INITIATING COVERAGE HTSMF IN EQUITY January 06,...

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White gold

In a category dominated by regional dairy companies, Hatsun has built a scalable business with presence in 5 states by focusing on: a) 100% direct milk procurement and b) building scale in the pouch milk business. This is complemented with a focus on systems and processes to improve transparency and automation in operations. Entry into Andhra/Telangana and leveraging pouch milk distribution to sell curd would drive 17% sales CAGR over FY16-21. Savings from vertical integration investments and improvement in profitability in new regions would drive ~200bps EBITDA margin growth. Profits would grow 4.5x (35% CAGR) over FY16-21 with RoCE rising from 17% in FY16 to 25% in FY21. Key risks: Capital misallocation and delays in executing vertical integration projects.

Competitive position: STRONG Changes to this position: POSITIVE Unmatched focus on milk procurement and growing pouch milk sales

Focus on direct milk procurement from farmers and building pouch milk business complemented by focus on systems and processes helped Hatsun get 14% share in the South milk/curd market with procurement of 2.7mn litres per day (lpd) and milk/curd sales of ~2mn lpd. This also helped increase milk procurement outside Tamil Nadu with ~25% now being procured from Andhra/Telangana/Karnataka. Entry into new regions and higher curd sales to drive 17% sales CAGR Over the last three years, Hatsun increased liquid milk volume in Andhra/Telangana at ~57% CAGR; it derives ~26% sales from outside Tamil Nadu. Entry into new regions in these states, leveraging pouch milk distribution to sell curd helped by renovation of franchise stores should drive 17% sales CAGR over FY16-21. We expect Hatsun to increase market share in milk/curd in South India to 20% by FY21 with curd contributing 22% of sales (9% currently) and outside Tamil Nadu sales contributing ~40%. Competitive advantages cannot be matched by competition

Direct milk procurement is the key to success in Indian dairy. However, winning farmers’ trust is more important than procurement price. Hatsun has achieved this through initiatives like direct bank transfers, automatic milk quality testing and SMS alerts to farmers, making milk procurement completely transparent. This transparency along with allied services like farm management assistance, subsidised veterinary care and cattle feed should help Hatsun counter threats from the likes of Amul, Mother Dairy or a new entrant. On course for a scale equivalent to Amul’s by 2030

Capital investments in vertical integration should reduce processing costs and also strengthen moats by increasing capital intensity for new entrants and incumbents to match Hatsun’s efficiency. Given these strengths, Hatsun can match Amul’s existing scale in the next 15 years despite having started 50 years after Amul. Hatsun deserves to trade in line with FMCG peers at 33x FY18E EPS.

INITIATING COVERAGE HTSMF IN EQUITY January 06, 2017

Hatsun Agro

BUY

Consumer Staples

Recommendation Mcap (bn): `56/US$0.8 6M ADV (mn): `4.5/US$0.1 CMP: `365 TP (12 mths): `435 Upside (%): 20

Flags Accounting: GREEN Predictability: AMBER Earnings Momentum: AMBER

Catalysts

Market share gain in liquid milk and curd in Andhra Pradesh and Telangana by 600bps over FY17-21

EBITDA margin expansion by 130bps YoY for FY18

Performance (%)

Source: Bloomberg, Ambit Capital Research

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90

110

130

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16

Mar

16

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16

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6

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Hatsun Sensex

Key financials Year to March FY15 FY16 FY17E FY18E FY19E

Operating income (` mn) 29,331 34,446 40,083 47,615 56,103

EBITDA (` mn) 1,983 3,047 3,596 4,914 6,015

EBITDA margin (%) 6.8% 8.8% 9.0% 10.3% 10.7%

EPS (`) 2.6 6.4 8.2 13.0 16.0

RoE (%) 19.5% 43.1% 43.9% 47.4% 42.1%

RoCE (%) 12.1% 16.9% 17.3% 19.5% 19.3%

P/E (x) 141.8 57.0 44.5 28.1 22.7

Source: Company, Ambit Capital research

Research Analysts

Ritesh Vaidya, CFA

+91 22 3043 3246

[email protected]

Anuj Bansal

+91 22 3043 3122

[email protected]

Dhiraj Mistry, CFA

+91 22 3043 3264

[email protected]

mailto:[email protected]



Hatsun Agro

January 06, 2017 Ambit Capital Pvt. Ltd. Page 2

Snapshot of Company Financials Profit and Loss Company Background Year to Mar (` mn) FY17E FY18E FY19E

Net revenues 40,083 47,615 56,103

EBITDA 3,596 4,914 6,015

Depreciation 1,359 1,608 2,001

Interest expense 697 848 979

Adjusted PBT 1,580 2,505 3,091

Tax 332 526 649

Adjusted net profit 1,248 1,979 2,442

Reported net profit 1,248 1,979 2,442

Profit and Loss Ratios EBITDA Margin (%) 9.0% 10.3% 10.7%

Net profit margin (%) 3.1% 4.2% 4.4%

EV/ EBITDA (x) 17.7 13.4 11.1

P/E on adjusted basis (x) 44.5 28.1 22.7

Price/Sales (x) 1.4 1.2 1.0

Hatsun Agro Product Limited is based in South India and was incorporated in 1986. Hatsun is the largest private sector dairy company in India. The company sells fresh milk under the brand name Arokya; paneer, ghee, SMP and dairy whitener under the Hatsun brand name. It is the market leader in ice creams in South India with significant sales from Tamil Nadu under the brand names Arun and IBACO.

Hatsun has a network of 16 plants across 4 states of South India. In FY16, Hatsun had total sales of Rs34.5bn from pouch milk/milk products/ice cream/cattle feed contributing 66%/ 21%/ 8%/5%.

Balance Sheet Cash Flow Year to Mar (` mn) FY17E FY18E FY19E

Total Assets 14,434 18,658 21,545

Fixed Assets 10,538 13,930 16,178

Current Assets 3,893 4,726 5,364

Investments 3 3 3

Total Liabilities 14,434 18,658 21,545

Total networth 3,372 4,986 6,604

Total debt 8,350 10,500 11,250

Others 261 261 261

Current Liabilities 2,450 2,911 3,430

Balance Sheet ratios RoCE 17.3% 19.5% 19.3%

RoE 0.4 0.5 0.4

Gross Debt/Equity (x) 2.5 2.1 1.7

Net debt (cash)/ Eq (x) 2.4 2.0 1.7

P/B (x) 16.5 11.1 8.4

Year to March (` mn) FY17E FY18E FY19E

PBT 1,580 2,505 3,091

Depreciation 1,359 1,608 2,001

Tax (332) (526) (649)

Net Working Capital 952 (232) (262)

CFO 4,257 4,203 5,160

Capital Expenditure (5,100) (5,000) (4,250)

Investment - - -

CFI (5,100) (5,000) (4,250)

Issuance of Equity - - -

Inc/Dec in Borrowings 1,635 2,150 750

Net Dividends (183) (365) (824)

Interest paid (697) (848) (979)

CFF 756 937 (1,053)

Net change in cash (88) 140 (143)

Closing cash balance 207 347 204

Hatsun’s direct milk procurement has recorded a 20% CAGR over 2000-2016

Hatsun - among the fast-growing dairy companies in India with the largest direct milk procurement network

Source: Bloomberg, Ambit Capital research

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Size of the bubble denotes the size of direct milk procurement for the company

Hatsun Agro


Fresh dairy products to grow at 12-13% CAGR over the next decade As highlighted in our dairy thematic dated 30th August, analysis of NSSO data on household milk consumption suggests that per capita expenditure on liquid milk has increased at ~9.5% over the last three decades. Assuming population growth of ~2%, liquid milk market has grown at 10-12% CAGR over this period. Also, ~90% of milk consumption is still in the form of liquid milk. In the last decade, per capita expenditure on value added dairy products (VADP) posted ~16% CAGR led by fresh dairy products. Considering the current primitive nature of dairy consumption in India, we expect rising income levels and urbanisation to drive 12-13% CAGR for fresh dairy products over the next decade led by pouch milk and curd.

Expect 12-13% CAGR in the dairy segment led by pouch milk and fresh dairy products Milk consumption has increased at 9% CAGR over the last 25 years

Exhibit 1: Rural and urban milk consumption has increased at ~9% CAGR over the last 25 years Per capita consumption (`/month)

Rural CAGR

1987-88 1993-94 1999-00 2004-05 2009-10 2011-12 1988-12

Milk liquid 12.1 24.9 38.4 44.3 76.2 106.3 9.5%

Ghee 1 1.3 3 1.9 2.9 5.7 7.6%

VADP 0.6 0.8 1.2 1.1 1.5 2.9 6.9% Total Milk consumption 13.6 27 42.6 47.3 80.6 114.9 9.3%

Urban CAGR Per capita consumption (`/month)

1987-88 1993-94 1999-00 2004-05 2009-10 2011-12 1988-12

Milk liquid 19.4 39.1 62.7 73.3 119.4 158.4 9.6%

Ghee 2.4 4 8 6.5 11.6 16.3 8.7%

VADP 2 1.9 3.5 3.5 6 9.6 7.1% Total milk consumption 23.8 45 74.2 83.3 137 184.3 9.3%

Source: NSSO

About 90% of household milk consumption is still liquid milk

As shown in the exhibit below, NSSO data suggests that ~92% of a rural household’s milk spends are on liquid milk. Similarly, for an urban household the proportion of spends on liquid milk of total spends on milk products has remained constant at ~86% over the last 20 years with spends on other products also being almost constant.

Exhibit 2: Split of monthly per capita expenditure on milk and milk products for rural and urban households

1987-88 1993-94 1999-00 2004-05 2009-10 2011-12

Rural Milk liquid 88.5% 92.2% 90.2% 93.7% 94.5% 92.5%

Ghee 7.2% 4.8% 7.1% 4.1% 3.6% 5.0%

VADP 4.3% 3.0% 2.7% 2.2% 1.9% 2.6%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Urban Milk liquid 81.5% 86.9% 84.5% 88.0% 87.2% 86.0%

Ghee 10.2% 9.0% 10.8% 7.9% 8.5% 8.9%

VADP 8.4% 4.2% 4.8% 4.2% 4.4% 5.2%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: NSSO, Ambit Capital research

http://reports.ambitcapital.com/reports/Ambit_ConsumerStaples_Thematic_Fresherthebetter_30Aug2016.pdf

Hatsun Agro


Expenditure on VADP has been increasing over the last decade

NSSSO data suggests that over 2005-2012 both rural and urban households have increased their expenditure on VADP at ~16% CAGR compared to liquid milk CAGR of 10-12%.

Exhibit 3: YoY growth in monthly per capita expenditure on milk products for a rural household


Exhibit 4: YoY growth in monthly per capita expenditure on milk products for an urban household


Growth driver #1: Expenditure on milk increases with increase in household income

Exhibit 5: Rural and urban households typically increase expenditure on milk products as income increases

Source: NSSO survey 2012, Ambit Capital research; Note: MPCE:01 denotes lowest monthly per capita expenditure per household & MPCE:12 denotes highest monthly per capita expenditure per household

Exhibit 6: Rural and urban households spend more on VADP as income levels increase

Source: NSSO, Ambit Capital research; Note: MPCE:01 denotes lowest monthly per capita expenditure per household & MPCE:12 denotes highest monthly per capita expenditure per household; VADP is defined as milk products excluding liquid milk and ghee

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Urban HH VADP expenditure as % of milk budget

Per capita expenditure on milk as % of total expenditure on food increases with increase in income level both for urban and rural households. The average per capita expenditure on milk and milk products as % of total household food expenditure is ~15% and ~16% in rural and urban household respectively.

As income level increases, households tend to increase their spends on value-added dairy products.

Hatsun Agro


Growth driver #2: Urbanisation also drives increase in milk consumption

According to the NSSO data, an average urban household spends 1.5x and 3.0x the amount spent by a rural household on liquid milk and VADP respectively. Thus urbanisation can be a driver of increase in milk consumption.

Exhibit 7: Urban liquid milk expenditure is 1.5x of rural

Source: NSSO, Ambit capital research

Exhibit 8: Urban value-added dairy products expenditure is 3.0x of rural


Direct milk procurement and marketing/distribution are key drivers of success in the dairy business In order to tap the vast growth opportunity in the dairy sector we define the key success factors of this business:

Key success factor #1: Direct milk procurement: We evaluate companies on their proportion of milk procurement through direct milk procurement as direct procurement ensures good quality milk availability. Diversification of procurement base is evaluated to see if the business has shown the ability to scale up.

