Introduction
VST Industries Ltd (VSTIND) is one of the leading cigarette manufacturers in India engaged in the manufacture and sale of cigarettes and tobacco. It sells its products under the brand name Charms, Charminar, Editions, Moments, and Total.
Detailed Analysis:
Business Fundamentals:
The business fundamentals of VST Industries look strong. It has delivered a healthy sales CAGR of 6% over the past 5 years. The operating profit margins are high at 27% due to the nature of the cigarette industry. Return on capital employed is an impressive 38% indicating capital efficiency. The company has demonstrated consistency in maintaining double digit net profit growth over the last decade highlighting the stability of its cigarette portfolio and execution capabilities.
The company is virtually debt free with a debt to equity of 0. This provides a great deal of financial flexibility to the company for funding future growth. Promoter shareholding is 32% with no shares pledged which indicates significant skin in the game and conviction. The dividend payout at 65% is also quite generous for investors.
On the whole, VST Industries passes the business fundamental check convincingly.
Valuations:
The stock appears reasonably valued trading at a P/E of 16.5x and a P/B of 4.3x compared to the industry average of 17x. This is despite strong fundamentals like higher margins, better capital efficiency and strong growth. The difference between CMP and book value is also quite high indicating potential undervaluation. The stock is currently trading in line with its historical average valuations.
An intrinsic valuation estimate also points to marginal undervaluation presenting an opportunity.
Technical Trends:
The share price is oscillating between the 50-day and 200-day moving averages indicating consolidation. This follows a downtrend seen over most of 2022 from the peak of Rs. 3,800. However, the corrections have brought the valuations to more reasonable levels. The downtrend may also reverse going forward if the uptick over the last month sustains.
The company has zero debt status and a strong portfolio of market leading brands which can support consistency in long term growth and profitability. This makes it well positioned to ride out short term industry and economic cycles. The technical factors and sentiment therefore turn positive for long term investors.
Some vital ratios for VST Industries Ltd. in simple terms for a layman investor:
Ratios help an investor simplify the task of analyzing financial statements of companies. They serve as useful indicators of the financial health and performance of a company. Here are some important ratios for VST Industries Ltd. explained simply:
Profitability Ratios
- Operating Profit Margin (OPM) – OPM measures the profit a company makes on its core operations before taking taxes and interest costs into account. It is expressed as a percentage of sales.
- VST Industries has an OPM of 27.1%. This means for every 100 rupees of sales it makes, the company retains 27.1 rupees as operating profit from the business. The higher the number the better it is.
- Return on Equity (ROE) – ROE measures how much profit a company generates with the money shareholders have invested.
- VST Industries has a ROE of 29.0%. This means that for every 100 rupees invested by the shareholders, the company generates 29 rupees in profit. So this shows it uses investments efficiently.
- Earnings Per Share (EPS) – EPS measures how much profits are attributable to each share of the company.
- VST Industries has an EPS of 199. So each share is entitled to 199 rupees of earnings. The higher the EPS, the better since investors benefit.
- The high OPM, ROE and rising EPS show VST Industries has a very profitable and efficient business.
Efficiency Ratios
Debtor Days – Shows the average time taken by customers to pay their dues. Lower days is better.
VST has a debtor day of 10 which means customers pay their bills quite fast. This signifies good customer quality and working capital efficiency by the company.
Valuation Ratios
Price to Earnings (P/E) Ratio – P/E shows investor sentiment for the share. At 16.5x, VST Industries commands a valuation premium to the industry average indicating higher growth expectations.
Dividend Yield – This ratio measures the dividend paid as a percentage of current market price. VST has an excellent dividend yield of 4.6%. So investors enjoy good regular income.
Detailed comparison of VST Industries against its key competitors in the Indian cigarette industry:
Industry Overview
The Indian cigarette industry is consolidated with ITC, Godfrey Phillips and VST Industries controlling over 85% market share. The organized sector accounts for 98% of the overall cigarette consumption. ITC is the market leader with 78% volume share.
VST Industries Performance VST Industries is the 3rd largest player with a market share of 10%. Some key metrics compared to top competitors are:
Sales Growth (5 years): VST Industries – 6.4% ITC – 7.6% Godfrey Phillips – 1.3%
VST Industries has delivered moderate sales growth compared to ITC benefiting from its strong brand portfolio. However, it has managed to grow faster than the number 2 player Godfrey Phillips.
Profitability: OPM VST Industries – 27.1% ITC – 38.7% Godfrey Phillips – 9.7%
VST Industries profitability is second only to market leader ITC given its premium brands. It generates far higher margins than Godfrey Phillips.
Returns: ROCE VST Industries – 38% ITC – 34.3% Godfrey Phillips – 13.4%
Capital efficiency for VST Industries is better than both its larger peers. It has created a lean business model to deliver superior returns from its operations.
Valuations: P/E VST Industries – 16.5 ITC – 38.9 Godfrey Phillips – 20.4
VST Industries is attractively priced considering its financial metrics compared to the other players.
VST Industries has maintained its market share while focusing on profitability driving higher capital efficiency compared to competitors. But there is scope for improvement in sales growth and valuations remain
appealing.
Valuation
Based on its current market price of Rs 3,282 and intrinsic value estimate of Rs 3,363, VST Industries appears marginally undervalued by around 2-3%. The valuations seem reasonable given the strong and stable fundamentals of the business. It offers good upside potential along with dividend yield of 4.6%.
Industry Outlook
The cigarettes and tobacco industry in India is valued at Rs 58,000 crores growing at 10-12% CAGR. While regulatory headwinds persist, volume growth is compensated by pricing power of brands allowing revenue growth. The premium segments catered by VST are expected to outpace mass segments. Overall long term outlook remains positive for the industry.
Long Term Performance
VST Industries has consistently demonstrated excellence in key parameters like sales growth, profit margins and capital efficiency over the past decade. It is expected to continue benefiting from its strong brand portfolio, new product pipeline, distribution enhancement and operational effectiveness.
The company is virtually debt free giving it tremendous financial strength. Initatives underway in automation and cost control will further augment profitability. With operating leverage kicking in, 15-20% EPS growth looks achievable over next 3-5 years. Considering sound growth visibility and attractive valuations, the stock offers substantial wealth creation potential.
Short Term Performance
In the near term, stock performance would be influenced by announcements regarding regulation and taxation which impact sentiment. However, VST has the financial resources and branding power to withstand short term upheavals limiting downside risk. Investors should utilize any significant dip to accumulate the stock from a long term view point rather than get perturbed by ephemeral volatility.
In summary, VST Industries offers a balanced mix of growth, income and stability for investors making it a quality stock for the long haul. Valuations currently offer a good entry point for long term investors to harness the power of compounding and create sustainable wealth.
Disclaimer:
The analysis and opinions provided above are for educational and informational purposes only. They should not be construed as specific investment, accounting, legal or tax advice. Individual situations and current events may differ from case to case basis, so readers and viewers are advised to consider analysis that aligns with their portfolio risk, investment goals and unique situation before making any investment or financial decision.