>VST INDUSTRIES LIMITED: second largest player in Indian Cigarette industry by sales

■ Second Largest Player : VST Industries is the second largest player in Indian Cigarette industry by sales. ITC has a market share of ~78% while VST Ind. and Godfrey Phillips account for ~8% each. Balance is made up by imports, unorganised sector &; smaller players. VST has positioned itself as the lowest cost filter cigarette provider with market presence in south, south central, UP, north-east states.


■ Shift from non-filtered to filtered stands complete: GoI increased excise on non - filter segment, which forced non - filter players to shift to filter segment.VST shifted its product portfolio in favour of filter cigarettes (95% of total volume) and grew volumes and price at CAGR of 8% and 12% respectively since 2009 vs flat volumes for ITC. Steep increase in excise duties on cigarette over the years has impacted volume growth but net realization of large players have continued to move up, which compensated for flat volumes over the last 5 years for the industry as a whole.


■ Increased traction in premium products will be margin accretive: The industry growth is faster in premium segment vs mass & mid segment. VST's premium brands witnessed volume growth of 30%+ in FY11 and now account for 33% of its volume resulting in higher realization besides giving phillip to volumes.


■ Exports present a promising opportunity: VST exports leaf tobacco from India and accounts for 26% of its sales. During 2005-10 peiod, tobacco export from India has shown CAGR of 30%.VST's export has also trebled in last 4 years to `150 Cr. It presents a promising opportunity and will be a good earnings driver.


■ Valuations and View: VST is quoting at a P/E of 13.7x /12.5x on FY12E/FY13E EPS. Its return ratios are ~50% with unleveraged Balance Sheet and ~5% dividend yield. There are upside risks to our conservative volume growth estimates of 2% in FY13E, which we have estimated due to expectation of excise duty hikes in budget. In the case of moderate or no hike volume growth may surprise positively. Recommend ACCUMULATE on VST Industries with a 1 Year target price of `1600 (16xFY13E EPS, discount of 30% to ITC's valuations)


To read the full report: VST INDUSTRIES LIMITED
RISH TRADER