Exhibit 9: Hatsun Agro is best placed in our direct milk procurement competitive advantage framework

Company Daily milk

procurement (mn lpd)

Milk directly procured (%) Diversification of procurement base

Daily milk procurement

growth FY13-15 Overall rating

Hatsun Agro 2.7 ~100% 70-75% from Tamil Nadu; 25-30% from 4 other states 11-12%

Heritage 1.1 ~100% 60-65% from Andhra Pradesh; 35-40% from 5 other states ~6%

Parag Milk Foods 1.0 ~100% 85% Maharashtra, non-Maharashtra proportion reduced from 24% in FY13 to 15% in FY15

10-11%

Prabhat Dairy 0.9 60-65% 100% Maharashtra NA

Kwality 3.0 15% Sources from 3 states - Rajasthan, Uttar Pradesh and Haryana 4%

Source: Company, Ambit Capital research. Note: - Strong; - Relatively Strong; - Average

Key success factor #2: Marketing/distribution: We evaluate a company’s distribution reach and brand equity followed by their orientation towards fresh dairy products. Given the strong prospects of fresh dairy products and their ability to provide scale to a dairy business, we prefer companies with a higher proportion of sales from fresh dairy products.

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Hatsun Agro


Exhibit 10: Hatsun Agro and Heritage Foods are best placed in our marketing competitive advantage framework; Parag Milk Foods scores lower due to its focus on value-added dairy products

Company Distribution reach and

brand Equity

Orientation of portfolio towards fresh dairy

products Overall score

Comments

Current Future

Hatsun Agro

Hatsun has the largest private pouch milk network in South India. The company derives 85%+ revenues from fresh dairy and plans to continue to do so

Heritage Foods

Heritage has the second largest private pouch milk network in South India. The company derives ~65% of total sales from fresh dairy products; plans to diversify into cheese in the near future

Parag Milk Foods

Parag is well-known in Western India for its value-added portfolio; derives only 35-40% of revenue from fresh dairy products and continues to focus on VADP

Prabhat Dairy

Prabhat has only recently increased focus on B2C; it is focusing on fresh dairy products along with products like cheese and flavoured milk

Kwality Dairy

Plans to launch products under Kwality brand name which was well known as an ice cream brand; planning to increase presence largely in VADP category

Source: Company, Ambit Capital research. Note: - Strong; - Relatively Strong; - Average; - Relatively weak.

Hatsun Agro


The Hatsun Agro story: Ice cream to pouch milk leader in two decades The journey of Hatsun Agro is the journey of its promoter Mr RG Chandramogan (RGC) from selling ice creams in Tamil Nadu to becoming the largest private dairy company in India.

Exhibit 1: Hatsun has delivered 22%/35% sales/PAT CAGR over FY02-16 with average RoE above 10% during the last 15 years

Source: Company, Ambit Capital research Note: MVA = Moving Average

1975-1995: Establishing a stronghold in the ice cream business Since the beginning, RGC showed the ability to spot untapped growth opportunities. When RGC launched ‘Arun’ ice cream in 1970, Chennai was a highly competitive ice cream market dominated by three brands ‘Dasaprakash’, ‘Kwality’ and ‘Joy’. RGC decided to focus on the untapped hostel and ship chandler market and cornered ~95% of this market by 1975. Sensing the limited availability of good quality ice cream in tier II and tier III cities like Puducherry, Madurai, Kumbakonam and Sivakasi in Tamil Nadu, RGC decided to supply Arun ice cream in these cities.

As RGC wouldn’t supply freezers to retailers, in 1981, after looking at customer response for Arun ice cream, one agent from Madurai offered to invest on his own in a deep freezer and get into a long-term distribution agreement with RGC. Unique in those days, this agent provided the innovative facility of ‘sit and eat’ ice cream parlour. The parlour was a success and soon others also queued up to take ‘Arun’ franchise. With the expansion of the Arun franchise to other towns of Tamil Nadu, in mid-1980s Arun ice cream became the market leader in terms of volume though it had no significant presence in Chennai.

Soon RGC started expanding his footprint in Chennai using TV advertisements and innovative promotional events. By the late 1980s, Arun ice cream became the market leader in volume and value terms in Tamil Nadu after dethroning Dasaprakash. ‘Arun’ ice cream started growing outside Tamil Nadu and by 1995 had ~30% market share of South India with more than 400 franchises.

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Hatsun Agro


Exhibit 2: Arun ice cream logo


Exhibit 3: Arun ice cream parlour


1995-2005: Getting a foothold in the liquid milk business Setting up the pouch milk business through entry into smaller towns

In 1992, the Indian government opened the dairy sector for private investments. Hatsun was already procuring milk from farmers for its ice cream business. Seeing the vast growth opportunity in the dairy business, in 1995, RGC decided to enter the pouch milk business under the brand name of ‘Arokya’.

However, Chennai (then Madras) which was the largest pouch milk market of Tamil Nadu was dominated by Tamil Nadu state’s milk co-operative brand Aavin which largely controlled the household consumer market with its toned milk (3.0% fat and 8.5% solid non-fat). The B2B market (tea stalls, hotels etc.) was commoditised and was dominated by Andhra Pradesh dairy companies selling buffalo milk. Hatsun procured milk only from Tamil Nadu, which was a cow milk producing region.

True to his nature, RGC decided to go where others did not see an opportunity. Hatsun decided to focus on the suburban and rural markets where there was low competition. Also, Hatsun decided to focus on selling standardised milk (4.5% fat) containing higher fat content than toned milk (3% fat) which was being sold by all the dairy players. This allowed Hatsun to command a premium for its milk.

In some instances of tapping under-penetrated markets, Hatsun transported milk over a distance of ~400km in refrigerated vans from the milk producing region of Salem to Nagarcoil. Although these operations were unprofitable initially, operations turned profitable as volumes increased in these smaller towns. Owing to its first mover advantage and investments in creating a brand in these new regions, other dairy companies failed to get break-even volumes from these markets.

Hatsun followed a similar growth strategy in Karnataka, where it set up a factory in Belgaum in 1999 and focused on North Karnataka instead of the highly competitive Bangalore milk market which was dominated by Karnataka milk co-operative’s Nandini brand.

Investing in A&P and regional factories to strengthen the dairy business

As Hatsun’s liquid milk business expanded, the company set up regional milk processing and pouching factories. This brought the production of milk closer to the end-user market, thus reducing logistics costs.

In 2002-03, the ‘Arjun Amma yaaru (Who is Arjun’s mother?)’ advertising campaign was launched. The success of this campaign helped establish ‘Arokya’ as a premium pouch milk brand.

Hatsun Agro


Laying the foundation for one of the largest direct milk procurement networks

In order to procure the best quality milk, Hatsun focused on procuring milk directly from farmers rather than from agents or vendors. To build its trust with the farmers, Hatsun undertook several initiatives, namely:

a) In order to ensure transparency in determining milk quality, Hatsun invested in Eko milk analysers which would do on-the-spot testing of milk quality;

b) Farmers were always paid on time without a single day’s delay; and

c) Farmers were provided services like artificial insemination, cattle feed and fodder at subsidised rates. As agents were eliminated from Hatsun’s procurement chain, Hatsun was able to pay the highest milk procurement price to farmers.

In FY03, Hatsun invested in an advanced IT system of Oracle Applications ERP to give better visibility of the company-wide operations and improve efficiencies.

“Due to the reputation we built with farmers in the initial years, entering newer regions was easier for us as farmers were more than willing to work with us. Unlike other dairy companies, we never relied on making advances to farmers to get their milk. We followed transparency, timely payments, best milk price and reliance on systems and processes to scale up our milk procurement network.” – RGC on how Hatsun scaled up direct milk procurement.

These initiatives helped Hatsun’s liquid milk sales grow by 43% CAGR over FY99-05. By the end of FY05, the company was procuring 13 lakh litres of milk through a network of >1lakh farmers and >3,500 collection centres and marketing ~6 lakh litres of liquid milk per day. However, due to the management’s focus on the liquid milk business, the ice cream business became the casualty as its sales grew only at 5% CAGR over FY99-05. By the end of 2005, the milk & milk product business was very much the main driving force for Hatsun Agro, contributing ~93% of total sales.

Total sales and PAT grew by 31% and 11% CAGR respectively during 1998-2006 while EBITDA margin went down from 8.4% in FY1998 to 4.7% in FY2006.

Exhibit 4: Ice cream contributed ~30% of Hatsun’s revenues in FY99…


Exhibit 5: …but only 7% in FY06 as milk and SMP contribution increased in the total mix


Milk, 57%

Milk Products,

13%

Ice Cream, 30%

FY99

Milk, 68%

Milk Products,

25%

Ice Cream, 7%

FY06

“While our competitors sprinted ahead of us in milk procurement by procuring from bulk vendors, we were running a marathon by steadily growing our direct milk procurement network.” - RGC

“We paid higher milk price to farmer but still had lower milk procurement cost than competitors who were at the mercy of the agents or the bulk milk vendors.” - RGC

“Due to our strong belief that we could succeed in the liquid milk business we incurred the capex required to establish the wide milk procurement network.” - RGC

Hatsun Agro


Exhibit 6: Hatsun’s revenue grew at 50% CAGR over FY98-06 led by liquid milk; EBITDA margin reduced to 4.7% by FY06 due to higher sales of milk which had low margins


Exhibit 7: Hatsun’s PAT grew at 10% CAGR over FY98-06, slower than sales due to margin compression; average RoE over this period was 15%


Exhibit 8: Hatsun stock delivered 23% CAGR over FY00-06 led by a spurt in the last two years as the company stabilised its EBITDA margin and improved RoE in FY06


2005 – 2010: Augmenting the liquid milk business Entering the milk powder business to augment milk procurement

In order to maximise absorption of milk supplied by the farmers, particularly during the flush season, in FY04 Hatsun set up a milk powder plant in Kancheepuram to convert the extra milk to milk powder. Initially, the focus was to set up these plants to augment milk procurement and use the ingredients for producing milk during the lean season.

Due to the rising SMP (skimmed milk powder) prices globally, Hatsun ventured into the export business in FY05. Milk powder and milk ingredient processing capacities were set up in Salem and Palacode. Export sales increased to 14.3% of total sales in FY06 but were impacted in FY07 due to the ban on export of SMP. EBITDA margin during FY05-11 was impacted by the volatility in SMP sales and the profitability of this business. However, milk powder capacity helped Hatsun increase its direct milk procurement from 1.3mn litres per day in FY05 to 1.5mn litres per day in FY10.

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Hatsun Agro


Exhibit 9: Hatsun’s export revenue as a percentage of total sales fell over FY06-10

Source: Ambit Capital research

Reducing one layer in distribution channel through franchise outlets

Till 2005, Hatsun’s liquid milk was being distributed through dealers similar to that of any other dairy company. In some of its smaller markets, Hatsun lost distributors to competitors who offered higher margins. To tackle this issue and directly reach distributors, Hatsun set up a franchise-based distribution network called Hatsun Distribution Centre (HDC).

Hatsun rented out the premises for the distribution centres and asked the franchise to invest in freezers and vehicles in return for a margin on the sales. As the premises were rented out by Hatsun, the franchise would have to move to a new place if he wished to distribute products of a competing dairy company. By reaching its distributors directly, Hatsun reduced one layer in the distribution chain and was able to provide higher margins to distributors. Hatsun’s milk products are distributed only through its own network of franchise outlets.

Investing in allied activities to build relationship with the farmer

To strengthen ties with farmers, Hatsun launched the White Gold project in FY07 to provide technical inputs to dairy farmers to increase the milk yield. In FY10, the company also started cattle feed manufacturing through third-party premises. This was sold under the ‘Santosa’ brand only to farmers supplying milk to Hatsun regularly.

Revival in sales of ice cream

In 2007, Hatsun launched a new format of ice cream parlour called ‘Arun Ice Cream Unlimited’ to offer consumers ice creams on a per scoop basis with a wide variety of offerings. Hastun also started selling its other dairy products through its network of Arun ice cream parlours. During this period, sales of the ice cream business revived to 21% CAGR over FY06-11.

Total sales and PAT grew by 20% and 35% CAGR respectively during FY06-11, while EBITDA margin improved from 4.7% in FY06 to 7.0% in FY11. Sales of pouch milk grew by 19% CAGR over FY06-11.

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Hatsun Agro


Exhibit 10: Hatsun’s revenue grew at 20% CAGR over FY06-11; EBITDA margin increased to 7.0% by FY11


Exhibit 11: Hatsun’s PAT grew at 35% CAGR over FY06-11; average RoE over this period has been 22%


Exhibit 12: Hatsun’s stock delivered 34% CAGR over FY06-11


2011 onwards: Becoming a fully integrated dairy company; entering new regions and categories Over 1995-2010, Hatsun invested in building a very strong pouch milk business in Tamil Nadu. Starting 2011, the strength and learning from this business was leveraged to enter new regions and product categories. The company has also been undertaking capital investments to become a vertically integrated dairy company.

Establishing a presence in the curd market

Since 2011, the company started selling curd under the Arokya and Hatsun brands. The branded pouch curd market in South India has been dominated by Heritage Foods. Hatsun leveraged the distribution backbone of its liquid milk business to grow its curd business. It achieved peak curd sales of 350 tonnes per day in 2015.

