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Debt Policy at UST Inc.
Submitted By: Group O
Manan Chandna (2012PGP068)
Mohammad Sohail (2012PGP069)
Priyankar Pandit (2012PGP081)
Sayar Banerji (2012PGP090)
Shruthi Kulkarni (2012PGP093)
Shupriya Singh (2012PGP094)
V. M. Sai Murali (2012PGP106)

Q1) Evaluate the business risks of UST from the viewpoint of a credit analyst / potential bondholder. Conclude by rating the overall business risk of UST The factors that have an impact on the company’s business risk are very high single product risk, competition faced owing to other competitors’ erosion into their market share and the effect of uncertain litigation problems and government regulations makes the future cash flows of UST risky. Unlike cigarette companies who combat declining domestic consumption trends with offshore growth, we can see that UST has no immediate plans for international expansion. However UST has been one of the most profitable companies not only in tobacco sector, but also in corporate America. UST has enviable margins with average gross profit, EBITDA, EBIT and net margins of 77%, 53%, 50% and 31%. With annual return on equity at 89% and return on assets at 48% they have already overtaken corporate icons like Coca-Cola and Microsoft. So we can conclude that although UST in extremely sound financial health, there are systematic risks associated with tobacco industry. UST has historically maintained an A-1 credit rating for its commercial paper. As UST increases its debt level, it will likely issue long-term debt and hence we can safely assume it to have AA credit rating for long term and maintain the short term A-1 rating.

2) UST’s past performance is very impressive – Do you expect the same to continue in the Future? The historical financial data indicates that that compound annual growth per year has been declining in the past five year compared with the past ten years in Net Sales, EBIT, and EPS. Obviously, this is a sign of UST slowing down its financial performance...
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