ValuePickr Forum

VST Industries: Puff full of power?

Very well put. I completely agree that the terms of the agreement should have been clearer.

I naturally assumed that the Exercise Price will be around the CMP. But seeing how they didn’t even give an estimate for it, I’m worried it could also be given at extremely lucrative rates to the employees. In that case, the loss of Cash / Dividends to the Shareholders will be larger than what I’d estimated.


Hello All,

Nice to see some interest in VST industries

The core investment thesis in VST industires was based on almost Infinite Return on Capital Employed it earns. That compensated less then mediocre growth in topline ( Tobbacco being sunset/low growth industry)

Please find the working and figures below and its sourced from Annual Report 2020.

The Core ROCE is so high (bordering on infinity ) that that a small growth in Topline results in and resultant amplified impact on bottomline results in outstanding investment and ATM Machine
However there are 3 factors which is making me question my investment

1- Not much space to employ additional capital made worse by stagnant growth in topline
2- Result of hike in Excise duty in 2020 Budget
3- Employ ESOP scheme ( there is no way i could have known it)

The hike in Excise duty in Budget 2020 has hit VST industries hard

Material cost, Employee cost and Excise duty are major cost line items for VST Industries

The above working somewhat punctures the hole in claim that Tobacco firms have pricing power and have ability to pass on hike in Excise duty to end customer ( Tobacco being sin product and being sticky business). In my Opinion (i surely might be wrong), the very thesis that Tobacco products are immune from Income elasticity and price elasticty is questionable.

While Excise duty at % of sales has increased from 7 % in Q1 2020 to almost 25 % in Q 32021 while the margin between Sales and material cost has increased from 59 % in Q1 2020 to just 66% in Q3 2021.

This added with ESOP fiasco is making me question my investment in VST industries

PS - I have been a nicotine addict ever since i can remember and in lockdown switched to much cheaper brand and 2 other guy member in my family have totally given up given the Price increase and it just occurred to me that if i can switch from my brand with whom i have been loyal for 8 years , then it can happen with everybody. This statement is full of sampling bias though and i understand that there is no way my behavior can be extrapolated to population of any size

PS 2 - If you find any mistakes in my calculation or dont agree with any of my conclusion then please let me know. id be happy to engage and learn.

Harsh Shah



Your views are much appreciated.
A few points to ponder about.

  • Lahiri was there in VST since early 2000’s. He climbed the management ladder while helping create the brand TOTAL which started selling 5 years ago. All this while he was happy drawing a very handsome salary. The Enlightened board which got a new British Indian chairman clearly faltered in retaining a class talent like Lahiri , however one can understand the pull of ITC.
  • The new MD is from Godfrey & can very much buy from the open market the companies stock with the very handsome salary that the company can pay him. What better way to align his & the companies interests. Skin in the game basically.
  • Since BAT cannot buy from the open market & RKD seems to be picking up chunks a la India cements style, One could speculate that this maybe BATs way of increasing its control in the company, I mean will the employee trust vote against BAT? :wink:
    The other explanation of long term employee retention seems too far fetched as this would be the fourth MD the company has had since 2009, an era where a large part of its volumes were from non filter segment. Co has grown without ESOP during all this while. what has changed suddenly? Could it be RKDs recent purchases?

The Voting is currently open & i would humbly request everyone holding the share to vote against this blatant misuse of shareholder funds.Every Vote counts.


There is a huge & unnecessary build-up of cash in this company. This issue bothered me in the past but I thought maybe the management will come out with some clarification on this. However they still have not done the same. The issue and its impact on valuation are as follows

Since the past 3 years, the company has slowed down its dividend payments and is hoarding up on the cash. If you see the Chart below, you will observe that the Cash & Current Investments have steadily increased and have reached to Rs 789 crores

As shown above, cash & current investments now amount to an astounding 56% of the total assets of the company!

Now you can very well argue that some portion of cash the company needs to retain to run its operations and hence not all of the above cash is “Excess Cash.” Thus, how to determine the amount of cash that is in excess? Should we take the thumb rule that 2% of a company’s assets should be taken as required cash and the balance as excess. I think a more nuanced view is necessary.