Converted Arun Unlimited to IBACO

In 2012, Hatsun launched a new premium ice cream parlour format called ‘IBACO’. The existing Arun Ice Cream Unlimited parlours were converted in to this format. However, the shop interiors, ice cream range were completely renovated to give a very premium feeling to the consumers. Hatsun has tried to leverage its access to quality milk from its own procurement network to offer the best quality premium ice cream.

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Hatsun Agro


Acquired Jyothi Dairy to enter the Andhra Pradesh milk market

In 2013, Hatsun acquired Jyothi Dairy which had a plant near Hyderabad and one in Chitoor with daily milk procurement of ~70,000 litres. As Hatsun installed its processes of direct milk procurement from farmers at Jyothi Dairy, procurement dropped to as low as ~35,000 litres per day due to opposition from bulk milk vendors. Hatsun’s transparency in milk procurement, timely payment and high milk procurement price allowed it to attract farmers to its network. Milk procurement has grown rapidly over the last 30 months to ~3 lakh litres per day.

Initially, consumer acceptance was low for Hatsun’s cow milk in Andhra Pradesh (AP) and Telangana (TS) which are largely buffalo milk markets. Hatsun followed its usual strategy of first entering the smaller towns instead of larger markets like Hyderabad, Vijayawada and Vishakhapatnam. Through extensive sampling activities and competitive pricing, Hatsun is now amongst the top 5 liquid milk players in the AP and TS markets.

Renovated HDC stores to turn them into retail-cum-distribution points

Over the last 2 years, Hatsun has started renovating its HDCs into the new Hatsun Daily (HD) format stores. Under the new format, the stores do the distribution activities in the morning and then operate like retail stores through the day. These outlets help Hatsun to exhibit its expanded product range to consumers and add one more income stream to its franchise owners. Initial feedback suggests that Hatsun Daily stores have seen ~50% increase in ice cream sales due to higher retail sales.

Acquisition of cattle feed plants to reduce costs

Hatsun acquired a cattle feed plant in Tamil Nadu in FY14 followed by another in Dec’15. Through these acquisitions, Hatsun plans to bring production of cattle feed in-house and save costs.

Driving initiatives to augment the existing business

To strengthen its existing pouch milk business, Hatsun has been driving several initiatives over the last 12 months:

Investing in farm management software: Hatsun initiated a herd tracking project in 2016 by investing in Herdman software, which helps in farm management,

Setting up Active Bulk Coolers (ABC) to increase milk procurement: Hatsun is investing in ABCs to increase milk procurement at its existing collection centres.

Hatsun is also investing in wind power and pouch film plants. The series of vertical integration initiatives over the last 5 years have been undertaken to bring down cost of production and strengthen the moats around its existing business.

Over the last five years, Hatsun increased its milk procurement from 1.5mn litres per day to 2.7mn litres per day. It currently has ~30% market share in the milk procurement market in Tamil Nadu. Hatsun currently has ~14% market share in the milk and curd market in South India, up from ~9% in FY12.

Total sales and PAT grew by 21% and 39% CAGR respectively during FY11-16, while EBITDA margin improved from 7.0% in FY11 to 8.8% in FY16.

“Liquid milk and curd always go hand in hand. Distributing only curd is an unviable proposition as costs would be very high. We have been leveraging our liquid milk distribution to grow the curd business.” – RGC on curd expansion.

Hatsun Agro


Exhibit 13: Milk, ice cream and SMP were the key products for Hatsun in FY11


Exhibit 14: Contribution of curd increased to ~7% in FY16 with milk contribution also increasing to ~68%


Exhibit 15: Hatsun’s revenue grew at 21% CAGR over FY11-16; EBITDA margin increased to 8.8% by FY16


Exhibit 16: Hatsun’s PAT grew at 39% CAGR over FY11-16; average RoE over this period has been 20%


Exhibit 17: Hatsun’s stock delivered 58% CAGR from FY11 to till date


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Hatsun Agro


What is Hatsun Agro’s secret sauce? Section 1: Focus on milk procurement and pouch milk Issues around perishability of milk and the low profit margin in the pouch milk business have made transporting milk over large distances unfeasible, thereby making dairy a regional business. As a result, there are several regional dairy companies but very few multi-state businesses. Hatsun Agro has solved this conundrum through its singular focus on: a) direct milk procurement from farmers and b) attaining higher volumes in its pouch milk business.

The more you procure in ONE REGION the lower is your procurement cost

Hatsun’s mantra has been to keep increasing milk procurement volumes “in a given region” in order to bring down supply chain and processing costs. The savings are due to higher utilisation of processing facilities and use of large tankers for transporting milk, which decrease freight costs. These savings are invested back into milk procurement through: a) higher procurement price to farmers, b) capital investments in bulk coolers for improving milk quality, and c) providing allied activities to farmers like lower priced cattle feed, veterinary services and farm management tools.

Lower the procurement cost the more one can invest to drive milk sales

To sell the procured milk, Hatsun has focused on the pouch milk category instead of any other value added category. Given ~90% of India’s milk consumption is still in liquid form, there is a huge addressable market for this product. The benefits of lower procurement and processing costs are partially invested in marketing and sampling activities to create a market for the procured milk. As a result, Hatsun has been able to create popular dairy brands like Arokya, Arun, IBACO and Hatsun in South India.

This model for procurement and sales has been repeated region by region by Hatsun over the 20 years, making it the largest private dairy company with major presence in Tamil Nadu and growing presence in Karnataka, Andhra Pradesh and Telangana.

Exhibit 18: Hatsun has maintained a single-minded focus on direct milk procurement and liquid milk sales


In the following section, we look at the enablers of Hatsun’s success in the dairy business till date.

High milk procurement

Lower milk procurement

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Hatsun Agro


2: Deepening the competitive moat Hatsun Agro has steadily built its competitive advantages across the four criteria of John Kay’s ‘IBAS’ framework, namely: Innovation, Brands and Reputation, Architecture and Strategic Assets (for more details of this framework, please refer to the Appendix). We discuss each aspect:

Innovation Focus on non-metro centres for selling pouch milk

As explained earlier, Hatsun grew its pouch milk business by focusing on smaller towns in Tamil Nadu, Karnataka, Andhra Pradesh and Telangana instead of the major milk consuming markets. This gave Hatsun the first mover advantage in several of these towns and it also faced less competitive intensity. Once Hatsun established its presence in these markets, it became extremely difficult for its competitors to enter these markets.

Exhibit 19: Hatsun has been focusing outside the top cities in a state to grow its pouch milk business

Tamil Nadu The top 4 cities in Tamil Nadu account for ~50% of the state’s milk consumption. However, according to our estimates, out of Hatsun’s total pouch milk sales in Tamil Nadu only ~30% is sold in these cities.

Karnataka Although Bidar, Davangere and Gadag are the 13th, 7th and 16th most populous cities respectively in Karnataka, they are amongst Hatsun’s top 5 markets in the state of Karnataka.

Andhra Pradesh Hatsun has limited presence in the top 3 populous cities in Andhra Pradesh - Vizag, Vijayawada and Guntur. Instead, Tirupati and Chittoor are amongst the top 3 cities for Hatsun in Andhra Pradesh.


“Distributing milk in smaller regions was unprofitable. However, our persistence with a region yielded volumes which increased our utilisation making us profitable in these regions.” – RGC on entering smaller markets for its pouch milk business

Selling full-cream/standardised milk instead of toned milk

Instead of selling toned milk which most competitors were doing when it entered the dairy business, Hatsun focused on selling full-cream or standardised milk. By selling milk with higher fat content, Hatsun could differentiate and command a premium for its milk. Hatsun was also one of the first dairy companies to introduce 100ml and 200ml pouch packs for milk, which enabled it to gain market share, particularly in the smaller towns/villages.

Using Eko analysers and direct bank transfers strengthen bond with farmers

Hatsun has been the first private dairy company to install Eko milk analysers at its milk collection centres for spot milk quality testing to ensure complete transparency in milk procurement process. Hatsun is the first dairy company in India to pay farmers directly into their bank accounts. These initiatives have improved transparency in milk procurement and helped Hatsun build stronger relations with its farmer network. Direct payment into bank accounts of farmers helps them create an income history and seek loans from banks at favorable interest rates (1% to 2% per month) instead of paying very high interest rates (4% to 6% per month) to local money lenders.

Hatsun has been able to increase procurement market share and cattle feed sales due to demonetisation

As Hatsun directly pays farmers into their bank accounts, it wasn’t impacted by the liquidity crunch. Instead, farmers supplying milk to other dairies started supplying milk to Hatsun Agro as their dairies were unable to make payment to the farmers. Hatsun’s cattle feed sales also increased following the demonetisation as farmers in Hatsun’s network do not have to use cash to pay for cattle feed. The amount is adjusted against their earnings from milk supplied to Hatsun. As a result, farmers preferred supplying milk to Hatsun and buying cattle feed from them as it helped them conserve cash for personal purchases. This has resulted in Hatsun’s milk procurement increasing by 1lakh/day in Dec’16 and cattle feed sales increasing by 20-30% YoY in Nov-Dec’16.

Hatsun Agro


Transporting milk in concentrated form to save costs and retain quality

Hatsun transports milk between its plants in concentrated form by removing moisture. So instead of transporting 100 litres of milk, it is converted into 35-40 litres of concentrated milk and transported. This allows Hatsun to transport more milk per tanker, hence reducing transportation costs. Also, as the milk is not converted into butter and SMP and then reconstituted, the aroma and taste of the milk is retained.

First to introduce ‘sit and eat’ format for ice cream retailing

In the early 1980s, Hatsun was the first company to introduce the concept of sit and eat ice cream parlors for Arun ice cream. This concept became such a success that within a period of 10 years, Arun became the market leader in ice cream in Tamil Nadu by late 1980s.

Brands Since its inception, Hatsun has focused on creating brands. Arun, Arokya, Hatsun and IBACO are its B2C brands.

Arun – market leader in ice cream in Tamil Nadu

Arun has been the market leader in ice cream in Tamil Nadu since the late 1980s and currently holds ~60% market share of the Tamil Nadu ice cream market. Outside Chennai, where it is just ahead of HUL’s Kwality ice cream, Arun is the market leader by a huge margin. Arun also dominates the South India ice cream market with a market share of ~30%.

Market dominance built on superior product quality and product innovation

Access to own milk procurement allows Arun to offer customers the best quality ice cream at competitive price points. The company also invests in the latest technology to produce innovative ice creams; e.g. Arun sells iBar ice cream which is similar to HUL’s Magnum ice cream. Hatsun has also invested in cone and chocolate manufacturing equipment to control product quality.

Currently, Arun is `2bn+ ice cream brand and has been growing sales at ~24% over the last 5 years. According to our estimates, Arun derives ~75% of its sales from Tamil Nadu, 12-15% from Karnataka and the rest from AP and Telangana.

Exhibit 20: Hatsun’s Arun iBar ice cream


Exhibit 21: Ice cream revenue has grown at 15% CAGR over FY99-16


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Arokya – the largest private pouch milk brand in India

Hatsun sells its pouch milk under the ‘Arokya’ brand name. Hatsun has focused on selling full-cream/standardised milk instead of toned milk unlike most of its competitors. The advertising campaign ‘Who is Arjun’s mother?’ in the early 2000s helped Arokya establish itself in the standardised and full cream segment. Currently, ~50% of Arokya sales are of the full-cream variant, followed by standardised milk (30-35%) and toned milk (~15%). Arokya’s brand equity allows it to command ~10% price premium over co-operative milk in the Tamil Nadu market.

This brand has now been extended into the curd segment to sell curd with higher fat content. The pouch milk business has been growing at 22% CAGR over FY11-16. According to our estimates, Arokya derives ~70% of its sales from Tamil Nadu, 15% from Karnataka and the rest from Andhra Pradesh and Telangana.

“We could have got immediate volumes in the pouch milk business by focusing on the tea stall channel. However, we knew that it wouldn’t help in creating a consumer brand. So we were always focused on tapping the households for our pouch milk business.” – RGC on building Arokya brand through the B2C route

Exhibit 22: Milk revenue has grown at 15% CAGR over FY99-16


Exhibit 23: Hatsun’s A&P has been ~3% over FY99-16


Becoming the farmer’s trusted milk procurement brand

Over the last two decades, Hatsun through its milk procurement network has built its brand equity amongst farmers in South India as a name that stands for trust and transparency. Transparency because of the use of Eko milk analysers used to determine the milk quality and trust because of Hatsun’s timely payment to farmers. Due to its brand equity, farmers look forward to Hatsun entering their village for milk procurement. Hatsun has built on these strengths to create the largest direct milk procurement network of ~2.7mn litres per day amongst private dairy companies.

“Now it’s very easy for us to enter new regions for milk procurement in South India as the Hatsun brand has a lot of credibility amongst farmers.” – RGC

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Exhibit 24: Hatsun logo


Exhibit 25: Milk procurement has increased at 20% CAGR over 2000-2016


Strong brand has helped gain market share from regional players

As shown in the exhibit below, Hatsun spends one of the highest amounts on A&P as % of sales. Given its regional presence, its advertisements are telecast on the regional channels. Consumer awareness created through these advertising spends supplemented with localised consumer promotions have helped Hatsun gain market share from regional dairy players whenever it entered a new region.

