ICICI Direct's research report on VST Industries
VST Industries reported flat sales (net of excise) at Rs 300.3 crore. Gross sales increased 22% to Rs 394 crore led by 25% growth in cigarettes sales & 7% growth in tobacco sales. Cigarette volumes were down 11% during the quarter. Trade promotional offers & schemes, which were taken back during lockdown period, have been gradually reinstated. However, cut in promotions still had a positive impact on sales during the quarter. Volumes were down 26% in H1FY21 and still have not revived completely. Significant reduction in socialising, prominent shift of work from home culture & health concerns, have negatively impacted demand condition of cigarettes. Gross margin saw a significant improvement of 395 bps with reduced promotional offers. Operating profit increased 17.2% to Rs 113.1 crore. Employee spend to sales increased 109 bps but overhead spends to sales declined 255 bps. This resulted in operating margin expansion of 543 bps to 37.6%. PAT increased 16% to Rs 88.5 crore.
The cigarettes industry has been severely impacted by excise increase & pandemic in the current year. We expect industry wide volume decline of 15% in FY21E. Moreover, a volume revival would require increase in socialising & prolonged period of stable taxation. However, VST has witnessed several such lull periods in the past and has always altered its sales strategy to drive volumes. We will wait to see the volume revival trajectory in the next few quarters. We downgrade the stock from BUY to HOLD with a revised target price of Rs 3850/share (17x FY23E PE).
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