As stated earlier, this company has extremely high returns on capital. As per my estimates of its Return on Invested Capital, in the past ten years the ROIC of the company has ranged from 30% to 77% and the median number is 40%. With this kind of return on capital, the company is a cash generating machine!
There is another interesting thing to note. The Net Block+CWIP of the company has increased marginally from Rs 152 crores in FY11 to Rs 200 crores in FY20 (i.e. only 1.31 times). However, in the same time period, the sales have increased from Rs 582 crores in FY11 to Rs 1239 crores in FY20 (i.e. 2.13 times). Why? The reason is because majority of the revenue increase is due to increase in price and NOT volume growth. During the past 10 years, the Cigarette volumes have only grown at a CAGR of 1.5% whereas the revenue CAGR was 10%. Furthermore, the incremental working capital needs of this company are also not very high.
Thus amazing ROIC combined with low (volume) growth leads to very little reinvestment requirements and consequently no need for the Company to hoard that cash.

Thus, in view of the above, can we simply apply the thumb rule of 2% of assets as required cash and balance as excess cash?
I would like still give the company some benefit of doubt in regards to its cash position. This is because when you see the Balance Sheet of VST, you will observe that there is an Item in Other Current Liability called “Statutory Liabilities”. Some portion of this amount is towards demands from various authorities that the company has challenged but as a matter of prudence it has recognised the same in its books. Thus, the company, apart from paying the undisputed statutory dues, would also need to keep apart liquid funds for disputed dues in case it loses its appeals.
Hence, I am willing to give the company making an assumption that the ENTIRE amount of required cash that the company needs is the amount equal to these statutory liabilities. If you see the table below, you will observe that the amount of Cash in FY 18 (highlighted) increased dramatically with the increase in Statutory Liabilities.

One can also assume that the incremental working capital needs also can be part of required cash but because that amount is not very large, and because I am already considering the entire amount of statutory liability, I have chosen to ignore the same.

Thus, even after considering the required cash, the Company still has excess cash to the extent of 34% of its total assets.

Some of you may think that I am being too liberal with the Company whereas some of may not agree with my method used to estimate the “Excess cash”. However, there cannot be any doubt that the company is hoarding an extremely high amount of cash since the past 3 years.

Before we do the valuation, it is important to note that the Dividends/Net Profit % has fallen to 52% from its past average of 70%. Thus, we need to value this company with two models – a FCFE Model and a Dividend Discount Model.
So now my super complicated valuation model is:

Wait… what is this? This looks too simple. Yes, guilty as charged! Since this a mature company in a mature market and with competitive advantages that are extremely likely to persist in the future, the model does not have to be complicated. In fact, the key assumption to make is the growth rate of its Net income. (On this note, I have written a brief post on the Indian Cigarette Industry HERE which can aid you to make your own growth assumptions). I have assumed that the net income of the will not grow in this year and thereafter will grow at the risk free rate. Thus, I have estimated a value/share of Rs 4,022. The stock is trading at Rs 3,640 (as at 21/1/2021) and so I should buy it right away? Not so fast. Remember the cash build-up?


Thus, from a dividend payout perspective, the valuation works out to only Rs 2,385/share and that means that the company will end up destroying shareholder value to the tune of more than Rs 1,600/share. Of course, this is with an assumption that the dividend payout ratio stays at its current level of 58.9%. Obviously, the company can change (AND SHOULD CHANGE!!) its dividend payout ratio. However, the idea in the above model is to point out that if the company doesn’t change course, then the Dividend Discount Model is not only the best measure for valuing this company but also explicitly shows how much value is being destroyed by holding onto extra cash.


The above modification is a more nuanced view of the previous dividend discount model. Here I have assumed that the company will change its dividend policy after Year-5 and also will return back the excess cash along with interest.
In this scenario, after accounting for the interest the value destruction per share works to around Rs 320.

Based on the assumption I have made for the company and the publicly available information out there as of now, depending on the view you take, the build-up of excess cash can cause value destruction to the extent of Rs 320 to Rs 1,600 per share.

Click HERE to see the Google spreadsheet link on my blog and see the “VALUATIONS” tab

Maybe (and hopefully) this excess cash issue would be a benign one and the company is planning to give out a big sweet dividend (according to me, the market is pricing it that away if you see the current valuations) and the cash will return to its normal levels OR…. it could be something else. Whatever the case, the Company ought to communicate to its shareholders and clarify the same.