Exhibit 26: Hatsun has highest A&P spends among peers


Architecture Systems and processes drive every operation in Hatsun

Most dairy companies in India face scalability issues due to the absence of systems, processes, and checks and balances. These are particularly important in a dairy business because: a) mishandling of the raw material can lead to huge monetary and credibility loss due to high perishability of milk, b) most of the talent employed in milk procurement are from rural areas with low literacy levels, and c) milk passes through several stages (collection centre, chilling centre, tankers) before reaching the plant.

There is immense focus on defining and following the standard operating procedures (SOPs) for any activity in Hatsun. The belief within Hatsun is that if the processes are executed then results will follow. For e.g. In the IBACO ice cream business, ~50% of the franchisee’s monthly income is determined by their performance on a 100 point checklist evaluating the hygiene, service etc. A similar checklist decides the payout for the HDC and Hatsun Daily stores for a monthly incentive of `5,000 to the franchise owner.

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Hatsun Agro was one of the first dairy companies in India to install ERP software (Oracle) in FY03. In FY10, this was upgraded with Oracle being replaced by SAP.

“From the day we join, we are made aware of the SOPs. This is rare in a dairy company where businesses are normally promoter driven.” – Employee at Hatsun Agro

“Following the systems and processes is very important as we are handling a highly perishable product. Without the SOPs, handling 27lakh litres of milk per day isn’t possible.” – RGC

Checks and balances in the procurement chain prevents pilferage

“Dairy companies face 5-6% losses while transporting milk from collection centre to the dairy plant due to pilferage in the supply chain. Controlling this pilferage can be the difference between profit and loss for a low-margin dairy business. ” – ex-Employee of dairy company

Hatsun has checks and balances throughout the procurement chain to check for pilferage. When every farmer pours milk at the VLCC (Village-level collection centre), he/she gets an SMS telling him his milk quantity and quality. Once the collection for the session is over, the VLCC in-charge gets an SMS with the total milk collected and its quality. This data is tallied when the milk from a VLCC reaches a chilling centre. Every van or tanker transporting milk has a GPS tracker installed with tamper proof seals put on their tanks. These checks ensure that transit losses for Hatsun are less than 1% vs 4-5% for some of its peers.

Focus on systems and processes has helped Hatsun build a multi-state milk procurement network

Building a milk procurement network is less a function of money but more of winning the farmer’s trust.

Several dairy companies rely on the promoter’s relationship with farmers in a particular region to procure milk. However, these models are not scalable beyond one particular region. Hatsun has built a multi-state milk procurement network by focusing on processes such as complete transparency, timely payments through banks and providing allied dairy services. The transparency followed by Hatsun Agro in its milk procurement process helps it in winning the farmer’s trust.

Hatsun has created a repeatable model, which it applies across regions and creates a scalable model of milk procurement.

Technology is leveraged to achieve this, including: Eko milk analysers are used to determine milk quality; every farmer after pouring milk at the collection centre receives an SMS mentioning the quality and quantity of milk he/she delivered; and digital tagging of cows is to track their health.

Hatsun’s milk procurement network should help it thwart any challenge from large dairy co-operatives like Amul, Mother Dairy and MNCs

Although Amul and Mother Dairy are well-known dairy brands across the country, the availability of their products is limited to only specific regions in the country. Product availability is dependent on penetration of milk procurement. Amul and Mother Dairy have been able to disrupt dairy businesses in North and West India due to their focus on direct milk procurement in these regions. Milk procured directly from farmers in Gujarat is sold as pouch milk by Amul in markets up to Hyderabad. However, Amul and Mother Dairy do not yet have a milk procurement network in South India where Hatsun Agro is present. Similarly, for Parag Milk Foods or other domestic dairy companies, they will also have to start building a milk procurement network to be a serious threat to Hatsun Agro.

As mentioned earlier, winning the trust of the farmer is more important than the procurement price paid for building a milk procurement network. Hatsun has already created one of the finest and largest milk procurement networks in these states through focus on transparency to win the farmers trust. Also, Hatsun doesn’t compete on price for pouch milk in its home market of Tamil Nadu. Hence, there is lower probability of Hatsun facing disruption due to the entry of Amul/Mother Dairy or from existing and new entrants in its dairy market.

Hatsun Agro


Instead, Hatsun’s focus on systems and processes for milk procurement could pose a threat to Amul’s and Mother dairy’s milk procurement in non-Gujarat states as Hatsun enters these states.

As shown in the exhibit below, Hatsun is the strongest dairy company in South India due to strong milk procurement, brand visibility and product availability. However, it is still weak in West India which could be its next region of growth after 3-5 years. Till then Hatsun Agro will have to focus on building its milk procurement network in this region to gain market share in this region.

Exhibit 27: Hatsun Agro is the strongest dairy company in South India but will have to work hard on milk procurement in West India to build presence there

Brand visibility Product availability Direct milk procurement Overall

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Mother Dairy

Parag Milk Foods

Hatsun Agro

Heritage Foods

West India Amul

Mother Dairy

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Heritage Foods

Source: Ambit Capital research, Note: - Strong; - Relatively Strong; - Average; - Relatively weak.

Focus on automation to improve processes

There is continuous focus to automate processes and reduce human intervention. For e.g. the internal audit team has a mobile app which gives them the checklist to be followed while auditing a store. The temperature of the vehicle transporting milk is monitored to avoid milk spoilage during transit. To ensure that the field force is following its visit plan, employees can mark attendance through selfies and geo-tagging. The company recently introduced order-taking through a mobile-based app for its distributors. This gives Hatsun better visibility of the expected demand and can plan production accordingly.

“We follow job rotation so that people get to do a new task every 3-4 years. This helps us get new ideas and has been one of the reasons for IT based automation in several processes. The SOPs ensure business continuity during the job rotation.” – RGC

Created architecture of factories/distributors to keep distribution costs low

Network of 13 dairy plants ensures shorter distance to market

With 87% of milk made up of water, transporting milk is akin to transporting water. Given the low margin of the pouch milk business, the dairy plant should be as close to the consuming market as possible. Instead of creating 1-2 large dairy plants, Hatsun has created a network of 13 milk processing and pouching plants across Tamil Nadu, Karnataka, Andhra Pradesh and Telangana. This network of plants has been mapped in a way that the end-market is within a 200km radius of the plant, thus keeping logistics cost low. Higher capacity utilisation of the regional dairy plant increases its profitability. Regional dairy plants also give Hatsun more flexibility to adjust to local demand.

“Due to the regional factories, we are able to compete with local players but with a brand which is a state-wide brand. We are as a result able to spend significantly higher than our competition on advertising.” – RGC

Hatsun Agro


Exhibit 28: Hatsun’s network of factories in South India ensures that the end-market is within ~200km radius of the factory


Number Location State1 Salem Tamil Nadu2 Belgaum Karnataka3 Kancheepuram Tamil Nadu4 Chennai- Red Hills Tamil Nadu5 Honnali Karnataka6 Madurai Tamil Nadu7 Vellisandhai Tamil Nadu8 Thalaivasal Tamil Nadu9 Salem -MPD Tamil Nadu10 Hyderabad Telangana11 Chittoor Andhra Pradesh12 Karur Tamil Nadu13 Kolasanahalli Tamil Nadu14 Tirunelveli Tamil Nadu15 Guduvancherry Tamil Nadu16 Palani Tamil Nadu

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Hatsun Agro


Network of 2,200+ franchise-based distribution centres

Hatsun doesn’t follow the FMCG distribution model. It has created a network of franchise distribution outlets called Hatsun Daily or Hatsun Distribution Centre (HDC) for its products. These outlets operate from premises rented out by Hatsun and are supplied with products directly from Hatsun’s factories. The outlets directly reach out to retailers, ensuring that Hatsun’s dairy products are available in every town having a population of >3000. Hatsun Daily outlets are allowed to stock only Hatsun products and no other product categories. They also undertake retail sales across the counter.

Hatsun sells its Arun ice cream through a network of exclusive Arun ice cream parlours. As Hatsun is the market leader in pouch milk in Tamil Nadu, it offers its franchises <10% margin vs 10%+ margin offered by its competitors.

“Although we offer lower margin to our franchises, our liquid milk sales volumes ensure that our franchises earn higher profit than distributors of other dairy companies.” - RGC

Competitors have tried to copy Hatsun’s distribution model but have met with limited success due to their inability to generate break-even sales volume per outlet. Hatsun currently has a network of 2,289 Hatsun Distribution Centres and Hatsun Daily stores spanning 6 states.

Exhibit 29: About 68% of HDC and Hatsun Daily stores are located in Tamil Nadu

Andhra

Pradesh Goa Karnataka Maharashtra Puducherry Tamil Nadu Telangana Total

HDC 84 13 261 5 - 1,027 99 1,489

Hatsun Daily 85 6 90 10 2 519 88 800

Total 169 19 351 15 2 1,546 187 2,289


Exhibit 30: Old HDC format


Exhibit 31: New Hatsun Daily format


Strategic Assets Scale is the most important strategic asset in a dairy business as it helps bring down costs. Hatsun’s milk procurement network of 3.2 lakh farmers procuring 2.7mn litres and sales of 2.0mn litres of milk+curd in the South India market are its strategic assets. Hatsun’s scale makes it almost twice the size of its nearest private dairy competitor. This scale advantage has helped Hatsun grow ahead of its peers. Hatsun is leveraging its strategic assets to create impregnable moats around its business.

Hatsun Agro


Exhibit 32: Hatsun’s scale is almost twice the size of its nearest private dairy competitor

Company/Brand Ownership Area of operation Liquid milk + curd sales (lakh litres daily) as of FY16

Nandini Co-operative Karnataka 38

Hatsun Private South India 20

Aavin Co-operative Tamil Nadu 20

Lactalis Private South India 11

Heritage Private South India 10

Doodla Private South India 8

Jersey Private South India 6


Hatsun increasing capital intensity to raise entry barriers

“We always look at profit margin not available to our competitors. By leveraging our existing scale we can undertake investments which can further open up the margin gap between us and our competitors.” – RGC

Over the last year, the company has been undertaking several capital investments to bring down cost of operations. The capital investments are being used to increase the capital intensity in the dairy sector, making it increasingly difficult for a new entrant to enter this sector or for a sub-scale dairy player to match Hatsun’s operating efficiency. This should allow Hatsun to keep growing ahead of the market and take market share from competitors. Some of the investments undertaken by Hatsun are:

Investing in Active Bulk Coolers: As milk procurement per collection centre has increased for Hatsun, it has started investing in Active Bulk Coolers (ABC) to bring down milk procurement costs as explained later. It plans to set up a network of 3000 ABCs in the next 5 years.

Setting up its own cattle feed plant: Given its ability to sell cattle feed to its farmer network, Hatsun has set up a cattle feed plant with a capacity of 20,000TPD in Palani, Tamil Nadu, which started commercial production from Nov’16. Despite selling subsidised cattle feed to farmers in its milk procurement, Hatsun will still make profits on these sales vs peers which mostly make marginal losses on these sales.

Investing in wind power and pouch film plant: Hatsun is investing in wind mills and a pouch film plant to substantially lower its power and packaging costs respectively.

Investing in best in-class manufacturing equipment: Hatsun has one of the most advanced curd packaging and ice cream production lines in the country. Given the scale of its ice cream business, the company has also invested in chocolate and cone making equipment to produce better quality chocolate and cones.

“Unlike several dairy companies which install refurbished equipment or order equipment from China, Hatsun mostly orders its equipment from European manufacturers despite the higher costs as it ensures output of the highest quality.” – Ex-Employee of a listed Indian dairy company

Investing in farm management software to assist farmers in its network: Hatsun is investing in implementing farm management software which help its farmers manage larger cattle size with less number of people.

Creating an end-to-end dairy business to strengthen its moats

As shown in the exhibit below, Hatsun’s capital investments are helping it create a completely integrated dairy business.

The farmer is tied up with Hatsun through its cattle fodder, cattle feed, veterinary services and farm management services.

The cattle feed is produced at a Hatsun owned plant; fodder is produced in Hatsun’s own premises.

Hatsun Agro


In the manufacturing process, Hatsun procures its milk directly from farmers, manufactures its ice cream cones and chocolate. The company also plans to manufacture its own pouch film by Jul’17

Hatsun’s dairy products are distributed through Hatsun’s franchise outlets operating from Hatsun rented premises.

The integration should help it increase its operating profit margin sustainably and also help it weather any attack from larger dairy co-operatives like Amul or Mother Dairy in the future.

