Smart Beta

Stock Valuation Competition

Hatsun Agro Products Ltd

Presented By:
Team Catalysts, IIM Kozhikode 12 Month Target : INR 806.6
Last Close (27/09/19): INR 725.4E
HOLD
Keshav Rathi
Vithika Agarwal Upside: 11.2%
Yogakshem Dangi
  Company Name: Hatsun Agro Products Ltd; Ticker: HATSUN;  Share Price (11th Jan 2020): INR 725.40
 Exchanges: National Stock Exchange, Bombay Stock Exchange and Madras Stock Exchange;  One-Year TP: [INR 806.6 (11.2% increase)
 Industry: FMCG Dairy Products; Sector: FMCG  Recommendation: HOLD
INVESTMENT SUMMARY
Key Figures
We issue a HOLD recommendation on Hatsun Agro Products Ltd (HATSUN) with a one-year target price of INR 806.6 per share, representing an Market Cap (Cr INR) 155.62 Bn
11.2% upside from closing price of INR [XX] per share of January 10th, 2020. Our target price is based on a mix of the Free Cash Flow to Equity
Model. The key drivers for our recommendation are: Number of shares outstanding (Cr) 21,55
 Established market position supported by strong brand, particularly in South India: Hatsun is the largest private sector dairy company in
52w High 884.00
India, with a portfolio of established brands, superior brand equity, well-spread distribution and procurement networks, and an aggressive
marketing strategy. Strong market position in the milk segment is cemented by widespread presence in South India, with majority of the 52w Low 285.00
processing units located across Tamil Nadu.
 Healthy operating efficiency backed by established procurement and distribution network: Hatsun owns over 10,000 procurement centers Avg. daily volume (30 days) 64,121
covering over 13,000 villages, with chilling and dairy units across its key operating markets. This enables it to reach out to over 3 lakh
TTM P/E ratio 86.85
farmers. Further the company has an established network of through its network of around 3400 own distribution outlets
 Strong financial risk profile: The total outside liabilities to tangible networth (TOLTNW) ratio was 1.6 times as on September 30, 2020 and is Return on Equity (TTM) 17.43%
likely to improve over the medium term supported by steady accretion to reserves
Beta 0.79
CURRENT HIGHLIGHTS Target Price (12 months) INR 806.6
 The main strength of the company lies in its efficient and effective supply and cold chain management and this allows it wide reach and
targeted coverage in the markets. The Company has a professionally-trained, technical human resource pool, built over the years to meet Major Stakeholders – Company largely held by Promoters
the challenges in the dairy industry. Promoters 73.68%
 Hatsun is strengthening its position in the dairy industry with greater reach and an expanded range of products and branding. Its strong
brand coupled with the varied product portfolio enables it to meet adverse conditions confidently and overcome it. More importance will General Public 15.12%
be given to product/process development/innovation, to bring down cost without compromising on product quality and to achieve
Banks, Mutual Funds and others 11.2%
international standards in quality and taste

Major Model Highlights

Revenue FY24 INR 792,122.6 lakhs
Price chart

EBITDA FY24 INR 128,762.3 lakhs

Revenue CAGR (FY20-24) 11%

PAT CAGR (FY20-24) 54%

Price (Upside Case) INR 1168.6

Price (Downside Case) INR 490.5

 For over 4 decades Hatsun has been pioneering dairy products. Its success story is a combination of innovative products, popular brands and
innovative marketing.

Structure of the Indian Milk Market Structure of the Indian Milk Market

The Indian dairy industry is expected to grow at 12-13% India is the worlds largest producer of HAP procures milk directly from over
CAGR over FY18-23 milk with production of 188MT of Milk produced at farms 4,00,000 farmers spread over 12,500
liquid milk in FY19 villages.

Co- As of FY18, the unorganised segment

operative dominated the ₹ 5.3 trillion Indian
(55% - 6 0 % ) dairy industry with 55-60% market
share in the retail sale of dairy
Village level collecti on HAP has ~10,000+ Hatsun Milk Banks
Organised products, according to CRISIL
centers (HMBs).
(4 0 % - 4 5 %) Research estimates

Marketed Over the next five years, the

Private organised segment likely to grow at a
Fluid Milk
(4 0 % - 4 5 %)
(58%-62%) much faster pace of ~17% CAGR,
while the unorganised segment is Has 1,000+ Active Bulk Chillers (ABC)
Bulk storage units
expected to grow at 10% CAGR situated closer to the villages.

