VST Industries Ltd (VST) chief executive Malcolm Fry says that he envisages " a much better year for VST" in 1997-98.
However, projections made by VST for their internal consumption indicate only a marginal improvement in the bottomline this year. From the net profit of Rs 7.56 crore posted in 1996-97, the company is expected to record a net of Rs 8 crore this year.
This projection has been made after assuming a price increase of all brands of its cigarettes of around 8.10 per cent per million in the major brand in the plain segment and 6.45 per cent per million in the major brands in the filters segment.
The company refuses to spell out how much additional turnover the price increase will net this year but sources maintain that it could be around Rs 30 crore in the full fiscal year.
In 1995-96, the company had registered a positive growth of around 12.32 per cent over the earlier year. Last year, however, it registered a negative growth of around 10.60 per cent over 1995-96.
For the current year, it has projected a growth of 14.9 per cent over last year.
The company proposes to achieve this growth by various marketing strategies which aim at maintaining the prices in the wake of competition, and thereby capturing a portion of the competitor's market.
Malcolm Fry declines to spell out the steps proposed, maintaining that "our strategies must remain confidential in this highly competitive market". VST is also planning a Rs 75 crore rights issue next month.
The instrument chosen is the zero coupon fully convertible debentures of Rs 135 each in the ratio of 36 debentures for every 100 equity shares.
The main purpose of the rights issue is to fund the agri-processing project of the company's subsidiary, VST Natural Products Ltd. VST proposes to earmark Rs 50 crore out of the Rs 75 crore rights issue for the subsidiary.
The remaining Rs 25 crore will be utilised to meet normal capital expenditure and long term working capital requirements.
Though the subsidiary has been a drain on the parent company, Malcolm Fry is firm that VST should retain ownership of the subsidiary and grow the business. "To do this, we will need global partners. The nature of these relationships will remain decisions to be taken by the board", Malcolm Fry told Business Standard.
VST Natural Products Ltd is a 100% EOU, and has put up a state-of-the-art plant to process vegetables and oleoresins in Venkatapuram at a project cost of Rs 50 crore.
VST financed the project to the extent of Rs 38 crore, and the balance Rs 12 crore came by way of short and medium term borrowings from banks. VST NPL has incurred a cost of about Rs 45.48 crore on the project as on April 30, 1997.
The Rs 50 crore from the rights issue will partly be used for repaying the borrowings. This will also help in restoring funds for the core business of VST. Secondly, it would substantially reduce the interest burden. The company has borrowings of around Rs 14 crore on which the interest burden alone is Rs 2.55 crore per year.
Out of the investment made by VST in its subsidiary, Rs 30 crore will be repaid to VST on availing of long term financing from external sources.
Apart from VST Natural Products Ltd, VST has six other subsidiaries, and none of them are doing very well.
Hallmark Tobacco, Hallmark Investments, Tobacco Leaf Investments, Vazir Investments, VST Distribution, Storage and Leasing and Tobacco Diversification are the six subsidiaries of VST .
While most of these subsidiaries showed net profit between Rs 1.31 and Rs 6.51 lakh in the year ending March 31, 1997, Tobacco Diversification Investments Ltd posted a net loss of Rs 7.43 lakh last year.
Sometime ago, Crisil, downgraded the rating of VST's fixed deposit programme. According to Crisil, the step reflected "VST's declining market position in cigarettes mainly because of the unprecedented state luxury tax levies in the areas of strength in which the company operates, and poor performance in its financial services activities owing to adverse market conditions and the consequent weakening of its financial performance".
Market sources feel that the capital structure of VST will improve substantially after the rights issue. However, its financial performance will depend crucially on VST's ability to retain market share, bring down interest costs and boost profitability apart from its earnings from VST Natural Products Ltd.
Promoters of VST Industries Ltd
Originally a joint venture between the then Nizam of Hyderabad and the Raleigh Investment Co. Ltd, a subsidiary of BAT Industries Plc. The Nizam's shareholding is now vested with the Government of Andhra Pradesh.
BAT holds 31.73 % of the existing share capital of the company and the Govt.of Andhra Pradesh holds 4.69 %.
Of the balance, financial institutions, banks and insurance companies hold 29.67 % while the balance 33.91 % is held by the public.