Hi Amol,

Terrific work !! your post has been great source of learning.

True, one of the few great company/business which doesnt require Fixed capital, let alone working capital.

For the sake of learning purpose can you/we (it would be great if its us) rerun your Valuation template with slightly different variables

1 -

IMHO the pricing power was/is the only moat it had to create the value for shareholders, given that businees is not scalable beyond a point and hence little room is available to further invest free cashflow.

However that moat has been breached in my opinion. (I can and want to be wrong).

In 83rd post , based on my working i see that Excise duty as a % to sales has in creased from 7 % in Q1 2020 to 25 % 2021 Q3. If it had truly pricing power then there wouldnt have been drastic rise in excise duty payable as it would have passed on the hike to end customers.

so can we have range of Percentage growth for Net Profit from Negative -4% to +4%.

Also please relevant snip from Annual Report 2020


As it is VST sells it product to bottom of pyramid.


The company has put a Dividend Distribution policy on its website and Company has stated that its payout ratio is around 70 %

Going forward i expect the dividend distribution to be 70% to be continued .The current reduction was maybe due to Covid.

3- Also for the computation of Fair value based on FCF/Dividend yield we’ll have to take 2 other variable for computing Net Profit. ( Since Net profit is the basis for determining dividend )

a- Impact of ESOP (if the resolution is passed) - ESOP will expensed in P&L which will have following impact

1- Reduction in Net Profit
2- Reduction in Taxes
3- Reduction in Dividend
4- Evaporation of Investments on the books to fund the purchase of ESOP share from secondary market

b- Impact of DTA in the Balance sheet to Net Profit

The world can changee from Profit before Tax to Profit after Tax due to presence of DTA


Source for both is Annual report 2020

Please let me know if you are open to any work together for my learning purpose.

Harsh Shah

Harsh, I have already covered most of your points in a Google spreadsheet (link of this spreadsheet is in my blog). Everyone can view the detailed assumptions made by me along with the formulas. Since the model I have used for valuation is so straightforward, you can make your own on seeing this sheet. In regards to your point regarding excise, I will not place too much as it is passed on to the consumers with a lag (even in the past)

@dd1474 and @dineshssairam would love your views on my calculations and assumptions

My VST Industries Valuation

I valued VST Industries at Rs. 3,200 using 11.42% Cost of Capital and 20% Margin of Safety (Please note that this was year ago)

My personal preference would be 15% Cost of Capital and 20% Margin of Safety. Also, the Risk-free Rate has lowered quite a bit compared to when I did it. So taking into account all this, I would say Rs. 2,200-2,500 is a safe price for me.

The ESOP is a fresh news. If my estimates are right, the dilution might be ~Rs. 100 at the most. Of course, if the ESOP turns out to be more lucrative to employees or if the management plans to issue ESOPs regularly in the future, the dilution will be well north of that.


I liked the way you structured your post. It shows great understanding about the Value Drivers and how they impact Value.

However in your DDM, you did not include the additional Cash Balance to the final value. Your cashflows are all non-cash items and so, your final PV is also all non-cash. Of course, if you’re assuming that the company will squander all the Cash they have, it makes sense. But short of making that assumption, you should add Cash at the end, which will bring your DDM value to Rs. 2,690.

The ‘Risk’ in Cash

Also, consider this: Cash does not have Business Risk. Unless the management willingly adds some other Risk to it (Ex: Investing in risky Bonds/Equities), it should always be considered at Face Value. Of course, if the management itself is questionable or they’ve had a bad capital allocation history, then you are better off not Valuing the company at all. All the same, it’s not that straight forward.

Prof. Aswath Damodaran talked about it in one of his Apple Valuations:

Cash has "Option Value"

If you want to get really technical about it, Cash has “Option Value”.

Michael Mauboussin Paper on “Real Option Value”:

Easier context from Prof. Sanjay Bakshi:

My personal opinion of Cash Holdings

I personally think it won’t make much of a difference to the final value how you treat Cash, at least based on my experience Valuing Indian companies. Even when you consider companies with a sizeable Cash balance like VST Industries (Or for instance, Goodyear India - which I hold), the impact due to Cash “mismagamement” is not very high. When I value a company, I am not looking to find out ‘exactly how much it is worth’. I am looking to find ‘a low enough price at which my capital will be safer’. In that context, I wouldn’t worry too much about this.

