VST Industries: Puff full of power?

-International Big tobacco stocks have been outperforming the general markets in the current downturn. BAT & Philip morris are at multi year highs.
-VST payout has reduced to 55% , if its goes back to its normal 70% then the yield is more like 5% currently.
I quite agree with your overall thesis.
Discl- Invested


Dear Dhiraj ji,
I have a lot of respect and admiration for the way you answer queries.

I wanted to understand that since reduction in dividend would also adversely affect BAT, why haven’t they objected to it. Also, since BAT shareholding is not very high and they would face resistance in increasing it further, how high do you see the probability of BAT eventually losing control.


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Thanks for your appreciation. Frankly, MNC controlling Indian company, generally are very happy to receive dividend (except in case like Whirlpool, where surplus funds are invested in group companies in other countries). So reason why BAT is not supporting higher dividend need exploration. The management is currently controlled by BAT for VST Industries. In past, Radhakrishna Damani group, the second largest holder attempted for hostile takeover for the company couple of decade back. Given this background, I see very limited chance for BAT to increase its stake further and with control, I assume they definitely would not be keen to reduce stake (unless they get control of ITC, which is also very difficult situation as being in same sector) by way of buyback of shares. Further, reduction in stake would futher improve propsect of Damani group attempting again to take control of the company.

The only major shareholder who can influence behaviour of BAT group is Damani group in this company specifically. Damani group have supported in past resolution to give ESOP to employee which indirectly dilute stake of BAT (unless the employee has some arrangement with BAT to support BAT on critical issue). While in normal circumstance, it would be very odd on MNC company to reduce payout ratio, in complex ownership of VST Industries with sector pecularities about foreign ownership of the cigarette industry, I am fail to get any obvious reason for not declaring dividend and hold cash on balance sheet. I guess BAT managment intend to to buyback of share in VST Industries (with they not participating in shares) and indirectly increase their stake in the company hence conserving the liquidity.


this is the new variant company launched last quarter.

Can you pls elaborate on this point as to what Whirlpool is doing differently as compared to other MNCs in India in terms of capital allocation or dividend policy? Is there any improper use of funds from Indian subsidiary? Thanks

This is my first post here and I’d like to share a short pros and cons list of a stock that I really like and one which I have been tracking for a while now. I’ve chosen not to mention the obvious aspects of the stock/business such as the addictive nature of its products, pricing power, regulatory risks, etc.

Reasons to buy VST:

  1. Free Cash flow at 300cr (after asset investments). Assuming even a 7-8% Cash flow growth for the next 10 years,a terminal value multiple of 15 with no debt and 800-900 crores of cash on the books, the market is undervaluing this stock by atleast 50-60%.

  2. Dividend Yield is around 3.5% - a consistent Dividend payer and is unlike those value traps where the company is cash rich but hoards the cash.

  3. 90% of the cigarettes market is illicit and the 10% legal market pays 90% of the taxes. There is incentive for the govt to reduce illicit trade in cigarettes by keeping taxes low on the cigarettes. Growth potential is quite high.

  4. Tobacco industry employs 4.5 crore people (mostly farmers) and contributes 60,000 crores in Taxes. So the govt is unlikely to shut down the industry overnight. The low valuations are largely on account of the regulatory concerns around the industry and the MF ESG compliance.

  5. Tobacco contributes 6000 crores in Foreign exchange to the govt on account of exports. Govt has incentive to ensure the growth of the industry. No govt ever killed a cash cow.

  6. Govt has not increased taxes on cigarettes in the last 2 budgets but has done so on Chewing tobacco. Chewing tobacco is cheap and its users upgrade to cigarettes, although there is some taboo around smoking. It is likely that some may upgrade to low end cigarettes, which is the market in which VST plays in. 90% of VST’s sales are in cigarettes.

Reasons not to buy:

  1. Mutual fund coverage is low. Value may not be realised for a long time, since Funds have to be ESG compliant. If holding period is significant, value may be realised but I hope funds will eventually see value and invest.

  2. With people becoming more health conscious, the sales are dropping but that is also because there is a large untapped market consuming chewing tobacco and illegal cigarettes. That said, profitability metrics - OM, PAT is increasing due to reduced fixed cost investments. With only 3 players in the market, this will aid growth in valuation. BAT has diversified into non tobacco products ,and as a parent, they may help roll out these products in the near future.

  3. Company has no plans to diversify into other sectors like ITC has done. This may reduce its attractiveness to investors and value may not be realised.

