% to Rs 100 crore. The company has been able to maintain double digit volume growth (~10%) YoY in 9MFY20. VST sells ~55% of cigarettes (largely Charms, Total) at Rs 5-6 price points. Edition, at Rs 10 price point, is contributing 5% to volumes. Moments and Charminar at below Rs 5 price point contribute the remaining 40% of sales. Aided by higher EBITDA and reduction in corporate tax rate, net profit surged 47% YoY to Rs 81.5 crore in Q3FY20.

Outlook

With a wide presence at the lower price points and strong distribution of 1 million retail outlets, VST’s brand has been especially popular in West Bengal, Bihar, Uttar Pradesh, Andhra Pradesh and Telangana contributing ~60% of volumes. The company’s fundamentals are driven by a strong capital structure, steady cash flow and consistent dividend payment. With robust volume growth in 9MFY20 change in product mix towards high priced cigarettes, we maintain our BUY rating on the stock with a revised target price of Rs 5,200/share.

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