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Thank you very much Dinesh for taking out the time to see through the post.

It was also nice of you to share the articles on cash holdings. However these articles/videos, though extremely useful (and I have saved the credit suisse one for future reference) don’t apply to VST as it is a slow (volume) growing with little capex requirements and has little seasonlity/volatility in cashflows. Hence there is no option value for the cash in this particular case.

I enjoyed going through your valuation of VST and it was good getting a different perspective. Have sent some feedback on your email for it and do have a look

The points you have raised in regards to cash balance in DDM is a good one. I have made two DDM models - one in which they company doesn’t distribute the cash and keeps building it up and this doesn’t model need to adjust for the cash balance.

However, there a second DDM model where I have assumed that the company builds up cash for 5 years and at the end of year 5 it distributes this cash with interest. In this model I should have considered the existing cash balance. Will account for this and update my post above as it will reduce the potential value destruction calculated in this model. Many thanks !!

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Please see below REVISED WORKING of Dividend Discount Model No.2 posted in my earlier thread


Thus the potential value destruction, IMHO, is now Rs 77/share as against Rs 326/share calculated earlier. While this amount is lesser, it still amounts to around 40% of the Company’s annual profit

Also if you wish to see my model along with all the assumptions, then click HERE to see the Google sheets

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Thanks for your message and efforts on the company. However, increasingly, I find that in investing, the soft aspect (evaluating company for investment and also holding one behaviour over holding period) are more important than hard aspect like Model. I would suggest you to do model the company in 2008 and compare it with actual. Many times we are not able to project over a long period company can grow at much higher rate than what we project. The last statement is more for general and not specific to VST Industries.

Having said that, Find enclosed my view point on your REVISED calculation post on 27Jan2021. My apology for delay in reply. Please note this observation are related to my approach of investing and hence may not applicable to others. I could be wrong in my understanding as well.

  1. While Cigarette industries is facing headwind and volume growth is also many years have been negative, what I found in VST Industries, due to their small size they have been manage to gain market share and grow at higher than industry rate.
    Even Screener data over past 3-5-10 years period is indicating Sales CAGR of around 8-10% and Net profit CAGR of 16-26%. (refer to data after profit and loss account in screener). So, 4% growth rate assume negative growth in volume and only price increase. While it could be bear case, but being optimistic I would wish higher growth rate say 8% (5-6% price growth and 2% from market share) on topline. With operating leverage, the net profit can increase at around 12-14% (if past data is any indication). Hence, I would look significant revision in Growth in net sales and net profit.

  2. Second point would be increase horizon over 5 years. I would be looking at around 8-10 years horizon of say 13% net profit growth, followed with terminal growth of 6-7% (my expected nominal GDP growth rate in India). In case of Cigarette we may see decline or stable volume, however, price growth would made up for deficit in my opinion. I may be very optimistic and completely off the mark.

  3. Dividend Payout rate for company during FY09-FY19 period has been in range to 65-75%. FY20 was exceptional year due to COVID and management did indicate in AGM that the lower dividend payout is a COVID specific phenomena as the company do not know how future would move and hence wanted to conserve resource. I would be safely assume around 70-80% payout over next 8-10 years.

  4. I do not assume that company would built up very large liquid resource and keep it idle. It may remain on balance sheet for 1-2 years. However, over long period, the shareholder as well as management would realise futility of holding cash and hence same would be distributed. Only point to note is Cigarette company have huge contingent liability. Hence, like MNC pharma, they keep large amount in liquid assets to meet adverse judgement/development on ongoing litigation. I believe this is nature of business (something similar to capital adequacy for Banks. Only difference being while bank keep just 10% of amount as adequacy, in Cigarette it may be 50-100% of contingent liability assessed by management).

Appreciate your efforts to develop hard model.

Disclosure: Among my top 10 investment holding and my view may be biased. Not a SEBI registered advisor, Not recommending any investment action


I wish this were the case with more Indian companies.
They just love to hoard cash on their books - for instance, look at Avanti Feeds, a valuepickr favourite.
1200cr of CCE, 7000cr market cap.
This is capital misallocation.