Exhibit 33: Hatsun is becoming a fully integrated dairy company, which will help it withstand competition from co-operatives or new/existing entrants


Promoter’s intelligent fanaticism

Mr RG Chandramogan’s (age 67 years) focus on growing the dairy business through prudent capital allocation over the last 25 years has helped create and sustain moats akin to the intelligent fanatics mentioned in Sean Iddings and Ian Cassells popular book, Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses. For a business of the size that Hatsun is today, an owner-manager can grow it till it is a largely South and West India focused dairy company. However, unlike businesses, humans unfortunately are not going concerns and hence grooming a successor and building high quality professional middle-management would be increasingly important over the next decade as the company aspires to eventually become a pan-India dairy company.

Section 3: Controlled capital allocation Exhibit 34: Hatsun has raised funds through a mix of internal accruals and debt over FY99-16


Exhibit 35: Majority of the funds has been deployed for capacity expansion over FY99-16


Milk procurement •Reach directly to farmer to get milk, •Setup cattle feed plant to supply own feed,

•Providing farmers with farm management software

•Produce own cattle fodder •Provide subsidised veterinary services

Milk processing and production •Setting up milk pouch plant •Setting up windmill to generate power •100% in-house production •Produce ice cream cones and chocolate syrup for ice cream in-house

Distribution •Setup franchise-based distribution outlets operating out of Hatsun rented premises

•Ice cream sold through franchise ice cream parlours

CFO 57%

Proceeds from

shares 3%

Debt raised 40%

Dividend paid 10%

Interest paid 22%

Net Capex 68%

Hatsun Agro


Most of the capital is deployed in expanding milk procurement and processing capacity

Building a direct milk procurement network and expanding the pouch milk capacity have been the primary uses of capital over the last two decades. Hatsun has steadily built a 2.7mn litre per day direct milk procurement network across the five states of South India. It sources milk directly through 8,700 collection centres and 97 chilling centres across 10,000 villages.

Exhibit 36: Hatsun’s milk procurement has grown at 20% CAGR over 2000-2016


As mentioned earlier, instead of setting up 1-2 large dairy plants, Hatsun has set up a network of smaller milk processing and pouching plants across South India. It currently has a pouch milk processing capacity of ~2.7mn lpd. Over the last five years, it has also invested in increasing its curd production capacity to ~3.5tpd.

Exhibit 37: Hatsun’s network of factories across South India Location State Year

Salem Tamil Nadu FY95

Belgaum Karnataka FY00

Kancheepuram Tamil Nadu FY00

Chennai- Red Hills Tamil Nadu FY04

Honnali Karnataka FY07

Madurai Tamil Nadu FY08

Vellisandhai Tamil Nadu FY08

Thalaivasal Tamil Nadu FY09

Salem –MPD Tamil Nadu FY13

Hyderabad Telangana FY14

Chittoor Andhra Pradesh FY14

Karur Tamil Nadu FY14

Kolasanahalli Tamil Nadu FY14

Tirunelveli Tamil Nadu FY15

Guduvancherry Tamil Nadu FY15

Palani Tamil Nadu FY15


Inorganic growth through small, easy to assimilate acquisitions

In order to enter new regions, Hatsun has acquired small dairy companies so that management has the flexibility to install its own system and process in the acquired companies.

0.1

1.2 1.4 2.0

0.1 0.2

0.3 0.3

0.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2000 2005 2010 2016

Millio

n l

itre

s p

er

da

y


Hatsun Agro


In 2000, Hatsun acquired Ajith Dairy for `140mn (0.35x of sales), which had a licensed milk processing capacity of 175,000 litres per day and turnover of `400mn. Ajith Dairy was bought to serve the Chennai market as its factory at Kancheepuram was only 75km from Chennai.

In 2013, Hatsun acquired Jyothi Dairy for `500mn. It had sales of `1bn, milk procurement of ~65k lpd with one factory each in Hyderabad and Chittoor. Jyothi Dairy had a turnover of `1bn with two factories and 10 milk collection centres in two states. This acquisition gave Hatsun access to the Telangana and Andhra Pradesh dairy markets.

In 2013 and 2015, Hatsun acquired two cattle feed plants. By bringing cattle feed manufacturing in-house, Hatsun has been able to produce cattle feed at a lower cost and provide it to farmers in its network to improve cattle productivity and bring down their cost of milk production. This also helps Hatsun strengthen its relationship with farmers.

Steady CFO generation from core business and debt used to fund growth

Hatsun’s growth till now has mostly been funded through a mix of internal accruals and debt. As shown in below exhibit, Hatsun has healthy cash conversion with average pre-tax CFO/EBITDA of ~80%. Due to its presence in the pouch milk business it has very low working capital requirement of ~6% as percentage of sales. Given the ability of Hatsun’s pouch milk business to generate steady cash flow, Hatsun has maintained high debt:equity levels over the last two decades.

Exhibit 38: Hatsun has one of the highest cash conversion ratios among peers

CFO/EBITDA FY12 FY13 FY14 FY15 FY16 Cumulative

Hatsun Agro 52% 104% 126% 37% 82% 81%

Prabhat Dairy 129% 82% 14% 8% 37% 43%

Parag Milk Foods 47% 34% 58% 64% 49% 51%

Kwality Dairy -68% -41% 4% 5% 29% -5%

Heritage Foods 119% 106% 91% 73% 126% 104%


Exhibit 39: Hatsun has low working capital requirement due to presence in pouch milk business; Heritage has lowest working capital requirement due to retail business

WC as % of sales FY12 FY13 FY14 FY15 FY16

Hatsun Agro 4% 4% 3% 4% 6%

Prabhat 17% 19% 22% 27%

Parag 20% 30% 32% 21% 18%

Kwality 25% 23% 24% 26% 28%

Heritage -1% -1% -1% 1% 0%


Over the last 15 years barring FY05 and FY10, Hatsun’s average debt-equity has been ~3x. In FY05, the debt:equity increased to 4x due to significant investment in expansion of milk procurement facilities with the setting up of 15 new chilling centres and 1000 new milk collection centres in a year. However, debt-equity was reduced to 3x in the following year by repaying debt and avoiding dividend. The debt-equity increased to >4x in FY09-10 mainly due to setting up of four milk processing factories over FY07-09. It has since reduced its debt:equity to ~3.0x through internal accruals and issuance of convertible debt.

Acquisitions by Hatsun

Year Acquired dairy

Acquisition cost

2000 Ajith Dairy in Tamil Nadu ` 140mn

2013 Jyothi Dairy in Andhra Pradesh ` 500mn


Hatsun Agro


Exhibit 40: Hatsun has used debt to fund its expansion over FY03-16


Exhibit 41: Hatsun has high leverage compared to its peers Debt/Equity FY12 FY13 FY14 FY15 FY16

Hatsun Agro 3.2 3.1 2.8 2.8 2.9

Prabhat 2.2 1.0 0.8 1.1 0.2

Parag 7.5 6.1 5.9 3.4 1.0

Kwality 3.6 3.3 2.5 1.9 1.7

Heritage 1.5 0.7 0.7 0.7 0.4


Hatsun has one of the best return ratios despite its rapid growth

Hatsun pre-tax ROCE has improved from 12% in FY10 to 23% in FY16. This increase in ROCE is on back of increasing EBIT margin from 3% in FY10 to 6% FY16 and improvement in capital employed turnover from 3.1x in FY10 to 3.8x in FY16 driven by higher utilisation of new capacities. Hatsun also has one of the highest RoE levels amongst its peer group, indicating that capital has been deployed in a prudent manner.

Exhibit 42: Hatsun’s RoCE and RoE have improved with improving margins

FY12 FY13 FY14 FY15 FY16

RoCE (Pre-tax)

Hatsun 16.9% 20.7% 20.4% 14.7% 23.3%

Prabhat 9.0% 11.6% 11.0% 10.7% 10.5%

Parag 18.9% 16.3% 13.3% 18.0% 23.3%

Kwality 24.0% 20.8% 20.9% 19.9% 18.7%

Heritage 15.0% 36.3% 28.2% 17.7% 30.2%

EBIT margin Hatsun 4.4% 4.7% 4.9% 3.8% 5.9%

Prabhat 6.8% 7.6% 6.8% 7.0% 6.9%

Parag 6.3% 6.6% 5.0% 5.6% 7.0%

Kwality 6.6% 5.5% 5.7% 5.8% 6.2%

Heritage 2.5% 5.4% 4.5% 2.7% 4.3%

Capital employed turnover Hatsun 3.6 4.1 3.7 3.5 3.8

Prabhat 1.3 1.3 1.5 1.4 1.4

Parag 1.9 1.6 1.7 2.7 2.3

Kwality 2.9 3.2 3.3 3.1 2.7

Heritage 6.0 6.7 5.6 6.2 6.9

RoE Hatsun 26.5% 37.7% 52.9% 19.5% 43.1%

Prabhat 8.4% 7.9% 7.3% 7.8% 4.9%

Parag 31.8% 32.7% 16.7% 29.5% 19.5%

Kwality 67.9% 46.7% 40.7% 30.5% 22.7%

Heritage 10.3% 45.1% 28.6% 15.3% 26.2%


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1

2

3

4

5

6

7

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Debt to equity Average Debt:Equity

Hatsun Agro


Milk procurement to reach 4mn lpd by FY20E Over FY17-20, Hatsun plans to increase its direct milk procurement from current level of 2.7mn lpd to 4mn lpd. This growth will be driven by: a) entering new regions in Maharashtra, Andhra Pradesh and Telangana and b) Increasing milk procurement per collection centre in Tamil Nadu. Milk procurement will be supported with investments in: a) expanding its network of Active Bulk Coolers (ABC), b) setting up of own cattle feed plant, c) tagging of all the cattle to implement a farm management software. These investments are expected to help attract more farmers into Hatsun’s network and also help increase the yield of cattle in its network, thus driving milk procurement CAGR of 14% over FY17-20.

“We can undertake these allied investments only because we have scale. Amul has done similar investments due to the scale it has.” - RGC

New regions to contribute to growth in milk procurement Hatsun through its network of 8,700+ village collection centres, 97 chilling centres and 184 Active Bulk Coolers (ABC) procures 2.7mn lpd of milk from Tamil Nadu (TN), Karnataka (KT), Andhra Pradesh (AP), Telangana (TS) and Maharashtra (MH). Hatsun has a milk procurement market share of ~30% in Tamil Nadu and ~4% in Karnataka. It is still a relatively small player in the other states. As shown in the exhibit below, majority of the growth is expected to be driven by deeper penetration into new regions in AP, TS and MH. In TN, the company expects to drive higher collection from existing procurement network and lesser from penetration into new regions.

Exhibit 43: Hatsun plans to increase milk procurement at 14% CAGR over FY17-20

Procurement States Milk Procurement (mn lpd)

FY17E FY20E FY17-20 CAGR

Tamil Nadu 2.0 2.2 4% Karnataka, Andhra Pradesh, Telangana and Maharashtra 0.7 1.8 37%

Total procurement 2.7 4.0 14%


Successful track record of milk procurement from new states

Hatsun entered Andhra Pradesh and Telangana about three years ago through the acquisition of Jyothi Dairy in 2013. Jyothi Dairy then had daily milk procurement of only 65,000 lpd mostly from agents.

“In Jyothi Dairy we replicated the Hatsun milk procurement model of going directly to farmers in AP and TS. Initially we faced resistance as these were mostly agent dominated markets, but we persisted.” – RGC

Hatsun’s direct milk procurement model faced resistance from milk agents in AP and TS, leading to ~50% drop in milk procurement. Hatsun paid the farmers `3/litre more than competition and persisted with milk procurement directly from farmers. This has helped Hatsun to increase its milk procurement to ~3.25lakh lpd from AP and TS within a period of three years. Even when Hatsun reduced the procurement price paid to farmers they have continued supplying milk to Hatsun due to the transparency in fat determination, timely payment and assurance of 100% procurement by Hatsun.

“Farmers now are more than welcoming as they want to part of our direct milk procurement network instead of the agent system as the former gives them better realisation and the allied services as well. Getting cow milk was an issue in this region but now some farmers are switching.” - RGC

Hatsun Agro


Using milk procured in Maharashtra to sell in adjacent markets of Telangana and Andhra Pradesh

Milk procurement price in Maharashtra is lower than that in AP and TS which is reflected in the pouch milk prices which are higher in AP and TS than that in Maharashtra. As the end-market for Hatsun’s pouch milk is in AP and TS, it uses the milk procured at a lower price in Maharashtra to sell in AP and TS. The price differential in the two markets allows Hatsun to pay farmers in Maharashtra higher milk procurement price than local competition and equivalent to what Amul is paying farmers in that region. Better milk price complemented with Hatsun’s systems and processes has helped it grow its milk procurement in Maharashtra to 75,000 lpd in just 12 months.

“As expected, we faced political opposition in Maharashtra. But the farmers have given us overwhelming support. Our direct milk procurement is being preferred by farmers here as well. Unlike our competition in Maharashtra, we are procuring milk without giving even one rupee of advance to farmers.” – RGC

Given track record of growing milk procurement in new regions through sustainable factors like using systems and processes and scale advantages, Hatsun can continue to grow milk procurement in new regions going ahead.

