Rating Rationale
March 28, 2022 | 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)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

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

 

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

 

For the nine months ending December 31, 2021, net revenue stood at Rs 876 crore (5% year-on-year growth over the corresponding period of the previous fiscal). Growth in revenue was primarily driven by rebound in volume with easing of lockdown restrictions. Operating margin was also healthy at 34.8%.

 

Revenue growth is likely to sustain over the medium term as well, with operating margin remaining steady at 34-35%. Financial risk profile will also remain strong, driven by the debt-free status and superior liquidity.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profile of VST Industries.

Key Rating Drivers & Detailed Description

Strengths

Strong financial risk profile

Financial risk profile is healthy, 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 over Rs 850 crore as on December 31, 2021, supports liquidity.

 

Established market position with reputed brands

VST is an established player in the cigarette industry with over eight decades of operations. It is the third largest player in the domestic market, with significant presence in West Bengal, Andhra Pradesh, Telangana, Bihar and Uttar Pradesh. The company has a vast portfolio of reputed brands such as Charminar, Charms, Special, Moments, Total, 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, in terms of volume, it has a small market share of around 10%. Further, the operations have been concentrated in southern and eastern parts of India, though the company has improved its market reach in Uttar Pradesh and Delhi. To gain additional market share and widen its geographical presence, VST has entered markets such as Gujarat, Maharashtra and Karnataka.

 

Susceptibility to adverse changes in regulations

The cigarette industry remains highly vulnerable to changes in government policies and regulations. An elevated tax structure on one hand, and curbs on promotion, consumption and packaging of cigarettes, on the other hand, constrain the overall growth.

Liquidity: Superior

Liquid investments, including cash and cash equivalents, exceeded Rs 850 crore as on December 31, 2021. Cash accrual and liquid investments are likely to remain adequate during fiscals 2022 and 2023. Absence of debt and major capital expenditure (capex) plans further aids liquidity.

Outlook: Stable

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

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 strong financial risk profile

 

Downward Factors

  • Substantial decline in market share to below 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

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

 

For the nine months ended December 31, 2021, net profit was Rs 233 crore on operating income of Rs 875.5 crore, against Rs 237 crore and Rs 833 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators

As on/for the period ended March 31,

Units

2021

2020

Operating income

Rs.Crore

1109

1225

Profit after tax (PAT)

Rs.Crore

311

304

PAT margin

%

28.0

24.8

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 Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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.Crore)

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

0.0

Simple

FAAA/Stable

NA

Non-Convertible Debentures*

NA

NA

NA

15.0

Simple

CRISIL AA+/Stable

^Includes sublimit for overdraft facility

*Yet to be issued

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non-Fund Based Facilities ST 60.0 CRISIL A1+   -- 29-04-21 CRISIL A1+ 21-04-20 CRISIL A1+ 17-05-19 CRISIL A1+ CRISIL A1+
Fixed Deposits LT 0.0 F AAA/Stable   -- 29-04-21 F AAA/Stable 21-04-20 F AAA/Stable 17-05-19 F AAA/Stable F AAA/Stable
Non Convertible Debentures LT 15.0 CRISIL AA+/Stable   -- 29-04-21 CRISIL AA+/Stable 21-04-20 CRISIL AA+/Stable 17-05-19 CRISIL AA+/Stable CRISIL AA+/Stable
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Letter of credit & Bank Guarantee^ 20 CRISIL A1+
Letter of credit & Bank Guarantee^ 20 CRISIL A1+
Letter of credit & Bank Guarantee^ 20 CRISIL A1+
^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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