Should you buy VST Industries shares now that Radhakishan Damani has increased his interest in the company?

Should you buy VST Industries shares now that Radhakishan Damani has increased his interest in the company?

Strong profit margins, new capital expenditures, and base shifts that increase operational efficiency could propel VST Industries' expansion.

The guy who started and oversaw Avenue Supermarts, Radhakishan Damani, has increased his ownership in VST Industries. The market is curious as to why the seasoned investor increased his ownership position in the business.

Although the firm is likely to develop due to its good margins, new capital expenditures, and improved operational efficiency from base shifting, the stock may suffer from the low growth expectation for cigarette sales and declining profitability.

In the most recent session, Damani purchased 2.33 lakh shares, or 1.51 percent of the total. The seasoned investor also acquired a 1.44 percent stake in January. Damani now has a larger share in VST Industries—35.84 percent—than the promoters do (32.16%).

Damani purchased stock in the business in December 2022, prior to 2024.

new infrastructure and capital expenditures

Co-founder and fund manager Anuj Jain of Green Portfolio said that the business would benefit from Damani's ownership and its global heritage. Jain notes that in order to improve operational efficiency, the business intends to move its operations base to Toopran.

"VST Industries is relocating its manufacturing activities to Toopran from the Azamabad Industrial Area. This will increase operational effectiveness and unleash value in Azamabad, according to Jain.

Additionally, according to B&K Securities, the change in operations base would allow them to create operational efficiencies by consolidating their production activities.

Jain went on to say that the business has been investing capital for an undisclosed project. As of September 30, 2023, there was a capital project underway for around 52 crores, the specifics of which are unknown to us. This new initiative and capital expenditure may guarantee future growth.

Changing growth trends for cigarettes

Nonetheless, the corporation may face difficulties due to declining profits and a slowdown in the increase of cigarette volume.

The company's sales increased by over 6% to Rs 468.42 crore in Q3FY24, while its profit decreased 32% YoY to Rs 53.72 crore.

Over the last five years, the stock has returned only 8.68 percent, behind the gains of bigger rivals like as ITC and Godfrey Phillips India, which have risen 40 percent and 166 percent, respectively.

“On a five-year basis, the topline CAGR is only 6%.” stated Jain. This is less than the 10% and 9% that ITC and Godfrey Phillips India reported for the same time frame.

Stronger laws on cigarettes and the tobacco industry might have an impact on the business, according to Amit Goel, chief global strategist and co-founder of Pace 360.

The tobacco business is subject to ongoing regulatory pressure, which may include higher taxes and more stringent advertising regulations. Moreover, health issues and anti-smoking initiatives may eventually cause a drop in cigarette use. Since VST depends so much on the tobacco business, anything that hurts that sector might have an adverse effect on it, he warned.

Jain continued, saying that VST Industries' declining cigarette sales had also contributed to the company's poor performance. "The amount of cigarettes sold decreased slightly from 8556 million units in FY19 to 8253 million units in FY23. Growing consciousness and regulator indifference may be the cause of the drought.

Is it wise to purchase?

According to Jain, the company represents a decent value for investors, given its trailing PE of 20 and 4% dividend yield. The stock will probably continue to be a low beta stock, he said. "Investors should think about the share if they want to benefit from a consistent dividend and an FD-style return."

Goel cautioned investors against making more investments in the firm at this time as it is preferable to book profits and the markets are now trading at high values.