Investing in allied activities to drive milk procurement To drive growth in milk procurement, Hatsun is investing in technology like Active Bulk Coolers and allied activities like farm management software, cattle feed plant and cattle fodder as explained below:

Investing in Active Bulk Coolers to increase procurement and reduce costs

As shown in the exhibit below, the current supply chain of milk starts with the farmer pouring his milk at the village-level collection centre (VLCC).

Exhibit 44: Milk supply chain currently followed by Hatsun without ABCs


As there are no chilling facilities at the VLCC, the milk has to be transported within two hours of its collection to the chilling centre to chill it to 4°C in order to avoid milk spoilage. From there it is transported to the dairy plant for further processing. Due to this quick turnaround time at the VLCC, dairy farmers get only a 45-60min window in the morning and evening to pour their milk at the collection centre. As a result, farmers staying only within a vicinity of 0.5-1km of the VLCC pour their milk at the VLCC. Those staying far away or who lack time to come to the VLCC due to domestic chores give their milk to the local milk agent.

Exhibit 45: With ABCs milk can be transported directly from VLCC to the dairy plant


Village-level collection

centre (VLCC)

Twice a day

Chilling centre

Once/ twice a

day Dairy plant

Village-level collection centre (VLCC) Once a day Dairy plant

Hatsun Agro


Over the last 6 months, Hatsun installed Active Bulk Coolers (ABC) of 1000-1,500 litres capacity at its VLCCs where daily milk procurement is >500lpd. The ABC cools the milk to ~4°C within two hours of its collection, thus preventing milk spoilage. This allows direct transportation of the milk from the VLCC to the dairy plant. Also, instead of transporting the milk twice a day from the VLCC to the chilling plant, ABCs storage capacity allows milk to be stored and transported only once a day directly to the dairy plant thus reducing logistics costs. This is expected to result in savings of ~0.5% of sales as the company rolls out 3000 ABCs over FY16-20 at a cost of `10lakh per ABC.

Hatsun has already rolled out 184 ABCs over the last six months. The key takeaway is that, those VLCCs which have an ABC installed have seen an increase of ~50% in its milk collection. This is because these VLCCs are open for a longer time (~2hours vs 45min for VLCC without an ABC) and hence farmers staying far away also deliver milk here instead of giving it to the agent as they get a fair price and timely payment.

Exhibit 46: Active bulk cooler (ABC)


Exhibit 47: VLCC without ABC


Investing in animal husbandry software to help dairy farmers in farm management

Dairy farming is the secondary occupation for most of the famers with agriculture being the primary occupation. Large dairy farms are unable to get labour and hence farm management is one of the biggest issues facing dairy farmers. In addition to its team of veterinary doctors and artificial inseminators, Hatsun has a farm management software called Herdman. Every cow in Hatsun’s milk procurement network is tagged with a unique number to create a database of all the cows in Hatsun’s milk procurement network.

The unique number and the Herdman software is used to record the treatment given by Hatsun’s staff of veterinary doctors and artificial inseminators. This database will be used to move towards preventive healthcare instead of curative healthcare for the cows. The farmers are also continuously updated about the health of their cattle and the fodder and feed that they should give to their cattle. This is expected to help the farmers manage larger farms without deploying extra labour. This is also expected to improve the milk yield of the cattle as was seen at Chitale dairy farms located in Pune where this software was implemented. Hatsun plans to roll out this software across its procurement network over the next 6-9 months.

Hatsun Agro


Supplying own cattle feed and fodder to its farmer network to bring down the farmer’s cost of milk production

As of Sep’16, Hatsun produced only 5000 tonnes of cattle feed per month under its brand Santosa through third-party manufacturers. In Dec’15, the company acquired a cattle feed plant at Palani, Tamil Nadu. The company plans to produce 15,000t/month of cattle feed at this plant and shut down all its third-party manufacturing. The increased capacity will allow Hatsun to reach more farmers in its milk procurement network with its own cattle feed.

The company is also supplying farmers with stems of high-yielding proteinaceous green fodder ‘Co-5’ developed by the Tamil Nadu Agricultural University (TNAU) in Coimbatore. These stems are planted by farmers to produce high yielding perennial protein rich fodder. The cattle feed and the fodder when used in the correct proportion as advised by Hatsun’s animal husbandry experts helps the farmers in reducing their cost of milk production (https://goo.gl/y7yIFD).

These investments in ABCs and allied activities should help Hatsun drive ~14% CAGR in milk procurement over FY17-20.

https://goo.gl/y7yIFD).

Hatsun Agro


Expect sales and PAT to grow at 17%/35% CAGR over FY16-21 Currently Hatsun derives 68%/9%/8% of its sales from liquid milk/curd/ice cream, which we expect to change to 56%/22%/10% by FY21. We expect Hatsun to increase its market share in the liquid milk + curd market in South India (ex-Kerala) from 14% currently to ~20% by FY21. This will be driven by: a) focus on driving liquid milk and curd sales by entering new regions in Andhra Pradesh and Telangana and b) leveraging milk distribution to drive curd sales in Tamil Nadu. Growth from entering western markets like Maharashtra could increase our growth estimates. Hatsun’s vertical integration initiatives are expected to drive EBITDA margin expansion from 8.8% in FY16 to 10.7% in FY19. Margin expansion and de-leveraging are expected to drive PAT CAGR of 35% over FY17-21.

AP and Telangana to drive the next leg of non-Tamil Nadu growth Exhibit 48: Non-Tamil Nadu South India growth to come mostly from Andhra Pradesh and Telangana

CAGR Comments

2011-12 2016-17E 2020-21E FY12-17E FY17-21E

South India (Ex-TN and Kerala) milk and curd market (lakh lpd) 75 87 98 3% 3% Market volume growth to be in line with the

Indian milk consumption growth

Hatsun market share 1% 6% 12%

Entry into new regions in AP&TS; curd business to ride on the growth and distribution reach of liquid milk

Hatsun milk & curd sales (lakh lpd) 1.0 5.0 12.0 38% 25% Hatsun liquid milk sales mix % 100% 91% 80%

Expect curd to grow faster due to current under-penetration

Hatsun Liquid Milk (LM) sales (lakh lpd) 1.0 4.5 9.0 35% 19% Entry into new regions to drive this growth; growth optically higher as starting from a low base Hatsun Curd sales (lakh lpd) 0.0 0.5 3.0 NA 58%

Hatsun LM realisation (`/ltr) 29 43 52 8% 5% Expect realisation growth in line with CPI expectations Hatsun Curd realisation (`/kg) 41 50 61 4% 5%

Hatsun LM annual sales (` mn) 1,058 7,066 17,199 46% 25%

Hatsun Curd annual sales (` mn) 1 873 6,666 NA 66% Initial focus on volume growth than profits for curd business

Total milk and curd sales (` mn) 1,059 7,938 23,865 50% 32%


Starting from ~40,000 lpd of liquid milk sales in FY14 in AP and TS, Hatsun has already scaled up to 2.5lakh lpd. According to our estimates, Hatsun sells ~50tpd of curd in this market thus commanding ~6% market share of the milk and curd market in South India excluding Tamil Nadu and Kerala. There was initial consumer resistance to Hatsun’s cow milk as the population there is accustomed to consuming buffalo milk. Hatsun offered the same fat content as was present in buffalo but sold it at `2/litre lower than competition. It could afford to do this because its procurement cost of cow milk was lower than the procurement cost of buffalo milk of its competition. As elaborated earlier, the company targeted the suburban areas around Hyderabad and Chittoor to gain a foothold in the market.

Hatsun taking market share through extensive sampling in AP and TS

“Hatsun did a lot TV advertising on the Telugu channel. Its field force would target one locality after the other distributing discount coupons to every household. Weekly discount coupons offering `7 discount for the first day, `6 for the second day and so on were offered to consumers. Once consumers tried Arokya milk, several converted permanently to consuming Arokya…. Hatsun offered its pouch curd for free to consumers buying its milk. There has been very strong consumer demand for Hatsun curd because it is very thick and creamy. No other company has been able to offer similar taste. Also, their curd has longer shelf life than their peers.” – Hatsun Daily franchise in Chittoor, Andhra Pradesh

Curd and pouch milk sales are considered together as both use the same supply chain, have daily demand and hence drive each other’s growth - RGC

Hatsun Agro


Over the next 12 months, Hatsun will set up a dairy processing plant in Ongole, Andhra Pradesh which will be used to service the AP and TS markets more efficiently.

Our channel checks suggest that Hatsun has been able to take market share away in the liquid milk and curd segment largely from local dairy companies and also to an extent from Heritage Foods, Doodla dairy and Tirumala in AP and TS markets. Given Hatsun’s initial success in AP and TS markets and the company’s ability to source milk from this region, we expect Hatsun to continue to increase its market share in this region.

Limited growth potential in the Karnataka market

In Karnataka, we see limited growth potential as the state co-operative benefits due to the subsidy offered by the state government to farmers. We expect Hatsun to drive its curd sales in this region with limited potential to increase liquid milk sales.

At least 2-3 years before successfully penetrating Maharashtra market

“Any consumer who has tried Hatsun or Arokya curd has surely come back to buy repeatedly. Consumer acceptance for Hatsun milk is slower as consumers here (Maharashtra) are used to white coloured buffalo milk. But Arokya milk has a slight yellow tinge as it is cow milk.” – Hatsun Daily franchise in Ichalkaranji, Maharashtra

Channel checks suggest that penetrating the Maharashtra market would be similar to AP and TS and would take 2-3 years for Hatsun to develop a base in this state. Till then, Hatsun plans to use the milk procured in Maharashtra to sell in the markets of TS and Belgaum in Karnataka.

Overall, we expect Hatsun to grow its sales at 32% CAGR in the South India milk and curd market (ex Tamil Nadu and Kerala) over FY17-21 led by market share gains in Andhra Pradesh and Telangana.

Deeper penetration and curd sales to drive growth in Tamil Nadu

Exhibit 49: Tamil Nadu milk and curd sales to increase at 13% CAGR over FY17-21

CAGR Comments

2011-12 2016-17E 2020-21E FY12-17E FY17-21E

Tamil Nadu milk and curd market (lakh lpd) 41 48 54 3% 3% Market volume growth to be in line with the Indian milk consumption growth

Hatsun market share 23% 29% 34%

Past ability to gain market share, change in Hatsun's retail format and focus on curd to drive market-share gain

Hatsun milk & curd sales (lakh lpd) 9.4 13.9 18.4 8% 7% Hatsun liquid milk sales mix % 98% 89% 75%

Higher focus on curd to drive increase in curd sales mix

Hatsun Liquid Milk (LM) sales (lakh lpd) 9.2 12.3 13.8 6% 3% Hatsun Curd sales (lakh lpd) 0.2 1.6 4.6 52% 30% Hatsun LM realisation (`/ltr) 29 43 52 8% 5% Expect realisation growth in line with CPI

expectations Hatsun Curd realisation (`/kg) 41 50 61 4% 5%


Hatsun Curd annual sales (` mn) 299 2,921 10,187 58% 37% Curd business to leverage on existing distribution of LM to drive sales

Total milk and curd sales (` mn) 10,074 22,256 36,468 17% 13% Source: Company, Ambit Capital research

Hatsun already commands ~29% of the milk and curd market in Tamil Nadu selling ~12lakh lpd of pouch milk and 160tpd of curd. We expect growth in Tamil Nadu for Hatsun to be mostly driven by: a) deeper penetration in existing markets through opening up of more Hatsun Daily stores, b) increase in sales at the renovated Hatsun Daily stores due to sales from the retail counter, and c) leveraging the existing pouch milk distribution outreach to drive sales of curd. Over the next 12 months, Hatsun is setting up a dairy processing plant at Dharapuram, Tamil Nadu to increase its milk and curd production capacity and drive growth in this market. Overall, we expect Tamil Nadu milk and curd sales to grow at 13% CAGR over FY17-21 with an increase in market share from 29% currently to 34% in FY21.

Hatsun Agro


“There has been an increase in my retail sales as the entire product range is now visible. There has been an increase in curd sales due to higher retail sales.” – Hatsun Daily franchise in Coimbatore, Tamil Nadu

Exhibit 50: We expect Hatsun’s milk and curd sales to grow at 19% CAGR over FY17-21 led by growth only in South India

CAGR

2011-12 2016-17E 2020-21E FY12-17E FY17-21E

South India (ex-Kerala) milk and curd market (lakh lpd) 116 135 152 3% 3%

Hatsun market share 9% 14% 20% Hatsun milk & curd sales (lakh lpd) 10.4 18.9 30.4 13% 13%

Hatsun liquid milk sales mix (%) 98% 89% 75% Hatsun Liquid Milk (LM) sales (lakh lpd) 10.2 16.8 22.8 10% 8%

Hatsun Curd sales (lakh lpd) 0.2 2.1 7.6 60% 38%

Hatsun LM realisation (`/litre) 29 43 52 8% 5%

Hatsun Curd realisation (`/kg) 41 50 61 4% 5%


Hatsun Curd annual sales (` mn) 299 3,794 16,853 66% 45%

Total milk and curd sales (` mn) 11,132 30,195 60,333 22% 19%


Overall, we expect Hatsun to command ~20% of the pouch milk and curd market in South India by FY21, delivering 13%/45% CAGR over FY17-21 in the liquid milk and curd category.

