VST Industries SYNOPSIS. C.M.P: Rs Target Price: Rs Date: Jan. 24 th, 2012 BUY

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1 VST Industries Ltd Result Update: Q3 FY 12 C.M.P: Rs Target Price: Rs Date: Jan. 24 th, 2012 BUY Stock Data: Sector: Tobacco Face Value Rs wk. High/Low (Rs.) / Volume (2 wk. Avg.) BSE Code Market Cap (Rs in mn) Share Holding Pattern 1 Year Comparative Graph SYNOPSIS VST Industries Ltd. is a public conglomerate tobacco company headquartered in Hyderabad, India. VST Ltd. is third largest cigarette manufacturing company in India. The company shares collaboration with British American Tobacco Group of the United Kingdom. During the quarter ended, the robust growth of Net Profit is increased by 45.59% Rs million. Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 39% over 2010 to 2013E respectively. VST Industries BSE SENSEX The company manufactures & distributes cigarettes under the brands Charms, Charminar, Gold. Years Net sales EBITDA Net Profit EPS P/E FY FY 12E FY 13E

2 Peer Group Comparison Name of the company CMP(Rs.) Market Cap. (Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%) VST Industries Ltd ITC Ltd Godfrey Phillips India Kothari Products Investment Highlights Q3 FY12 Results Update VST Industries Ltd. has reported net profit of Rs million for the quarter ended on December 31, 2011 as against Rs million in the same quarter last year, an increase of 45.59%. It has reported net sales of Rs million for the quarter ended on December 31, 2011 as against Rs million in the same quarter last year, a rise of 23.20%. Total income grew by 25.55% to Rs million from Rs million in the same quarter last year. During the quarter, it reported earnings of Rs a share. Quarterly Results - Standalone (Rs in mn) As At Dec-11 Dec-10 %change Net sales % PAT % Basic EPS % 2

3 Break up 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, 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, The Company has its Registered Office at Azamabad, Hyderabad. The Company has a manufacturing facility at Hyderabad (A.P) and its principal activities are manufacture & sale of cigarettes and unmanufactured tobacco. Brands The company manufactures and 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. 3

4 Financial Results 12 Months Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) FY10 FY11 FY12E FY13E Description 12m 12m 12m 12m 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

5 Quarterly Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) 31-Jun Sep Dec Mar-12E Description 3m 3m 3m 3m 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

6 Key Ratios Particulars FY10 FY11 FY12E FY13E No. of Shares (in mn) EBITDA Margin (%) 21.50% 27.15% 34.74% 34.95% PBT Margin (%) 18.01% 23.14% 31.76% 32.20% PAT Margin (%) 13.06% 16.25% 21.68% 21.98% P/E Ratio (x) ROE (%) 25.49% 36.47% 35.88% 29.13% ROCE (%) 49.31% 70.28% 62.79% 50.27% EV/EBITDA (x) Book Value (Rs.) P/BV Charts: Net Sales & PAT 6

7 P/E Ratio(x) EV/EBITDA 7

8 P/BV Outlook and Conclusion At the current market price of Rs , the stock is trading at x FY12E and x FY13E respectively. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs and Rs respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 39% over 2010 to 2013E respectively. On the basis of EV/EBITDA, the stock trades at 8.53 x for FY12E and 7.50 x for FY13E. Price to Book Value of the stock is expected to be at 4.90 x and 3.47 x respectively for FY12E and FY13E. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. 8

9 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 tobaccoproducing 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. 9

10 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. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 10

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