Stocks to look for the week: VST Industries Ltd Consumer Staples - Food Beverage & Tobacco

VST Industries Ltd
Consumer Staples - Food Beverage & Tobacco

CMP | Rs.3000

Target Price | Rs.3492

Upside | 16%

Buy.

Company Profile: 

Leader in Lower Price Range Cigarette Products

Soaring Demand for Lower Price Range Cigarettes to Further Boost Growth Momentum: VST Industries Ltd. has witnessed impressive growth in its topline and bottomline during FY17 on the back of soaring demand for lower price ranged cigarettes and arrested growth in total expenses. The topline has grown at 7.4% from Rs.8831 mn in FY16 to Rs.9482 mn in FY17 while bottomline has grown at 9.2% from Rs.1531 mn to Rs.1672 mn during the same period. Thus, the company has registered steeper growth in its bottomline on the back of sharp rise in other income while tax expenses growing at very moderate rate. The growth momentum so set is likely to get further boosted in view of rising preference for low price ranged cigarettes amongst low income group people who have so far been consuming beedis till late. Besides, driver to this trend has been favorable demographics, increase in consumer disposable income, availability of improved product, innovations etc. Above all, likelihood of GST getting implemented from July 1, 2017 may prove to be great respite for organized players into the industry like VST who have been sufferers of price competition from unorganized players who have been avoiding paying tax and causing cut-throat competition at market place. With the implementation of GST, unnecessary price competition will go as every player irrespective of their sizes will have to pay tax thus creating level playing environment. All these developments augur well for tobacco industries in general and VST industries in particular as the company has been focused on value creation by significantly investing product design, innovation, quality marketing and distribution and has been successful in creating leadership position in this segment for itself.

Valuation and Outlook:

Given the backdrop of soaring demand for low priced cigarettes and uniformity in tax rate to be ensured with the implementation of GST, I expect VST industry to register revenue growth at CAGR of 9.6% during FY17-19E. Although I remain long term positive on the company on account of its sound financials, clarity on GST rate would be a key trigger to watch out for. Recently, the stock has good run-up; still I believe that valuation of stock has scope to expand further amidst improving sales and net profit. I have come out with “BUY” recommendation on the stock for next 9-12 months valuing it at P/E 25.0x on its FY19E EPS of Rs.139.7 with a target price of Rs.3492/share.