VST INDUSTRIES LIMITED

Result Update: Q2 FY13

HOLD

CMP Target Price

1885.00 2073.00 Jan 4th, 2013

ISIN: INE710A01016

Stock Data
Sector Tobacco BSE Code 509966 Face Value / Div. Per Share 10.00 52wk. High / Low (Rs.) 2025.00/1056.15 Volume (2wk. Avg ) 1212.00 Market Cap ( Rs in mn ) 29104.40 Annual Estimated Results (A*: Actual / E*: Estimated)

SYNOPSIS
VST Industries Ltd. is a public conglomerate tobacco company headquartered in Hyderabad, India. VST Ltd. is third largest cigarette manufacturing company in India. VST Ltd has recommended dividend for the year 2011-12, Rs. 65.00 per Equity Share of Rs. 10.00 each. During the quarter ended, the robust growth of Net Sales is increased by 6.94% to Rs. 1761.90 million. Net Sales and PAT of the company are expected to grow at a CAGR of 13% and 30% over 2011 to 2014E respectively. Company has recorded leaf export turnover of Rs. 154 crore, in the year 2011-12. During the year under review the cigarette volumes stood at 762 millions up by 12% when compared to 2010-11. The company manufactures & distributes cigarettes under the brands Charms, Charminar, Gold.

Years
Net Sales EBITDA Net Profit EPS

FY12A
6844.30 2354.90 1425.10 92.30

FY13E
7734.06 2899.64 1802.47 116.74 16.15

FY14E
8507.46 3325.32 2087.18 135.18 13.94

P/E 20.42 Shareholding Pattern (%)

1 Year Comparative Graph

BSE SENSEX VST INDUSTRIES LTD Source: Company Data, Firstcall Research

Peer Groups Company Name VST Industries Ltd ITC Ltd

CMP (Rs.) 1885.00 282.05

Market Cap Rs. in mn. 29104.40 2217855.80

EPS (Rs.) 92.30 8.58

P/E (x) Ratio 20.42 32.83

P/BV(x) Ratio 10.03 11.83

Dividend (%) 650.00 450.00

Godfrey Phillips India Ltd Kothari Products Ltd

3399.00 399.15

35354.50 2647.20

142.69 120.40

23.82 3.32

3.84 0.41

350.00 150.00

Investment Highlights Results updates- Q2 FY13, The companys net profit jumps to Rs.276.00 million against Rs.335.90 million in the corresponding quarter ending of previous year, a decrease of 17.83%. Revenue for the quarter rose 6.94% to Rs.1761.90 million from Rs.1647.60 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs.17.88 a share during the quarter, registering 17.83% decrease over previous year period. Profit before interest, depreciation and tax is Rs.458.50 millions as against Rs.541.40 millions in the corresponding period of the previous year.
Months
Net Sales PAT EPS EBITDA

Sep-12

Sep-11

% Change

1761.90 276.00 17.88 458.50

1647.60 335.90 21.76 541.40

6.94% -17.83% -17.83% -15.31%

Expenditure :

During the quarter variable cost rose by 6 per cent mainly on account of increase in Cost of Material Consumed along with consideration of depreciation in the rupee impact. Total expenditure in Q2 FY13 was at Rs. 1380.80 million as against Rs. 1297.00 million in Q2 FY12. Employees benefit expenses stood at Rs.157.70 million against Rs.145.80 millions in the corresponding period of the previous year. Other Expenditure jumped to Rs. 265.00 million and Cost of Material Consumed surged to Rs. 904.50 million in Q2 FY13 are the primarily attributable to growth of expenditure.

Company Profile
The Vazir Sultan Tobacco Company Limited was incorporated on 10th November, 1930, under the Hyderabad Companies Act No. IV of 1320 Fasli and now governed under the Companies Act, 1956. It shares collaboration with British American Tobacco group of the United Kingdom. The name of the Company was subsequently changed to VST Industries Limited on 30th April, 1983. The Company has its Registered Office at Azamabad, Hyderabad. The Company has a manufacturing facility at Hyderabad (A.P) & its principal activities are manufacture & sale of cigarettes and unmanufactured tobacco. Brands The company manufactures & distributes cigarettes under the brand names of Charms, Charminar and Gold etc. It is the third largest cigarette manufacturing company in India. CHARMS VIRGINIA FILTER and CHARMS SMOOTH VIRGINIA are the other brands.

