VST Industries - Steep price hikes eat into volumes; Buy - Anand Rathi

Steep price hikes (due to higher excise and VAT rates) led to VST Industries' (VST) volumes falling. Lower volumes and EBITDA margin held net profit down 18% yoy. We expect volumes to recover in 2HFY13, continuing into a strong FY14. Hence, we retain our Buy on the stock, with a price target of Rs.2,260.

- Steep price hikes impact volumes. In 2QFY13, volumes fell 15% due to a) ~20% price hike to pass on ~20% excise duty hike as well as 200bps VAT hike across states; b) raising prices from Rs.2 to Rs.2.50. In 1HFY13 export revenue from leaf tobacco was up 35% yoy; cigarette revenue was down 3%.

- Change in revenue mix hits margin. Lower volume growth and a change in the revenue mix resulted in a 490-bp lower EBITDA margin. The effective income tax rate was stable, at 32% yoy. Other income dropped 39% yoy. Net profit was down 18% yoy.

- Expect recovery in 2HFY13. The company entered the 64mm cigarette segment at Rs.1.50 and Rs.2. It has launched brand extensions of Charms and Moments at Rs.19 for 10 cigarettes. We believe a nationwide launch of cigarettes at Rs.1.50 and Rs.2 would help volumes recover.

- FY14 to see strong growth rates. We expect no major change in excise duty in the Feb'13 budget as excise had already been hiked ~20% in the Feb'12 budget. The government has not hiked excise by more than 5% in years when it had been hiked by over 15% in the year prior. The company will be able to stabilize the launch of 64mm cigarettes at Rs.1.50 and Rs.2 and regain lost volumes.

- Valuation. We value the stock at a price target of Rs.2,260, at a target PE of 19x FY14e earnings. Dividend yield of 4% and cash per share of Rs.110 support our valuation. Risks. Weaker momentum in cigarettes.

Source : Equity Bulls

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