1

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 39.90% Rs. 335.90

million.

Net Sales and PAT of the company

are expected to grow at a CAGR of

15% and 33% over 2010 to 2013E

respectively.

The company manufactures &

distributes cigarettes under the

brands Charms, Charminar, Gold.

Years Net sales EBITDA Net Profit EPS P/E

FY 11 5845.70 1587.00 950.10 61.53 20.20

FY 12E 6547.18 2136.56 1293.73 83.79 14.83

FY 13E 7267.37 2418.74 1473.96 95.46 13.02

Stock Data:

Sector: Tobacco

Face Value Rs. 10.00

52 wk. High/Low (Rs.) 1483.00/570.00

Volume (2 wk. Avg.) 1546.00

BSE Code 509966

Market Cap (Rs in mn) 19191.92

Share Holding Pattern

1 Year Comparative Graph

VST Industries BSE SENSEX

C.M.P: Rs. 1243.00 Target Price: Rs. 1404.00 Date: Nov. 7th, 2011 BUY

VST Industries Ltd Result Update: Q2 FY 12

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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. 1243.00 19191.92 61.53 20.20 7.37 450.00

ITC Ltd. 210.35 163605.28 7.09 29.67 10.29 445.00

Godfrey Phillips India 3356.40 3490.25 180.15 18.63 4.43 350.00

Kothari Products 482.95 320.29 116.36 4.15 0.54 220.00

Investment Highlights

� Q2 FY12 Results Update

VST Industries Ltd. has reported net profit of Rs 335.90 million for the quarter

ended on Sep 30, 2011 as against Rs 240.10 million in the same quarter last year,

an increase of 39.90%. It has reported net sales of Rs 1647.60 million for the

quarter ended on September 30, 2010 as against Rs 1573.20 million in the same

quarter last year, a rise of 4.73%. Total income grew by 7.49% to Rs 1716.80

million from Rs. 1597.10 million in the same quarter last year. During the quarter,

it reported earnings of Rs 21.76 a share.

Quarterly Results - Standalone (Rs in mn)

As At Sep-11 Sep-10 %change

Net sales 1647.60 1573.20 4.73%

PAT 335.90 240.10 39.90%

Basic EPS 21.76 15.55 39.90%

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� 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, 1956. 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, 1983. 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.

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Financial Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY10 FY11 FY12E FY13E

Description 12m 12m 12m 12m

Net Sales 4750.10 5845.70 6547.18 7267.37

Other Income 218.70 161.30 185.50 202.19

Total Income 4968.80 6007.00 6732.68 7469.56

Expenditure -3947.30 -4420.00 -4596.12 -5050.83

Operating Profit 1021.50 1587.00 2136.56 2418.74

Interest 12.60 9.80 11.27 12.51

Gross profit 1034.10 1596.80 2147.83 2431.25

Depreciation -178.70 -244.20 -256.41 -279.49

Profit Before Tax 855.40 1352.60 1891.42 2151.76

Tax -234.90 -402.50 -597.69 -677.80

Profit After Tax 620.50 950.10 1293.73 1473.96

Equity capital 154.40 154.40 154.40 154.40

Reserves 2279.50 2451.10 3744.83 5218.79

Face value 10.00 10.00 10.00 10.00

EPS 40.19 61.53 83.79 95.46

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 31-Mar-11 31-Jun-11 30-Sep-11 31-Dec-11E

Description 3m 3m 3m 3m

Net sales 1613.60 1472.10 1647.60 1729.98

Other income 49.70 48.40 69.20 65.74

Total Income 1663.30 1520.50 1716.80 1795.72

Expenditure -1174.40 -978.10 -1175.40 -1212.72

Operating profit 488.90 542.40 541.40 583.00

Interest 6.00 5.40 3.10 3.19

Gross profit 494.90 547.80 544.50 586.20

Depreciation -102.30 -50.20 -49.50 -50.99

Profit Before Tax 392.60 497.60 495.00 535.21

Tax -123.60 -155.40 -159.10 -169.39

Profit After Tax 269.00 342.20 335.90 365.82

Equity capital 154.40 154.40 154.40 154.40

Face value 10.00 10.00 10.00 10.00

EPS 17.42 22.16 21.76 23.69

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Key Ratios

Particulars FY10 FY11 FY12E FY13E

No. of Shares (in mn) 15.44 15.44 15.44 15.44

EBITDA Margin (%) 21.50% 27.15% 32.63% 33.28%

PBT Margin (%) 18.01% 23.14% 28.89% 29.61%

PAT Margin (%) 13.06% 16.25% 19.76% 20.28%

P/E Ratio (x) 30.93 20.20 14.83 13.02

ROE (%) 25.49% 36.47% 33.18% 27.43%

ROCE (%) 49.31% 70.28% 61.37% 50.22%

EV/EBITDA (x) 18.79 12.09 8.98 7.93

Book Value (Rs.) 157.64 168.75 252.54 348.00

P/BV 7.89 7.37 4.92 3.57

Charts:

Net Sales & PAT

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P/E Ratio(x)

EV/EBITDA

8

P/BV

Outlook and Conclusion

� At the current market price of Rs.1243.00, the stock is trading at 14.83 x

FY12E and 13.02 x FY13E respectively.

� Earning per share (EPS) of the company for the earnings for FY12E and FY13E

is seen at Rs. 83.79 and Rs. 95.46 respectively.

� Net Sales and PAT of the company are expected to grow at a CAGR of 15% and

33% over 2010 to 2013E respectively.

� On the basis of EV/EBITDA, the stock trades at 8.98 x for FY12E and 7.93 x for

FY13E.

� Price to Book Value of the stock is expected to be at 4.92 x and 3.57 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.1404.00 for Medium to Long term investment.

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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 tobacco-

producing 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.

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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.

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___________ ____ _________________________ 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.

12

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