Financial Highlight
Balance sheet as at March31, 2012 (A*- Actual, E* -Estimations & Rs. In Millions) FY12 EQUITY AND LIABILITIES: Shareholders Funds: Share Capital Reserves and Surplus Net worth (a) Non-Current Liabilities: Long Term Provisions Long term liabilities (b) Current Liabilities: Trade Payables Other Current Liabilities Short Term Provisions Current Liabilities Total (a+b+c) ASSETS: Non-Current Assets: Fixed Assets: Tangible Assets Capital work-in-progress (d) Deferred tax assets other non-current assets Non Current Investments Long Term Loans and Advances (e) Current Assets: Current Investments Inventories Trade Receivables Cash and Cash Equivalents Short Term Loans and Advances Other Current Assets (f) Total (d+e+f) FY13E FY14E

154.42 2747.50 2901.92 4.99 4.99 470.28 2573.07 1166.55 4209.90 7116.81

154.40 3022.25 3176.65 5.44 5.44 620.77 2624.53 1504.85 4750.15 7932.24

154.40 3324.48 3478.88 5.93 5.93 769.75 2677.02 1805.82 5252.60 8737.40

1634.06 1.24 1635.30 115.34 0.08 217.40 63.95 396.77 2020.00 2382.51 126.21 359.75 180.63 15.64 5084.74 7116.81

1764.78 2.23 1767.02 99.19 0.08 217.40 44.77 361.44 2572.25 2430.16 126.00 438.90 220.37 16.11 5803.78 7932.24

1888.32 3.57 1891.89 87.29 0.08 217.40 32.23 337.00 3085.35 2503.07 141.12 509.12 253.42 16.43 6508.51 8737.40

Annual Profit & Loss Statement for the period of 2011 to 2014E Value(Rs.in.mn) Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Depreciation Profit Before Tax Tax Profit After Tax Equity capital Reserves Face value EPS FY11 12m 5845.70 161.30 6007.00 -4420.00 1587.00 9.80 1596.80 -244.20 1352.60 -402.50 950.10 154.40 2490.00 10.00 61.53 FY12 12m 6844.30 257.20 7101.50 -4746.60 2354.90 0.00 2354.90 -248.30 2106.60 -681.50 1425.10 154.40 2747.50 10.00 92.30 FY13E 12m 7734.06 270.06 8004.12 -5104.48 2899.64 6.80 2906.44 -255.75 2650.69 -848.22 1802.47 154.40 3022.25 10.00 116.74 FY14E 12m 8507.46 305.17 8812.63 -5487.31 3325.32 7.48 3332.80 -263.42 3069.38 -982.20 2087.18 154.40 3324.48 10.00 135.18

Quarterly Profit & Loss Statement for the period of 31 Dec, 2011 to 30 Sep, 12E Value(Rs.in.mn) Description Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Depreciation Profit Before Tax Tax Profit After Tax Equity capital Face value EPS 31-Mar-12 3m 1958.80 73.80 2032.60 -1382.10 650.50 0.00 650.50 -94.20 556.30 -189.00 367.30 154.40 10.00 23.79 30-Jun-12 3m 1552.30 66.90 1619.20 -1117.50 501.70 0.00 501.70 -53.60 448.10 -143.00 305.10 154.40 10.00 19.76 30-Sep-12 3m 1761.90 25.10 1787.00 -1328.50 458.50 0.00 458.50 -53.60 404.90 -128.90 276.00 154.40 10.00 17.88 31-Dec-12E 3m 1867.61 29.12 1896.73 -1359.62 537.11 0.00 537.11 -57.89 479.22 -158.14 321.08 154.40 10.00 20.80

Ratio Analysis Particulars EPS (Rs.) EBITDA Margin (%) PBT Margin (%) PAT Margin (%) P/E Ratio (x) ROE (%) ROCE (%) EV/EBITDA (x) Book Value (Rs.) P/BV FY11 61.53 27.15% 23.14% 16.25% 30.63 35.93% 69.25% 18.34 171.27 11.01 FY12E 92.30 34.41% 30.78% 20.82% 20.42 49.11% 89.71% 12.36 187.95 10.03 FY13E 116.74 37.49% 34.27% 23.31% 16.15 56.74% 99.33% 10.04 205.74 9.16 FY14E 135.18 39.09% 36.08% 24.53% 13.94 60.00% 103.16% 8.75 225.32 8.37

