ICICIdirect.com has recommended to hold VST Industries with a target price of Rs 1631, in its research report dated March 2, 2015.
With the 25% increase in excise duty below 65 mm cigarettes category and 15% increase in above 65 mm category in the Union Budget, VST Industries would have to take a price hike of ~23% to maintain operating margins at ~28% in FY16E considering volume de-growth. However, we estimate a price hike of 20% in FY16E and 10% in FY17E considering its limited pricing power. We expect a volume decline of 7.5% in FY16E and 5% in FY17E. We also expect the company to maintain 64 mm category contribution at the current level of 65-70%. We estimate excise per stick for VST would go up 31% from Rs 1.18 in FY15E to Rs 1.55 in FY16E and further to Rs 1.69 in FY17E. We believe a fourth consecutive year of excise hike would pressurise volumes and, in turn, negatively impact revenues, earnings growth. We expect revenue, earnings CAGR of 4.1%, 1.6%, respectively, in FY14-17E. We cut our FY16E EPS estimate by 21% & FY17E EPS estimate by 6.5%. We believe continuous excise hikes & other regulatory restriction would remain an overhang on the stock. We revise our target price from Rs 1962 to Rs 1631 with a HOLD rating.
"The steep increase in excise duty for
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