Not out of the woods! Why this RK Damani stock is still below its pre-Covid levels

New Delhi: Dalal Street veteran Radhakishan Damani has earned the big bucks in stocks over the years from value investing and his multibagger brain chain Avenue Supermarts or popularly known as DMart.

However, the ace stock-pickers portfolio is still trading below its pre-Covid highs and interestingly, Damani holds more stake in this stock than promoters of the company.

We are talking about Hyderabad-based VST Industries, a pure play of cigarettes and tobacco products formerly known as Vazir Sultan Tobacco Company.

As of September 30, 2022, promoters held a 32.16% stake in the company. On the other hand, Damani and his firms (Bright Star Investments and Derive Trading And Resorts) held 32.34%.

It is interesting to note that Damani has been increasing his stake in the company. Two years ago, at the end of September 30, 2020, his stake stood less than 30%.

The stock, which trades at a discounted P/E multiple of 16 times, has a strong ROCE at 42% and a dividend yield of 4% and enjoys a debt-free status.

The company also operates under the names Total, Charms, Charminar, Editions, Special, and Moments, which make it the second-largest cigarette manufacturing company in India.

Rakesh Bansal, Founder, of IamRakeshBansal.com, said that despite Damani's holding more than promoters, it is still trading below its pre-Covid levels. "The third-largest player in the Indian market, with several reputed brands in its portfolio."

With strong fundamentals, including strong dividend yield and a debt-free status, the free float of the company is very less as a majority of the stake lies with funds and Damani, he said. "One should keep an eye on this stock."

Shares of VST Industries rallied about 20% in the last year, whereas the stock is up by about 30% from its Covid-19 lows. However, it needs to rally about another 20% to scale its pre-Covid highs.

Kranti Bathini, Equity Strategist, Wealthmills Securities, said that VST Industries has a different business model compared to peers as it operates in the low ticket size products, but it is a very long-term player, say 5 years at least.

"The company's performance was muted for three years due to Covid-19, but it rebounded in the last quarter, which has not been reflected in the stock price yet," he added. "The company's strong asset bank, whose value is yet to be unlocked."

For the quarter ended September 30, VST industries reported a 15% rise in the net profit of Rs 92.2 crore with total revenue of Rs 472 crore, which jumped over 27% on a year-on-year (YoY) basis.

Largely, the results were a mixed bag for the company. Its operating profit dipped 10.9%, whereas sales were up 26.6% YoY, led by high tobacco exports. It clocked an EBITDA of Rs 93 crore, down 10.9% YoY, and margins stood at 27%.

ICICIDirect Research has slightly changed its numbers for VST Industries. It believes that premium cigarettes need to gain traction to re-capture market share. The brokerage has a hold rating on the stock with a target price of Rs 3,775.

Volumes are still below pre-Covid-19 levels. The contribution of high-priced cigarettes is expected to continue to rise. It is looking to introduce new brands at higher price points, it said. "Taxation and dividend payout to remain stable."

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