Charts

Outlook and Conclusion At the current market price of Rs.1885.00, the stock P/E ratio is at 16.15 x FY13E and 13.94 x FY14E respectively. Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.116.74 and Rs.135.18 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 13% and 30% over 2011 to 2014E respectively. On the basis of EV/EBITDA, the stock trades at 10.04 x for FY13E and 8.75 x for FY14E. Price to Book Value of the stock is expected to be at 9.16 x and 8.37 x respectively for FY13E and FY14E. We recommend HOLD in this particular scrip with a target price of Rs.2073.00 for Medium to Long term investment.

Industry Overview Tobacco is an agro based product processed from the fresh leaves of plants in genus Nicotine'. Tobacco is widely available for sale in dried and cured forms and is often smoked in the form of a cigar or cigarette, or in a smoking pipe, or in a water pipe or a hookah. It can also be chewed, or sniffed into the nose in the form of powdered snuff. The term tobacco industry connotes to those companies engaged in the growth, preparation for sale, shipment, advertisement, and distribution of tobacco and tobacco-related products. All the methods of consumption of tobacco result in the absorption of nicotine in varying amounts into the user's blood stream. Prolonged use of tobacco or tobacco products may result in significant risks of developing various cancers as well as strokes, and severe cardiovascular and respiratory diseases. Tobacco is an important agro-based Industry. It is highly labor intensive & provides livelihood to about 5 million people directly and indirectly. Cigarette is an item falling under the First Schedule to the Industries (Development & Regulation) Act, 1951 and requires an industrial license. It plays a significant role in the Indian economy as it contributes substantially in terms of excise revenue, export revenue and employment. India is the third largest producer and eighth largest exporter of tobacco and tobacco product in the world. While India's share in the world's area under tobacco crop has risen from 9% to 11% in the last 3 decades, its share in production has inched up from 8% to 9% in tobacco industry. Asia and America, together account for 75% of world's production of tobacco. China, USA and India are the three leading tobacco-producing nations in the world.

Production area Andhra Pradesh, Gujarat and Karnataka account for the major portion (80%) of raw tobacco production in India. These states produce FCV tobacco, beedi tobacco, cigar tobacco, cheroot tobacco and snuff tobacco. FCV (Flue Cured Virginia) Tobacco is cultivated mainly in the states of AP & Karnataka followed by Orissa & Maharashtra in small areas in various soil zones under varied rainfall conditions. Other states which manufacture tobaccos are Orissa, Tamil Nadu, West Bengal, UP and Bihar. Growth promotional activities FCV (Flue cured Virginia) tobacco production and is regulated by The Tobacco Board. About 0.75mn growers are engaged in tobacco production. Easy availability of tobacco has helped development of cottage industry for manufacture of chewing tobacco, cigar, cheroot, flux etc. Bidi industry provides employment to 4.4mn rural people, mostly women and the cigarette industry provides employment to 0.55mn people. Types Tobacco is consumed in two ways, either by smoking or chewing. While smoking the following tobacco products are consumed: Cigarette, Cigar, Bidi (Hand rolled, leaf wrapped country cigarettes) and to chew the products are: Raw tobacco, Supari (Areca nut), Gutkha, Pan Parag etc. Due to diverse climatic conditions every type of tobacco is grown in India. Almost 90% of area is accounted for by Nicotine tobacem and 10% by Nicotina Restica. Only one third of the tobacco output in the country is Flue cured Virginia (FCV) variety, suitable for cigarette manufacturing. Tobacco Categories There are seven major categories of tobacco, viz. Flue Cured Virginia tobacco (FCV), Burley, Oriental, Bark flue cured, Sun cured, Light flue cured cigar and Dark flue cured. Flue cured Virginia tobacco is mainly used for manufacture of cigarettes. Light air cured tobacco is used in the manufacture of bidis. Unmanufactured tobacco is also consumed in India, for chewing purpose.

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