Hold VST Industries; target of Rs 3430: ICICI Direct

ICICI Direct's research report on VST Industries

In the review meeting of the GST Council on tax rates, the council has raised the specificcess on cigarettes in all categories below 75 mm.  The product mix for VST is currently at 50:50 for below 65 mm: above 65 mm category.  We believe this would increase the blended tax incidence per stick from Rs 2.3 to Rs 2.9. We believe this increase in tax incidence would compel the company to undertake ~20% price hike to pass on the complete burden to consumers. Due to this sharp increase in the tax incidence for the company we have revised our volume estimates downwards from 6.0% and 5.0% to zero percent and 2% for FY18E and FY19E, respectively.  We are factoring in a price hike of 20% and 10% for FY18E and FY19E, respectively.

Outlook

Post the revision in rates, we factor in flat volume s for FY18 E and 2% for FY19E. Further, to pass on the tax burden, we estimate that VST would have to take 20 % and 10 % price hike for FY18E and FY19E, respectively.  Our gross revenue estimate thus, get s revised marginally upwards by 3.9 % for FY18E and 1.2% for FY19E. However, with increased tax incidence, our PAT estimates get revised downwards by 9.2 % and 13.3 % for FY18E and FY19E, respectively.  We believe that with ~16% increase in tax incidence compared to pre - GST level, cigarette volume s would continue to remain under pressure.  We downgrade VST to HOLD with a target price of | 34 30, valuing it at target PE of 24x on its FY19E EPS of |142.8.