VST has been one of the under performers in the current bull run. From the high of around Rs 4,500 in January 2020 stock is currently trading at Rs 3,500.
I personally attribute the underperformance to Covid-19 and it’s related fear about Cigarette smoking. The same is also reflected in the reported financial performance by the Company. Revenues and profits have struggled so far to cross the levels achieved in FY20.
Fundamentally and technically, the stock seems to be nearing tight consolidation and I expect a significant upmove over the short to medium term.
Key reasons –
- Contrary to the initial expectations, the Company’s financial performance has not fallen off the cliff. The performance and returns continues to be resilient positively surprising many. In FY 2021, Company reported revenues of Rs 1,111 crore and net profit of Rs 311 crore against Rs 1,239 crore and Rs 304 crore respectively in FY 20. June 2021 quarter performance also continued to remain resilient. It’s important to note here that FY 21 was severely impacted with lockdowns and June 2021 with the worst 2nd wave impact in significant parts of India.
- Covid fear is ebbing and many people have started smoking again albeit slowly. This feedback is based on my survey with selective paanwallas. Besides, restaurants and bars have started filling back providing further impetus to the cigarette sales.
- Valuations are at historic lows and hence would not be a bottleneck if investors decide to invest. Current trailing P/E is around 18x as against historic highs of about 40x. ROCE of about 50%, ROE of 36% and debt free status continue to be highly favorable.
- Technically – both on long term and short term charts, the stock is currently undergoing a tight consolidation. This also continues to be a low float stock and hence can move very swiftly.
This looks like a very interesting stock to keep a watch upon. Anyone looking a more diversified play to ride Cigarette revival, should surely look at ITC.