We hardly hear questions about capital allocation of managements on earning calls. Since most of the particiapants are are sell-side analysts, they’re more obssessed with trying to get the next quarter’s EPS/revenue number, and have 0 vested interest in the long term performance.


Thank you for taking out time to see through my long post.
It is good to have your views on the expected growth rate, even though I do not agree with them. Differing views is what makes a stock market run :grinning:

Also on the note of terminal growth, I too have assumed it at around 6%. However it is reduced to 4% because of deduction of the default spread (of 2%). Increasing it to 6% would have also increased the discount rate by that additional 2% and hence net-net, the end result is more or less the same.

My primary issue is with the cash balance. If one takes the view that cash is being hoarded because of contingent liability (even though such hoarding of cash was never done until just 3 years ago), then the DDM is best way to value the company and that value is very less.
If one takes a view that the company will give it out soon (which is also my view) then also there is a potential value destruction (which is around 40% of the company’s annual profit as per my assumptions) if the cash is being held for so long. Its been already 3 years since the company is doing this and merely citing covid (which started only last year) isn’t enough. Their profits were impacted by only 2% in the past 9 months.

At the very least, if I was a shareholder, I would definitely pester the company for answers for this cash build-up

In my view, it would be better if you can nominal rate in growth and discount rate. While not material, but it may not be correct approach. For instance, Last year cashflow (in your case year five, would Year 4 cashflow (1+terminal growth)/(K-g). So if terminal growth is taken at nominal value in numerator than it is fine.

I understand your concern about withholding large balance and would like company putting excess cash return to shareholder. However, very few companies/ management follow disciplined approach in capital allocation. We find companies like HUL and Nestle distribution more than 100% profit as dividend which trade in multiple of more than 60x while other group like to keep liquidity with them which reduce ROCE and other return ratio for the company. That adversely affect valuation. I agree that we shall constantly questions and try to get excess liquidity at productive use.

Everything is in nominal terms only

The Prof Damodaran way of calculation Risk Free Rate (RFR) is 10 year Bond Yield - Country Default Spread (which is around 2%)

Then he proposes using this RFR as a proxy of long term economy growth rate (for the purpose of terminal growth)

Thus if I did not deduct that 2%, the RFR would have increased to 6% (and threby the terminal growth rate). However even the discount rate would have increased as well.

That’s what I meant earlier

The Cost of equity (k) = RF+ B (Rm-Rf). So when you consider VST Industries stock, normally, Beta would be less than one. Hence, there would not be 1:1 relationship between cost of equity (expected market return from investment in the company) in my opinion. The terminal growth rate would (even I take RFR as suggested by you), would be Rf in equation of cost of equity and not cost of equity in my opinion. I may be wrong in my understanding.

I am using RFR = Terminal Growth Rate (and NOT the Cost of Equity).

Firstly the basis for deducting the Default Spread from the RFR:

Secondly, the basis for using the RFR for the Terminal Growth Rate

In regards to not deducting that 2%:
This would make the RFR increase to 6%. Consequently Equity Risk Premium would decrease as also evident from your equation as well (though Prof Damodaran calculates it differently). Also the growth rates would increase by 2%. So, I re-ran the template with 6%. The results are not EXACTLY 1:1 but are close enough.

This is a very good issue you have raised though. Will look into more detail

This reply is getting out of place for this thread. We can delete it later if you wish

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The ESOP plan seems to have RKD’s backing.


Dear @dd1474 ji,

Could you please explain this point. Only recent case I can recall is the trademark infringement involving ITC and Godfrey Phillips.


Contingent liabilities from Cigarette companies arise mainly from two points. First various litigation with State/Central government in various form. they have excise, GST, cess and what not? Increased number of levies/taxes result in higher number of cases for Cigarette company as compared with other industries.

Second point of Consumer suits against companies being sin products. Consumer can sue for damage from consumption of Cigarette. Currently, this being not a major concern from Cigarette players in India. However, same has become major cost for global players. As Indian Per capita income and standard of living increase, we shall see major jump in such litigation in India as well.


VST Industries Ltd reported a -4.60% yoy fall in consolidated net revenues for the Mar-21 quarter at Rs278.12cr

VST also announced a Final Dividend of 114/- per share.

Disc : Invested

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