Raw Unorg ani- The organised sector is split evenly

Traditional
sed between co-operatives and private
Milkmen
Milk (55%- companies. Amul, Nestle & Mother
60%) Processing Unit
Dairy are the only players with a well HAP markets its Milk and Curd through
Self established Pan India presence
C onsum-
its popular brand names of “Arokya” and
ption “Hatsun”. While the Milk is marketed in
(38%- Large unorganised market moving four different variants viz., standard, full
42%) towards an organised structure will cream, toned and double toned, the
lead to high market growth and higher
E nd Consumer Curd is marketed in the form of pouches
penetration of VAPs. By FY23,
organised players are estimated to ranging from 180 grams to 1 kg and cups
account for 48% of the market ranging from 50 Gms to 400 Gms.
 For over 4 decades Hatsun has been pioneering dairy products. Its success story is a combination of innovative products, popular brands and
innovative marketing.

Understanding of Hatsun Agro’s Core Business Model Timelines and the growth story of Hatsun Agro
 Hatsun is the largest private sector dairy company in India, with a portfolio of established brands, superior brand Amalgamation of M/s. Ajith Dairy
Company began its footprint Amalgamation with Hatsun Foods
equity, well-spread distribution and procurement networks, and an aggressive marketing strategy. with the introduction of Arun Inaugurates dairy ingredient plant
 Strong market position in the milk segment is cemented by widespread presence in South India, with majority of Icecreams (second drier) at Kanchipuram

the processing units located across Tamil Nadu, AP, Telangana and Karnataka.
1980- 1995- 2010-
 Hatsun has established an extremely efficient supply chain management, superior logistics and a widespread 1970
1995 2010 2020
distribution network spearheaded by exclusive franchise outlets. The company is engaged primarily in B2C
activities through retail as well as its self owned Hatsun daily outlets. It also exports to 35+ countries.
Hatsun Foods Private Limited Set-up of milk processing at
 The company owns over 10,000 procurement centers covering over 13,000 villages, with chilling and dairy units
(HFPL) is incorporated as a Vellichandai, Karur Tirunelveli and
across its key operating markets. This enables it to reach out to over 3 lakh farmers. Further the company has an Private Limited Company. Chitoor. Entry into wind-mills and
Inaugurates ice-cream factory pizzas. Reaches retail milestone
established network of through its network of around 3400 own distribution outlets. with 3000th outlet
(Atlantic) at Salem

Key products under Hatsun Agro’s Product Portfolio Key Operating and Financial Metrics

INR 53 Bn INR 1.2 Bn

FY20 Revenue FY20 Profit
(~16.8% 10 years CAGR) (Industry Leading)
SMP & Milk Butter & Ghee Flavoured Milk & Whey Products &
Ice Creams UHT Curd

2.9 Mn LPD 3,00,000

FY20 Procurement Farmers in reach
(~9.6% 10 years CAGR)
Hatsun receives 90% of its revenues from dairy products and remaining from ice creams.
 Financial Highlights (Figures in INR Lakhs)

Particulars FY18 FY19 FY20 FY21 E FY22 E FY23 E FY24 E Considerations

Revenue 429,821.4 476,634.7 531,698.5 546,800.0 612,176.5 692,726.1 792,122.6  During FY21, company is planning to roll out the following 3 greenfield
projects to increase its capacity, which would drive revenue growth:
% Growth - 10.9% 11.6% 2.8% 12.0% 13.2% 14.3%
a. 19th Plant in Solapur, Maharashtra, to produce milk and milk products
EBITDA 38,006.3 44,750.0 55,872.6 79,968.0 90,392.9 112,773.1 128,762.3
with a capacity of about 4 LLPD is expected to be operational during Q3
EBITDA % 8.8% 9.4% 10.5% 14.6% 14.8% 16.3% 16.3%
b. 20th Plant in Udhiyur, Dharapuram, Tamil Nadu, to produce milk
products which is expected to be commissioned during Q4
PBT 9,093.6 11,484.7 11,227.2 28,074.5 36,341.1 52,801.7 64,038.2
c. The 21st plant, which will be HAP’s biggest investment of about `210-
PBT % 2.1% 2.4% 2.1% 5.1% 5.9% 7.6% 8.1%
Crores ice-cream plant at Govindapur in Zaheerabad taluka of Telangana’s
27,708.2 37,504.0 55,193.5 72,108.5 72,734.4 100,040.6 106,271.2 Sangareddy district, which is expected to be commissioned during Q4
CFO
 The company is aggressively expanding its oyalo and cattle feed business,
Total Debt 129,895.5 102,791.0 143,362.1 143,457.4 116,857.8 101,866.9 85,525.2 which would drive the growth outside Milk & Milk Products segment

