Radhakishan Damani sells stake in this fundamentally strong stock. Here’s why

Or maybe you want to free up cash to invest elsewhere.

Good companies can become overvalued in the market and then an individual may initiate a sale.

The stock in question today is VST Industries and the seller here is market maven Radhakishan Damani.

Last week on Friday, Damani sold stake in VST Industries in the open market via a block deal.

In this case, has the company's valuation become higher than what Damani perceived it to be or are there other reasons?

Before we move on to why Damani sold stake, let’s take a look at who Damani is…

A word about Radhakishan Damani

Radhakishan Damani is a Mumbai-based entrepreneur, businessman, and billionaire investor who founded India's mega-retail chain D-Mart.

Born on 15 March 1954 to an Indian Marwari family, born and brought up in Bikaner, Rajasthan, RK Damani is one of the few self-made billionaires in the country.

Damani is considered to be one of the Big Bulls in the Indian stock market. He manages his portfolio through his investment firms, Bright Star Investments and Derive Trading & Resorts.

Over the years, the veteran investor has invested in cement, technology, and retail sectors.

He is considered India's retail king after the March 2017 IPO of his supermarket chainAvenue Supermarts.

Why did Damani sell stake in this fundamentally strong company?

On 2 December 2022, the billionaire investor offloaded shares of VST Industries worth nearly ₹330 million ( ₹33 crore).

The transaction was carried out in a block deal.

Radhakishan Damani has been an investor in VST Industries since December 2019. Damani's shareholding under his personal name has stayed unchanged at 1.6% from September 2021 to September 2022.

Interesting fact here is Damani held more stake in VST Industries than the company’s promoters before this block deal.

The latest shareholding pattern of VST Industries shows that promoters hold 32.2% stake in the company. Damani and his firms Bright Star Investments and Derive Trading & Resorts held 32.3%.

He was increasing his stake in the company for several quarters. At the end of September 2020, his stake stood less than 30%.

Now coming to why Damani changed his stance this time…frankly, the reason is unknown. However, there are some points we can assume and try to interpret this move based on available facts.

While VST Industries has good fundamentals to boast, it has come under the scanner various times due toESG concerns.

ESG investing has created headwinds for tobacco stocks globally despite the fact that the companies operating in the industry have performed well.

Cigarette companies were being left out by big investors including FIIs because tobacco consumption is a major factor driving health related disorders and because cigarettes are referred as ‘sin product’ by many.

This can possibly be one reason.

Another reason could be the risk of higher taxes. The incidence of taxes on cigarettes has more than trebled since 2012-13. The implementation of GST in July 2017 increased the tax burden on cigarettes by a weighted average of 13% over the pre-GST tax rates.

Last year, when we were nearing the yearly Budget, cigarette stocks came under pressure on fears of a hike in taxes.

The rise in taxes is passed on to the consumer, who has very limited choice to avoid consumption.

Last year, there was no change to the tax. Prior to that, there were no hikes for two consecutive years. We could see a hike this time, no one knows for sure…but if the hike is in double-digits, it would be negative for cigarette companies.

Further, a sharp increase with the National Calamity Contingent Duty rates in the Union Budget 2020-2021, boosted the illicit trade further.

Volumes have grown for the illicit cigarettes segment and India is a fast-growing illegal cigarette market. This could affect the organized players like VST, ITC, etc.

Operating in an industry that is devoid of any social benefit would continue to act against tobacco and cigarette manufacturers. The companies remain the easiest target for the government to fetch higher taxes.

What makes VST Industries a fundamentally strong stock?

One look at the company's numbers will tell you this company ranks high on most parameters.

The average return on equity (ROE) and return on capital employed (ROCE) of VST Industries for past five years are 36% and 51%.

The company has a solid track record of stable profits and revenues for the past two decades.

It has handsomely rewarded shareholders with dividends too. The company has paid more than 50% of its profits as dividends without fail for more than a decade now.

All this withzero debton its books.

VST is in a segment which has high barriers to entry. This is a big plus point for the company. Cigarette advertisements and FDI investments in cigarettes are banned by the government. This prevents competition from big foreign firms.

While there are big players like ITC and Godfrey Phillips in the segment, VST has stayed away from competing with them by focusing on a different set of customers, the rural population.

How VST Industries has fared in 2022 so far

In 2022 so far, VST Industries share price has gained 11%. Most of these gains have come in recent sessions after the company reported decent Q2 results.

VST Industries has a 52-week high of ₹3,865 touched on 25 November 2022. It has a 52-week low of ₹2,786 touched on 25 February 2022.

In the past five years, the stock has largely underperformed the benchmark index BSE Sensex.

As can be seen from the chart above, the company's performance was muted for three years due to Covid-19.

But the company has shown improvement in the past two quarters, which has not strongly reflected in the stock price yet.

Here’s a table showing comparative analysis of VST with its peers.

About VST Industries

VST Industries Ltd was incorporated in 1930 under the name Vazir Sultan Tobacco Company. The company's principal activities are manufacture and sale of cigarettes and unmanufactured tobacco.

It has expertise in all varieties of tobacco. Its R&D efforts include developing quality blends with innovative filter variants for new brands. Its growth efforts include both expansion in geographical areas and new brands.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com