Buy VST Industries, target Rs 3,900: ICICI Direct

ICICI Direct has a buy call on VST Industries with a target price of Rs 3,900.

The current market price of VST Industries is Rs 3,116.65.

Time period given by the brokerage is year when VST Industries price can reach defined target.

Investment rationale by ICICI Direct
Realisation to lead growth, going ahead; volume growth to recover: In FY18, cigarette volumes remained flat on account of a steep rise in tax incidence. The company took a price hike to the tune of 10 per cent in the year largely passing on the increase in the indirect tax incidence post GST implementation. We estimate 9 per cent and 10 per cent realisation increase for FY19E and FY20E, respectively. Given the steep price hike in the current year resulting in flat volumes for FY18, we expect a volume recovery in 3 per cent and 2 per cent growth in FY19E and FY20E, respectively, largely on the back of a favourable product mix towards high priced cigarettes in the regular & king size category. Thus, we estimate net revenue CAGR of 11.4 per cent in FY18-20E to Rs 1,176 crore.

EBITDA/stick to improve with favourable product mix: VST Industries, with 7.5 per cent volume market share, is a prominent player in the low priced cigarette (Rs 3.0-5.0/stick) segment in India (brands: Charms, Charminar, Kingston, Moments, premium: Total & Edition). Over time, VST has shifted its product mix towards lower length cigarettes, which attracted lower tax (aiding volume) and also launched premium cigarettes – Total, under 69 mm at price point of Rs 6 (contributing nearly 15 per cent to the total mix) and Edition, under Kings size at price point of Rs 10 (nearly 5 per cent contribution to total mix). Currently, Charms remain the largest brand for VST contributing more than 20 per cent of sales. With a favourable product mix and price hikes, we estimate the EBITDA/stick will increase from Rs 0.38 in FY18 to Rs 0.41 in FY19E and Rs 0.47 in FY20E.

Dividend payout to remain encouraging: VSTs dividend payouts increased from 52.9 per cent in FY08 to 65.8 per cent in FY18 on account of robust profitability and free cash flows over the same period. The companys profitability has increased at 12.1 per cent CAGR in FY08-18 while FCF has grown at 10.9 per cent CAGR in FY08-18. Going ahead, with no major capex requirement, we expect the payout to remain elevated at 64.7 per cent and 68.5 per cent for FY19E and FY20E, respectively.

Favourable mix of premium cigarettes to drive profitability; maintain BUY: Increased tax incidence and, thus, the muted consumption environment is expected to restrict any significant volume growth. However, with the improving product mix towards high margin products (contributing nearly 20 per cent currently to total volumes), EBITDA/stick is estimated to increase to Rs 0.47 per stick. We reiterate BUY recommendation on the stock with a target price of Rs 3900/share, valuing it at 24.3x FY20E earnings.

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