Fixed Assets 120,512.1 139,528.0 151,221.8 166,599.7 177,989.4 178,690.5 188,221.5  Fall in milk procurement prices would lead to high margins in FY21. Others
business (oyalo +cattle feed + wind mill) is expected to turn profitable
D/E Ratio 3.55 1.28 1.59 1.21 0.75 0.49 0.31 going forward, which would help maintain the margins
ROE 24.9% 14.3% 12.4% 23.7% 23.5% 25.4% 23.6%  The company has a comfortable liquidity position – with healthy intetest
Current Ratio 0.4 0.6 0.5 0.6 0.9 1.2 1.6 coverage ratio and a strong credit rating of A+

ICR 2.4 2.9 2.5 4.2 5.0 6.8 11.1

 Valuation

Midpoint Assumptions
Methodology Description Valuation per share
to CMP
Performed a 2 phase DCF  We have performed a three phase DCF – Phase 1 (till FY24), Phase 2 (till FY28), Phase
DCF analysis till FY32 672 968 13.1%
3 (till FY32)
Relative Used the P/S multiple
range 833 984 25.3%  In Phase 2 DCF, we have grown the FCFE by 12% per annum
Valuation

Broker Used broker estimates  In Phase 3 DCF, we have grown the FCFE by 10% per annum
range 737 851 9.5%
Estimates
 The current long term government bond yield has been used as discount rate
Checked and mapped the
52WK H/L 52wk high & low 285 884 -
 Market estimate of beta has been used
Current Price – Rs. 725  Terminal growth rate is assumed to be 5%

DCF Assumptions DCF Results  Three sets of assumptions (base case, best case, worst case) have been used for the
DCF
Risk free rate 5.8% Forecast period PV 390,632.7
Risk premium 4.7% • Critical assumptions like revenue growth rate, finance cost, other expenses,
PV of Terminal Value 913,463.3
revenue/short term debt, working capital days, purchase, capex & net debt have
Beta 0.7
Equity Value 1,304,096.0 been taken as extremes in worst and best case
COE 9.1%
No of shares 1,616.8
Discount Rate 9.1%  The company has done aggressive capex in last 3-4 years. Hence, the future capex has
Price (Base Case) 806.6 been toned down. Debt repayment has been assumed going forward, company
Terminal Growth 5.0%
would generate enough cash flows to cover the capex cycle.
Terminal Value at 2032 2,594,838.9 Price (Best Case) 1,168.6

PV of Terminal Value 913,463.3 Price (Worst Case) 490.5  For relative valuation, the 5 year average Price/Sales multiple of 2.4x and FY22 EPS
has been used.

 For broker estimates, lowest and highest forecast of the brokers covering this stock
has been taken
 Case Study – Hatsun Gaining Share over key competitor Aavin

Aavin operates in Tamil Nadu as its a major Dairy co-

operative
Revenue Profitability

 Aavin’s milk procurement has increased at CAGR of

6.1% over FY11-19 whereas Hatsun’s milk
procurement increased at CAGR of 9.6% over same
time. Considering milk production in Tamil Nadu has
increased at CAGR of 2.6% over FY11-19, we note
Hatsun has gained market share.

 Hatsun has not just grown the volumes higher than

Aavin, it has also increased its selling prices at higher
pace than Aavin indicating strength of the brand. As
Hatsun has introduced some premium products (e.g.,
Ibaco ice cream), it has also helped to increase
realizations and revenues.

 Hatsun’s average realization has increased at faster

pace than Aavin due to higher investments in brand
building activities.
 Smart Beta
Stock Valuation Competition

Thank You!
Presented By:
Team Catalysts, IIM Kozhikode
Keshav Rathi
Vithika Agarwal
Yogakshem Dangi