Ice cream: New cold storage and entry into new regions to drive ~20% growth Hatsun sells ice cream under the Arun brand name and also on a per scoop basis through IBACO outlets. Arun ice cream contributes ~80% of the ice cream sales with the remainder by IBACO. Arun ice cream brand is the market leader in South India with ~30% market share. Sales of the ice cream business have grown at ~24% CAGR over FY11-16 led by Arun. Hatsun is investing in a new 9 lakh litre capacity cold storage, which would be used during the peak season to store almost 9-10 days of ice cream inventory. This storage capacity will help Hatsun store more ice cream variants and also undertake longer production runs for one variant. This is expected to lower cost of ice cream production and help sales growth due to Hatsun’s ability to supply more variants in the peak season. These savings will be used to fund growth of Arun ice cream in new geographies like Maharashtra.

Arun ice cream sales are also seeing a benefit from the new format of Hatsun Daily stores. Some of these new format stores are reporting a 50% jump in their retail sales, mainly led by ice cream. We expect the ice cream business to grow at ~20% CAGR over the next 5 years led equally by Arun and IBACO.

“My retail sales have increased from `75,000/month to `1,25,000/month due to ice cream. Consumers can see all the variants in the new clear top refrigerators.” – Hatsun Daily franchise in Coimbatore, Tamil Nadu

Cattle feed business to grow at 25% CAGR due to higher in-house production The ‘Others’ segment comprising cattle feed and milk powder contributes ~10% of sales. We expect the cattle feed business to grow at ~25% CAGR over FY16-21 due to the increase in capacity following the acquisition of a new cattle feed plant in Dec’15. In the milk powder business, the company plans to focus more on consumer packs of 1kg than bulk sales. This will help the company avoid losses due to sharp price volatility.

Based on our segmental sales growth assumptions, we expect Hatsun to report overall sales CAGR of ~17% over FY16-21 led mostly by the milk and curd business.

Hatsun Agro


Exhibit 51: Hatsun’s FY17 revenue split by product category


Exhibit 52: Hatsun’s FY21 revenue split by product category


Exhibit 53: Hatsun’s revenue from other regions contributes only 26% in FY17


Exhibit 54: Hatsun’s revenue from other regions will increase to 40% by FY21


EBITDA margin to expand by 200bps over FY16-21 By leveraging its current scale of operations, Hatsun plans to undertake several investments over the next 24 months to further bring down its cost of production. Part of the savings will be reinvested into the business to drive Hatsun’s growth in new regions. Hatsun plans to increase vertical integration to reduce costs through investments in wind power, pouch film and cattle feed plants. While these investments seem to add risk to the business, they will help Hatsun strengthen its moats around the business. Some of its loss-making divisions are also expected to see a turnaround as these segments mature. These initiatives are expected to drive ~200bps EBITDA margin expansion over FY16-21.

Vertical integration to bring down costs

Wind power project to reduce power costs by 15%

At a capex of `1.6bn, Hatsun is planning to install wind power units in Jan’17 to fully meet its power demand. Currently, Hatsun purchases power at `6.25/unit through a GCC (group captive consumption) arrangement, which would be replaced by its own wind power that will likely reduce unit cost by ~80%. This should help Hatsun reduce its power costs by 15% in FY18. GAMESA will be operating and maintaining this project for Hatsun.

Milk, 66% Curd, 9%

Ice Cream, 8%

SMP, 12%

Cattle Feed, 5%

FY17E

Milk, 57%

Curd, 22%

Ice Cream, 10%

SMP, 5%

Cattle Feed, 7%

FY21E

Tamil Nadu, 74%

Others, 26%

FY17E

Tamil Nadu, 60%

Others, 40%

FY21E

Hatsun Agro


Pouch film plant to drive savings of ~`120mn

Instead of buying the pouch film used for pouch milk and curd, Hatsun plans to manufacture it on its own in Tamil Nadu. Only Amul has invested in a similar plant. Once GST is implemented it will have to pay GST on the pouch film while buying it from its suppliers based out of Diu and Daman. However, as milk is exempt from GST, Hatsun will not be able to claim set-off for this GST. By manufacturing the film on its own, Hatsun will have to pay GST on only the raw material and not the value addition of converting it into film. This project is expected to cost `400mn with savings of `10mn per month.

In-house cattle feed manufacturing to result in savings of ~`200mn

Post the acquisition of the cattle feed plant in Dec’15, Hatsun plans to augment its manufacturing capacity to 15-20,000t/month. By bringing production in-house, Hatsun will save on conversion charges paid to third-party manufacturers. It is also building storage facility to store four months inventory of raw material. Leveraging its scale of purchase, it plans to save on raw material cost. These initiatives are expected to result in savings of ~`200mn for Hatsun.

Investment in cold storages to help save GST on butter purchase

Hatsun has invested in cold storages with a capacity of 9 lakh litres. Along with ice cream, these cold storages will be used to store butter produced from excess milk in the flush season. Instead of buying butter from outside as done currently, Hatsun will use this butter during the lean season to produce milk and curd. By using butter from internal sources, Hatsun will not have to pay GST, which it would have to if purchased from outside. Also, claiming input tax credit is not possible as pouch milk and curd are GST-exempt goods.

Turnaround of loss-making divisions

Turnaround at Hyderabad and Chittoor to contribute ~`300mn to EBITDA

Hatsun’s dairy operations in Hyderabad are still loss-making while Chittoor operations make low single-digit profit margin. The profitability is impacted due to the high milk procurement price paid to farmers and the lower milk price charged to consumers. Having achieved ~3mn litres of daily milk procurement, in Oct’16, Hatsun reduced the procurement price by `0.75/litre. This should add ~1.7% to EBITDA margin. Through adequate price adjustments for the end-product, Hatsun plans to make these operations adequately profitable. We estimate that 4-5% price hike on pouch milk and curd along with the cut in procurement price can add `300mn to EBITDA over the next two years.

While vertical integration should result in savings over the next 12-15 months, the turnaround of the Hyderabad and Chittoor businesses could take a little longer. Overall, we expect these savings to drive ~200bps EBITDA margin expansion over FY16-21.

Given sales CAGR of 17% and EBITDA margin expansion of ~200bps over FY16-21E, we expect EBITDA CAGR of 23%. Strong cash flows are expected to drive de-leveraging and reduce interest burden with net debt:equity reducing from 2x currently to 0.5x by FY21. This is expected to drive PAT CAGR of 35% over the period.

Hatsun Agro


Ability to become the next Amul of Indian dairy industry demands a premium Although the dairy category is expected to grow at 12-13% CAGR over the next decade, few dairy companies have the ability to benefit from this due to: a) inability to grow milk procurement sustainably outside home territory and b) focus on the wrong set of dairy products to grow sustainably. Hatsun Agro, with its focus on direct milk procurement and pouch milk, has the ability to grow sustainably outside its home state of Tamil Nadu. This should help it more than double its sales and grow PAT 4.5x in the next 5 years with RoCE improving from 17% in FY16 to 25% in FY21. The recent vertical integration investments by Hatsun are increasing the capital intensity in the sector, making entry of new players difficult and strengthening the moats around its business. Our DCF-based valuation of `435 (20% upside) implies 33x FY18E EPS, which is in line with the FMCG sector median valuation.

DCF-based value of `435 (20% upside) Given the cash-generative nature of the business, we use a 3-stage DCF-based model to arrive at a fair value for Hatsun Agro. The assumptions for the weighted average cost of capital and terminal growth rates are shown in the exhibit on the right. We have assumed longer-term debt:equity ratio of 0.25 given its strong cash position and free cash flow generative business. Hence, the company has enough surplus cash available on its balance sheet for capital expenditure in the future.

Stage 1 DCF: FY17-21 – Growth driven by expansion in existing markets

Over FY17-21, we are expecting that Hatsun continues to drive growth only in its existing geographies through its three key products - pouch milk, curd and ice cream. To grow its curd business, Hatsun will have to leverage its existing pouch milk distribution infrastructure. As Hatsun’s sales volumes in the AP and TS markets increase, operations in these markets are expected to become more profitable. Although Hatsun has already started selling its pouch milk, curd and ice cream in a few towns of Maharashtra, we are not factoring a sizable business in this state till FY21. Increase in sales of value-added products like flavoured, UHT milk will add to Hatsun’s growth during this period. We are building in 17%/35% sales/PAT CAGR over FY16-21 with EBIT margin expanding from 5.9% in 8% in FY21.

Stage 2 DCF: FY21-30 – Gaining a foothold in western India

Over FY21-30, we assume that Hatsun’s pace of growth in its existing markets moderates to ~10% due to limited potential to increase market share. We assume that the company will be able to command 5% market share in western India by FY30 with most of the market share gains over FY21-30. We believe the presence of Amul will make growth in western India difficult for Hatsun. As the proportion of value-added products like curd, ice cream, flavoured/UHT milk increase in the mix, capital intensity is expected to reduce marginally with gross block turns increasing from 2.5x in FY21 to 3.2x in FY30 and working capital turns increasing from 31x in FY21 to 37x in FY30. These products would increase the realisation/litre of milk for Hatsun and leverage the existing pouch milk distribution infrastructure. We assume 15%/16% sales/EBIT CAGR over FY21-30 with EBIT margin increasing from 8% in FY21 to 8.3% in FY30.

Hatsun in FY30 = Amul in FY17?

We estimate that Hatsun’s sales would reach `270bn by FY30, which would be almost equal to what GCMMF (the entity which sells Amul dairy products) would report in FY17. In FY30, Hatsun would still be processing only ~1% of the surplus milk in the country. Given the opportunity size, we see limited downside due to the impact of increased competition. However, dilution in focus on direct milk procurement and fresh dairy products could impede growth. Currently, we do not see evidence of this.

Our assumptions for WACC

Item Value

Cost of equity (%) 15.0

Cost of debt (%) 12.0

Debt/Equity ratio (%) 25

Tax rate (%) 30.0

WACC (%) 13.35

Terminal growth rate (%) 5.0

Hatsun Agro


Stage 3 DCF: FY30 onwards - Beyond FY30, we factor in terminal growth of 5% assuming ~3% inflation and ~2% population-led volume growth.

Based on these forecasts, we estimate a DCF-based valuation of `430/share (upside of 25%), implying FY18E P/E multiple of 31x.

Exhibit 55: Hatsun’s cash flow profile


Exhibit 56: Our assumption of operating metrics in the fade period of our DCF-based valuation


Exhibit 57: Hatsun’s RoE and EPS growth


Exhibit 58: Hatsun’s sales growth and EBITDA margin


Valuing Hatsun in line with its FMCG peers

Fresh dairy products are not yet commoditised in India and have significant scope for growth through penetration and shift from unorganised to organised consumption. The profitability of these products is comparable to value-added dairy products. Hence, given the growth prospects, profitability and high return of the fresh dairy segment, we believe Indian companies in this segment can trade at a premium to global peers having exposure to value-added dairy products. Globally, value-added dairy companies trade in line with their FMCG peers. Hatsun, which derives ~80% of sales from fresh dairy products, is best-placed to benefit from the shift towards organised fresh dairy consumption and, hence, deserves to trade in line with Indian FMCG peers. Our DCF-based valuation implies 33x FY18E EPS, which is in line with the implied FY18E P/E for our FMCG coverage.

