VST Industries: Puff full of power?

After attending AGM, asking question to management and getting reply from the managmenet, I decided to exit from my investment in VST Industries. Find enclosed questioned I asked to managment vide email along with my working file.

Email extract:
My name is X, DP ID Y Customer ID: Z.

I have already registered as speaker in AGM through KFintech Website.

Find enclosed my working and queries:

1 Reason for decline in payout ratio for shareholder when every other stakeholder have adequately rewarded. Considering no DDT payable, the dividend has declined majorly despite improvement in profit and salary and ESOP? In FY2021, total Dividend paid is Rs 159.05 Cr as against total Dividend cash outflow of Rs 176.85 Cr in FY2020. In last AGM, management did try to explain COVID related issue for reduction in dividend payout ratio, however same has to borne only equity investors and not other stake holders? I would sincerely recommend company declare interim dividend and also do share buyback for excess liquidity remaining in balance sheet at the earliest.

2 Why to design Annual report not in A4 size single page in PDF? Have anybody attempted to read PDF annual report I can say from my experience it is very cumbersome.

3 ESOP given to employee upto 5 per cent of equity capital. Rationale for same. While not against adequately remunerating employees, why can not same be paid by cash compensation? How many employees would be eligible for ESOP?

4 In Initial part of report, various parameter like market coverage, wholesaler, brand wise sales have considered FY2015 as base year. What is specific reason to take only FY2015 as base?

5 When Total amount to be spent on CSR is not spent to extent of Rs 229.96 Lakhs, what is rationale to sitting fee of Rs 80,000 per meeting per director for CSR committee? Appreciate if board can genuinely provide reasonable explanation for same. The company spent Rs 4 Lakh as CSR meeting sitting fees with result being nearly 1/3 of eligible amount being not spent. Would it not make sense to link the sitting fees to actual amount spent?

6 Reason for keeping Rs 884 Cr in investment in total Balance sheet size 1485.78 Cr, nearly 60% of funds which also adversely affect return on capital employed and Return on networth. Does management has any view of utilise/distribute this fund by way of buyback of shares?

7 Page 112, Current Advance receivable in Cash of around ~ Rs 200 Cr as on March 31 2020 and March 31 2021. Can you please provide reason for such a large Advance? What are purpose and who are the counter-party?
VST Industries Dhiraj Workng July 2021.xlsx (15.1 KB)

The reply management was giving was not at all making sense to me to be invested in the company. Mr. Lahiri, who left company in FY2021 was a key person driving the show of Cigaretter business which company has also highlighted in the annual report indirectly by commenting on market share gain and among most succesful brand named Total from the company. He left the company for ITC. Now, we get a new MD who is coming from Godfery Phillip and immediately implement ESOP plan with kind of 5% of equity capital.

What was the most worrisome was reasoning of the management. When question asked about lower dividend, they cite COVID related uncertainity as a reason. However, during same time, they find no issue in increasing Director remuneration at an extremely high rate !!!. I specifically put the table which provide details of cashflow to all stakeholder. As compared with FY19, cash outflow from Dividend (including Distribution tax) was lower in FY21, when all other stakeholder has benefited disproportionately.
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Personally, It was a very difficult decision to exit from the company. I have been holding this company share since 2009, as it is my second oldest holding in portfolio. My reason to invest in the company was that it was rewarding shareholder adequately by Dividend. However, since last 2 years, depsite everthing being fine, the company has reduced payout ratio from 70% stated in dividend policy to around 50% and also reduce total cash outlfow on account of dividend when DDT is included in FY2019 distrubution. However, at the same time, Directors and employees have wonderful rewards in form of ESOP and hike in pay. While I am not against providing good remuneration to Employee and also Independent directors, In case of VST Industries, I did not find any merit to reward Non-executive director at such higher rate when dividend is maintained or increased marginally. Even the management did not provide any satisfactory reply to Rs 800 Cr cash which carried on balancesheet. Couple of more shareholder raised some concern, but BAT controlled management, proababaly, still leaving in era pre 1947 and feel that they are not answerable to Indian minority shareholder. While they may be right, I can not accept same and hence exited this investment.

I shall be looking at ITC/Embassy REIT to invest this fund partially in short term.

Disclosure: My view may be biased due to my recent decision to divest my holding after more than 12 years being among my core investment. Reader shall do his/her own duu diligence. I am not SEBI registered advisor. I am not recommending any investment decision in the company. I have proven wrong in my investment decision mutilple time and even this action I may regret in future.

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