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TURNAROUND The Smoke Clears VST has shed its loss-making businesses and turned the corner. But investors don't seem impressed. By E. Kumar Sharma
Back then, VST had racked up losses of Rs 88 crore (1997-98), marketshare was slipping, and investors had pummelled its stock to the sub-100 range compared to the early '90s' peak of Rs 650. As VST's Chairman Abhijit Basu recently told shareholders, that was ''the darkest period in (VST's) history''. Thanks to the 50-year-old Noronha and his A-team, the gloom is lifting. In the first quarter of this fiscal (half year results were not available when BT went to press), VST's net profit jumped to Rs 5.21 crore compared to a net profit of Rs 2.86 crore in the same period last year. The company's topline is rising and its flagship brands-Charms and Charminar-are actually seeing a growth in sales. ''It has been an uphill climb in the past two years,'' notes Noronha. It's a vastly nimble VST that its shareholders-the single-largest among them being the London-based British American Tobacco (BAT) which owns 32.2 per cent of the company's equity-get to see today. The stock market boom-induced diversifications of the early '90s have been lopped off. For instance, two finance companies-VST Investment and Tobacco Diversified Investment-that lost a total of Rs 35.87 crore, have been closed down. A six-year-old, loss-making agro exports subsidiary, VST Natural Products, was sold late last year to Global Green, a Ballarpur Group company. That apart, VST has offloaded surplus real estate, raking in Rs 22 crore over the past two years. The underlying idea was to shore up the core business of cigarettes. Already, VST's workforce has been slashed from 1,600 to 1,150 through a voluntary retirement scheme. There also are plans to shift its factory from Hyderabad to Guntur to reduce costs. Says S. Thirumalai, 52, Deputy Managing Director and part of the core turnaround team: ''We will be able to add nearly Rs 14 crore to our reserves every year, and restore VST's fiscal health.'' Moving Up The Value Chain VST's biggest problem has been the annual increase in the Excise duty on cigarettes. For instance, in plain cigarettes, which account for 52 per cent of its revenues, the Excise has risen from Rs 250 per thousand sticks to Rs 390 in just six years. Says Ajit Sahgal, 54, General Manager, Philip Morris Services India: ''The market has been stagnant for the last four years, mainly due to the increase in Excise duties and new taxes.'' That also has widened the price gap between plain cigarettes and bidis. And that's a big blow for VST, considering that its low-priced brands like Charminar Standard and Charms Standard (priced at Rs 3 for a pack of 10) are under tremendous pressure to stay profitable. The company has been working furiously on reducing its dependence on plains, and succeeded. Four years ago, two-thirds of its cigarette sales were plains. Today, it's about one-half. In comparison, the proportion of revenue from filter cigarettes (priced around Rs 10 for a pack of 10) has jumped from 34 per cent to 48 per cent. Noronha expects their share to soar to 70 per cent by 2003. Image, however, could prove a problem for the mass-market player. Some analysts fear that its attempt to move up the price segment may result in a loss of its existing customers without any fresh gains. Admits Noronha: ''Our major weakness is that all the brand-health indicators for our filter brands are weak relative to competition. Our first task is to change this.'' Repackaging Brands Based on a market research exercise, the Charms brand was repackaged last year. Charminar, too, was put through what Noronha calls a 'pack rationalisation', entailing changes in pack graphics and style to make it more contemporary. Apparently, the repackaging is working. Charms and Charminar sales between April and September, 2000, were 12 per cent higher compared to same period last year. Over the next three years, the company plans to invest Rs 15 crore in new machinery that will make hinge-lid packaging possible. And it already has enough machines to increase the filter cigarette share in the portfolio to 70 per cent. VST's best bet, then, is to target the filter market, whose share in the overall market has grown from 60 per cent to 70 per cent in the past five years. Its sister company ITC, for instance, derives 77 per cent of its revenues from filter cigarettes. To slash manufacturing costs, Noronha plans to begin sourcing cigarettes from plants located in the North-Eastern states, all of which levy no tax on cigarette manufacturing. But surviving in an industry that is being persecuted globally may not be easy. And investors seem to agree, since the VST stock hasn't gained much from the company's turnaround. Perhaps, good things at VST are happening a little too late. |
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Every time
Raymond Stephen Noronha takes his occasional walk around VST Industries'
factory in Hyderabad, he can't help but recall how bad things were barely
two years ago when he took over as the tobacco company's managing
director. The factory's neglected gardens would be dotted with workers
idling around during production hours. It was as if they were waiting for
the inevitable to happen: the closure of the 70-year-old company.