Rating Rationale
April 29, 2021 | Mumbai
VST Industries Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.60 Crore
Short Term RatingCRISIL A1+ (Reaffirmed)
 
Fixed DepositsF AAA/Stable (Reaffirmed)
Rs.15 Crore Non Convertible DebenturesCRISIL AA+/Stable (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/FAAA/Stable/CRISIL A1+' ratings on the non-convertible debentures, fixed deposit programme and short-term bank facility of VST Industries Limited (VST).

 

The ratings continue to reflect VST's strong financial risk profile and established market position. These strengths are partially offset by small market share, risk of regional concentration in revenue, and susceptibility to regulatory changes in the tobacco industry.

Revenue is expected to exhibit stable trend over the medium term and the operating profitability is expected to remain healthy over the medium term. However, resurgence of the second wave of Covid-19, leading to localised lockdowns and the extended work-from-home situation is likely to moderate the operating performance of the company in the current fiscal.The financial risk profile is expected to remain strong driven by the debt-free status and superior liquidity.

 

For the nine months ending December 31, 2020, net revenue stood at Rs 833 crore (12% year-on-year de-growth over the corresponding period of the previous fiscal).  De-growth was on account of extended work-from-home and restrictions on large social gatherings on account of covid-19 pandemic. Operating margin improved to 37.5% during this period (from 33.8%). The improvement in operating margin was led by price hike and better realisations due to increasing contribution of higher priced cigarettes. The financial risk profile remains strong marked by debt free status and superior liquidity with cash and equivalents of over Rs 750 crore as on September 30, 2020.

Key Rating Drivers & Detailed Description

Strengths

*  Strong financial risk profile

Financial risk profile is driven by a strong capital structure (debt-free status since 2003), steady cash accrual, and superior liquidity. Healthy portfolio of investments (mainly in debt mutual funds), and cash and bank balance of more than Rs 750 crore as on September 30, 2020, supports liquidity.

 

*  Established market position with reputed brands

VST is an established player in the cigarette industry with over 8 decades of operations. It is the third largest player in the Indian cigarette market, with significant presence in West Bengal, Andhra Pradesh, Telangana, Bihar and Uttar Pradesh. The company has a portfolio of reputed brands such as Charminar, Charms, Special, Moments, Total, and Editions in the 64 millimetre (mm) and 69 mm segments. It has also entered the 84 mm segment with its brand, Editions. Strong brand loyalty and adequate pricing power will continue to support the business risk profile over the medium term.

 

Weaknesses

*  Small market share and risk of regional concentration in revenue

Though VST is the third-largest player in the Indian cigarette market, it has a small market share of around 10% in terms of volume. Operations remain concentrated in southern and eastern India, however the company has improved its market reach in northern states such as Uttar Pradesh and Delhi. To improve its market share and increase geographical diversity, VST has also entered into new geographies, such as Punjab and Central India.

 

*  Susceptibility to adverse changes in regulations

The cigarette industry continues to be highly vulnerable to changes in government policies and regulations. On one hand, the industry faces a high tax structure, and on the other hand, there are limitations on promotion, consumption, and packaging of cigarettes, constraining overall growth.

Liquidity: Superior

Liquid investments including cash and cash equivalent were more than Rs 750 crore as on September 30, 2020. Cash accrual and liquid investments are expected to remain healthy and at similar levels in fiscals 2022 and 2023. The company has zero debt and no major capital expenditure (capex) plans.

Outlook: Stable

CRISIL Ratings believes that VST will sustain its credit risk profile, driven by a strong financial risk profile and stable business position.

Rating Sensitivity Factors

Upward Factors

  • Sustained and material improvement in market share to over 25%
  • Significant improvement in networth, along with stable operating margin and sustenance of the strong financial risk profile

 

Downward Factors

  • Substantial decline in market share to less than 7%
  • Weakening of the financial risk profile because of diversification into unrelated businesses, involving significant capex
  • Any adverse regulatory change in the cigarette industry
  • Considerable decline in cash and liquid investments.

About the Company

The Hyderabad-based company, VST is an associate of British American Tobacco Plc (rated 'BBB+/Stable/A-2' by S&P Global), which holds a 32.2% stake in the company. It manufactures and markets cigarettes, and trades in unmanufactured tobacco.

 

For the nine months ended December 31, 2020, net profit was Rs 238 crore on operating income of Rs 833 crore, against Rs 233 crore and Rs 948 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators

As on/for the period ended March 31,

Units

2020

2019

Operating income

Rs.Crore

1225

1098

Profit After Tax (PAT)

Rs.Crore

304

227

PAT Margin

%

24.8

20.7

Adjusted debt/adjusted networth

Times

NA

NA

Interest coverage

Times

NA

NA

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

IN

Name of Instrument

Date of Allotment

Coupon rate (%)

Maturity Date

Issue size (Rs.Cr)

Complexity Level

Rating Assigned with Outlook

NA

Letter of credit & Bank Guarantee^

NA

NA

NA

60.0

NA

CRISIL A1+

NA

Fixed Deposits

NA

NA

NA

0

Simple

FAAA/Stable

NA

Non-Convertible Debentures*

NA

NA

NA

15.0

NA

CRISIL AA+/Stable

^Includes sublimit for overdraft facility

*Yet to be issued

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non-Fund Based Facilities ST 60.0 CRISIL A1+   -- 21-04-20 CRISIL A1+ 17-05-19 CRISIL A1+ 17-05-18 CRISIL A1+ CRISIL A1+
Fixed Deposits LT 0.0 F AAA/Stable   -- 21-04-20 F AAA/Stable 17-05-19 F AAA/Stable 17-05-18 F AAA/Stable F AAA/Stable
Non Convertible Debentures LT 15.0 CRISIL AA+/Stable   -- 21-04-20 CRISIL AA+/Stable 17-05-19 CRISIL AA+/Stable 17-05-18 CRISIL AA+/Stable CRISIL AA+/Stable
All amounts are in Rs.Cr.
 
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Letter of credit & Bank Guarantee^ 60 CRISIL A1+ Letter of credit & Bank Guarantee 60 CRISIL A1+
Total 60 - Total 60 -
^Includes sublimit for overdraft facility
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Fast Moving Consumer Goods Industry

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