  4. Govt., under pressure from private bodies like NGOs, Healthcare institutes, etc may increase taxes significantly. Cigarettes are addictive and most companies should be able to pass on the increase to customers. But there may still be a significant drop in volumes.

The pros outweigh the cons for me and I see significant runway for the firm to grow.

Disclosure: Invested


Most points are great but the number on illicit cigarette market is wrong. 75 percent of cigarettes sold are legal and illicit is only 25 percent. The numbers you have are for total tobacco market and not cigarettes where 10 percent of tobacco products(mainly legal cigarettes) contribute to 90 percent of the taxes in the tobacco sector

Yes. I meant 90% of the Tobacco market and not 90% of the cigarette market, as mentioned. Apologies.

The number is around 25% for the cigarettes market, which is roughly around 13,000 crore and growing.

This article has more details: India loses Rs 13,000 crore every year due to illegal cigarettes: Report | Deccan Herald

I feel major disruptor for this industry would be vape … which could have major impact

But Govt ban would continue , since the govt feels that it would increase vaping among the youth

and i feel the data in line with govt of India view …

any change in the government policy and vape black market would have major impact on VST

Video on Detailed Business Analysis of Cigarette.
Government taxes, FII continuous selling in cigarette companies…
Compared Global and historical valuation.
VST Inds: Business analysis and investment rationale - YouTube](https://youtu.be/-erjDhNAlJw

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As per latest data Mr damani (through his holding cos) holds more stake than promoters… am I correct? Can some seniors please confirm if my understanding is correct?


Yes you are right. Cumulatively, Mr. Damani is holding more than promoters stake in VST. But I am even more surprised as to why he or any of his nominees are not on the board of directors of the company

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Co announced a 140Rs. Dividend per share. The payout has thankfully reverted back to earlier levels. @ cmp Stock still @ 4.32% yield.

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Good to know that company improved payout ratio. However, interesting to note that net of excise duty there has been marginal drop in Net sales. Secondly, there is significant jump in other income which contributed to growth in net profit during Q4FY22. Not sure whether this kind of other income is sustainable. We shall get more insight once ITC and Godfrey announce their results to understand that the decline is industrywise factor or standalone factor.

Appreciate your efforts and conviction.

Disclosure: Do not have any investment in the company (sold in August 2021) but ITC is among top two holding. Hence, my view may be negatively biased.

As per my little knowledge, Mr Damani (RKD) always stay away from limelight, you won’t even find a single public interview leave being the board of directors of the company.

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I agree with your point that Mr. RK Damani likes to stay away from limelight.

But what surprised me is this: -

His investment in VST Industries is one of his major holdings. I think he is invested in VST Industries since early years of 2000, I mean he is holding it for very long time and to top it he is slowly increasing his holding. Just give a thought about these two points. Holding it for long time and increasing his holding plus this holding is a major portion of his investment portfolio. Would one not like to participate directly in the growth of such company? What better way to participate in the growth than becoming a board of director either by himself or by making some one from his side as a member board of directors? Board of director rarely give interviews to media or make posts on social media. Most of them stay away from publicity.

Am I missing something here?

Apart from wanting to stay away from limelight, being in board also ties up his hands with respect to buying/selling since he would be considered insider and has to honour the silent period. Even in India cements he has been raising his stake from long time and now holds more than 22% but not in board of directors.


If one is convinced with management, what is the need to be in board of directors? I think the great investor here values his time and other commitments more than being tied up with meetings and procedures which come along as compliance when being board of directors.


Below are broad actions of 3 primarily cigg & tobacco cos. in last 1 year : -

  1. ITC :-
    - Acquired a few FMCG/D2C brands at seemingly expensive valuations
    - Went after a blogger with a defamation suit
    - Opened an e-commerce store - a category where thr are well-entrenched players and some deep pocketed players entering alongside

  2. Godfrey Phillips : -
    - Involved in family settlement case where one party wants to sell, other wants to continue
    - Hired a new CEO; threw a Page 3 bash for the same :stuck_out_tongue:
    - Investments in Cloud kitchens, Retail, Candy biz etc.

  1. VST : -
    - Created an ESOP pool to retain and motivate employees
    - Expanding its product lines in new states; broadly mentioned thr strategy to grow organically by increasing penetration of their products

Well, if mgmt and thr actions have an impact on your decision to invest ( or not), please consider above and take your call.

Disclosure :- Was invested in all 3 last FY and had the pleasure of observing above actions. Exited both ITC and GPIL now.