(2,000)

-

2,000

4,000

6,000

8,000

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

FY20E

FY21E

CFO (Rs mn) Free cash flow (Rs mn)

5%

10%

15%

20%

0

5,000

10,000

15,000

20,000

FY22

FY23

FY24

FY25

FY26

FY27

FY28

FY29

FY30

FCF (Rs mn, LHS)Revenue growth (RHS)

-100%

-50%

0%

50%

100%

150%

0%

10%

20%

30%

40%

50%

60%

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

FY20E

FY21E

ROE (LHS) EPS growth (RHS)

5%

7%

9%

11%

13%

20%

22%

24%

26%

28%

30%

32%

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

FY20E

FY21E

YoY growth in sales (LHS) EBITDA margin (RHS)

Hatsun Agro


Exhibit 59: On 1-year fwd P/E, Hatsun Agro is trading at the lower end of its last 3-year average


Exhibit 60: On 1-year fwd EV/EBITDA, Hatsun Agro is trading at the lower end of its last 3-year average


Exhibit 61: Indian dairy companies vs Indian FMCG companies

Company name CMP (`) Mcap

(` bn) Rev

CAGR EBITDA

CAGR EPS CAGR PE EV/ EBITDA RoE RoCE

Working Capital % of

Sales

CFO/ EBITDA

FY13-16 FY13-16 FY13-16 FY16 FY16 FY16 FY16 FY16 3 yr avg

Dairy companies Hatsun Agro 365 56 17% 27% 30% 57.0 19.1 43% 17% 6% 82%

Prabhat Dairy 110 11 22% 18% 21% 43.8 10.7 5% 7% 27% 20%

Parag Milk Foods 263 22 21% 20% 29% 39.1 16.8 19% 13% 18% 57%

Kwality Dairy 130 31 18% 20% 17% 17.6 12.0 23% 14% 28% 13%

Heritage Foods 889 21 14% 8% 2% 36.3 15.8 26% 20% 0% 97%

Median 18% 20% 21% 39.1 15.8 23% 14% 18% 57%

FMCG HUL 833 1803 8% 13% 2% 44.2 32.0 110% 110% -17% 121%

Dabur 279 491 11% 15% 18% 39.1 28.8 33% 28% 3% 117%

Godrej Cons 1524 519 12% 17% 12% 46.4 30.2 24% 18% 6% 87%

Marico Inds 261 336 10% 19% 22% 46.4 29.2 37% 33% 7% 107%

Britannia Inds 2866 344 12% 43% 46% 42.7 26.0 53% 51% 0% 104%

Nestle India 5922 571 -1% -4% -19% 101.4 34.3 20% 35% -18% 123%

GSK Cons 5137 216 6% 9% 11% 31.5 27.1 30% 32% -20% 187%

Colgate 899 244 10% 12% 5% 42.4 23.8 64% 67% -9% 107%

ITC 247 2991 7% 10% 9% 30.2 17.6 31% 29% -2% 116%

Median 10% 13% 11% 42.7 28.8 33% 33% -2% 116%


10

20

30

40

50

60

70

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Hatsun 1yr fwd PE 3- yr average

+1 s.d. -1 s.d.

10

12

14

16

18

20

22

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Hatsun 1 yr fwd EV/EBITDA 3- yr average

+1 s.d. -1 s.d.

Hatsun Agro


Exhibit 62: Global value-added dairy companies trade at a premium to companies selling basic dairy products and in line with their FMCG peers

Company Name Country Market

Cap (mn USD)

Last 3yr sales CAGR

Gross margin (FY16)

EBITDA margin (FY16)

Profit margin (FY16)

Debt to Equity (FY16)

WC/ Sales

(FY16)

CFO / EBITDA (FY16)

Gross block

turnover

TTM EV/ EBITDA

RRM PE Ratio

Indian dairy companies

Hatsun Agro India 818 16.7 27.7 8.8 2.8 2.9 6% 82% 3.2 19.1 57.0

Prabhat Dairy India 158 22.2 22.3 10.2 2.1 0.2 27% 37% 2.3 10.7 43.8

Parag Milk Foods India 325 21.1 28.4 9.0 2.9 1.0 18% 49% 3.4 16.8 39.1

Kwality Dairy India 450 17.7 9.4 6.1 2.7 1.7 28% 29% 38.3 12.0 17.6

Heritage Foods India 303 14.1 21.1 5.5 2.4 0.4 0% 126% 4.8 15.8 36.3

Median

17.7 22.3 8.8 2.7 1.0 18% 49% 3.4 15.8 39.1

Global dairy companies

Fonterra Shareholders Fund New Zealand

6,745 (1.6) 21.1 11.3 4.7 0.9 6% 148% 1.6 8.0 12.0

Dean Foods USA 1,983 (4.0) 24.3 5.4 (0.1) 1.5 4% 151% 2.9 5.9 15.4

Megmilk Snow Brand Co Ltd Japan 1,968 3.4 23.1 5.4 2.6 0.7 2% 94% 1.7 9.7 20.6

China Mengniu Dairy Co China 7,318 11.3 31.4 8.3 4.8 0.4 13% 59% 2.2 11.0 20.4

Median

0.9 23.7 6.9 3.7 0.8 5% 121% 1.9 8.9 17.9

Global VADP companies

Almarai Saudi Arabia

14,718 11.8 38.3 28.3 13.9 0.9 10% 121% 0.5 14.7 26.8

Nestle Sa-Reg Switzerland 224,523 (0.3) 49.8 17.9 10.2 0.3 -4% 92% 1.7 14.4 26.3

Danone France 41,866 2.4 50.0 16.7 5.7 0.9 -5% 69% 2.1 11.2 21.3

Vietnam Dairy Products Jsc Vietnam 8,128 14.7 40.6 25.6 19.4 0.1 27% 82% 2.8 14.8 21.5

Fromageries Bel France 3,535 3.7 33.6 13.3 6.3 0.4 22% 84% 1.8 8.0 16.8

Whitewave Foods Co USA 9,847 19.6 34.2 12.5 4.4 1.8 0% 70% 2.2 18.3 43.5

Median 7.7 39.4 17.3 8.2 0.7 5% 83% 2.0 14.6 23.9

Global FMCG companies Unilever Plc UK 121,802 1.4 42.2 17.1 9.2 0.9 -14% 85% 2.7 13.4 22.2

Procter & Gamble Co/The USA 226,121 (7.4) 49.6 25.3 16.1 0.5 5% 93% 1.6 14.0 22.8

Reckitt Benckiser Group Plc UK 57,644 (2.5) 59.1 24.6 19.6 0.4 -24% 74% 5.1 18.1 30.4

L'Oreal France 99,461 4.1 71.2 20.4 13.1 0.0 4% 81% 2.8 14.3 32.5

Colgate-Palmolive Co USA 58,895 (2.0) 58.6 20.7 8.6 NA 5% 91% 2.0 14.7 23.7

Median (2.0) 58.6 20.7 13.1 0.4 4% 85% 2.7 14.3 23.7


Hatsun Agro


Risks to our BUY stance Government regulations on milk procurement price: Any government

subsidy similar to the one offered in Karnataka will impact Hatsun’s milk procurement and, hence, our growth estimates. For every `1/litre increase in milk procurement price paid to the farmer, Hatsun’s EBITDA margin is impacted by 200bps. Although part of this impact can be passed on to consumers through price hikes, Hatsun’s milk procurement growth would be impacted.

Volatility in global SMP prices: Sharp increase in global SMP prices could drive higher local milk price, which could marginally impact EBITDA margin expansion. Sharp drop in SMP prices also results in losses on SMP sales. 12 months ago, SMP prices corrected by >50%, resulting in almost 8-10% EBITDA margin loss for Hatsun on its SMP B2B sales. To minimise the impact of volatility of SMP prices on profitability, the company has increased the proportion of SMP sales in 1kg packs instead of bulk B2B sales. B2B sales ensure that the company recovers at least its cost price, thus minimising losses.

Entry of Amul/Mother Dairy or MNC entrant in Hatsun’s dairy market: We see no impact of entry of Amul and Mother Dairy in South India as Hatsun’s moats around its direct milk procurement should help it maintain milk procurement. Amul’s entry into Hyderabad hasn’t impacted Hatsun sales in that city. In Tamil Nadu, Hatsun already sells its pouch milk at a 10% premium to its local competitor, Aavin.

Execution failure of the vertical integration initiatives: The company has planned several vertical integration initiatives over the next 12 months. Any delays in executing these capex plans or lower than expected savings from these initiatives can severely impact return ratios and lead to lower than expected EBITDA margin expansion.

Time/capital misallocation to ventures outside dairy industry: Hatsun has ventured into frozen food under the ‘Oyalo’ brand. While the capital employed currently under this initiative is negligible (`80mn), the downside from failure of this initiative is limited. Given the long growth ramp for dairy sector in India, we believe diversifications outside the dairy industry domain on a larger scale could lead to distraction for the management and possible capital misallocation.

Catalysts EBITDA margin expansion in FY18: We expect EBITDA margin expansion of

~100bps YoY for FY18 to ~10% driven by the company’s vertical integration investments. This will be the key catalyst for the stock over the next 12 months.

Market share gains in new regions: We expect Hatsun to grow by over 15% (ahead of regional peers like Heritage Foods) over FY18-21 driven by growing presence in Andhra Pradesh and Telangana in product categories like pouch milk and curd. This should help the company increase its pouch milk and curd market share in South India (ex-Kerala) from 14% currently to ~20% by FY21.

Exhibit 63: Explanation for our accounting score

Segment Score Comments

Accounting GREEN Hatsun scores well on cash conversion, related party transactions, RoE and working capital cycle compared to its peers; however, debt to equity is relatively high.

Predictability AMBER Predictability of earnings for a dairy business is low due to the volatility in milk prices.

Earnings Momentum AMBER There is no coverage on this stock by other analysts. EBITDA margin expansion of ~200bps in FY16 ahead of expectations should have ideally led to positive earnings momentum.


Hatsun Agro


Exhibit 64: Hatsun’s forensic score evolution - score declined in 2015 due to slightly lower cash conversion but recovered in 2016

Source: Ambit ‘HAWK’, Ambit Capital research, Note: Using our ‘accounting framework’, we categorise the market into deciles on the basis of their accounting quality with ‘D1’ indicating the best decile and ‘D10’ indicating the worst decile. Our analysis points towards a strong link between accounting quality and share price performance.

Exhibit 65: Hatsun’s greatness score has improved due to higher sales and profit growth vs peers

Source: Ambit ‘HAWK’, Ambit Capital research, Note: On our ‘greatness framework’, on a scale of 0 to 100, a small minority of outstanding companies tend to score above 67 whilst most companies tend to have scores below 50

Hatsun Agro


Balance Sheet

Year to March (` mn) FY15 FY16 FY17E FY18E FY19E

Shareholders' equity 109 109 152 152 152

Reserves & surpluses 2,106 2,198 3,220 4,834 6,452

Total networth 2,215 2,307 3,372 4,986 6,604

Minority Interest 0 0 0 0 0

Preference share capital 0 0 0 0 0

Debt 6,137 6,715 8,350 10,500 11,250

Deferred tax liability 285 261 261 261 261

Total liabilities 8,637 9,283 11,983 15,747 18,115

Gross block 10,170 11,322 16,422 21,422 25,672

Net block 6,322 6,472 10,213 13,605 15,853

CWIP 234 325 325 325 325

Investments 8 3 3 3 3

Cash & equivalents 236 294 207 347 204

Debtors 126 149 160 190 224

Inventory 2,585 3,468 2,416 2,870 3,382

Loans & advances 1,025 820 1,073 1,275 1,503

Other current assets 20 43 37 44 52

Total current assets 3,992 4,775 3,893 4,726 5,364

Current liabilities 1,728 2,201 2,286 2,715 3,199

Provisions 192 90 165 196 230

Total current liabilities 1,920 2,292 2,450 2,911 3,430

Net current assets 2,072 2,483 1,443 1,815 1,934

Miscellaneous 0 0 0 0 0

Total assets 8,637 9,283 11,983 15,747 18,115


Income statement


Operating income 29,331 34,446 40,083 47,615 56,103

% growth 17.6% 17.4% 16.4% 18.8% 17.8%

Operating expenditure 27,348 31,399 36,487 42,700 50,088

Operating profit 1,983 3,047 3,596 4,914 6,015

% growth 11.6% 53.6% 18.0% 36.7% 22.4%

Depreciation 940 1,071 1,359 1,608 2,001

EBIT 1,043 1,976 2,236 3,306 4,013

Interest expenditure 634 683 697 848 979

Non-operating income 65 46 40 48 56

Adjusted PBT 474 1,340 1,580 2,505 3,091

Tax 82 365 332 526 649

Adjusted PAT/ Net profit 392 975 1,248 1,979 2,442

% growth -52% 149% 28% 59% 23%

Extra Ordinary Items - (370) - - -

Reported PAT / Net profit 392 605 1,248 1,979 2,442

Minority Interest - - - - -

Share of associates 0 0 0 0 0

Adjusted Consolidated net profit 392 605 1,248 1,979 2,442

Reported Consolidated net profit 392 605 1,248 1,979 2,442


Hatsun Agro


Cash flow statement


EBIT 1,108 2,022 2,276 3,353 4,069

Depreciation 940 1,071 1,359 1,608 2,001

Others (28) (14) - - -

Tax (110) (327) (332) (526) (649)

(Incr) / decr in net working capital (1,281) (537) 952 (232) (262)

Cash flow from operations 615 2,186 4,257 4,203 5,160

Capex (1,247) (1,353) (5,100) (5,000) (4,250)

(Incr) / decr in investments - 5 - - -

Interest/Dividend Received 4 6 - - -

Others (0) (0) - - -

Cash flow from investments (1,243) (1,342) (5,100) (5,000) (4,250)

Net borrowings 2,575 551 1,635 2,150 750

Issuance of equity 300 - - - -

Interest paid (634) (662) (697) (848) (979)

Dividend paid (78) (675) (183) (365) (824)

Others (1,406) 2 - - -

Cash flow from financing 756 (783) 756 937 (1,053)

Net change in cash 128 61 -88 140 -143

Closing cash balance 233 294 207 347 204

Free cash flow (632) 833 (843) (797) 910


Ratio analysis

Year to March (%) FY15 FY16 FY17E FY18E FY19E

EBITDA margin (%) 6.8% 8.8% 9.0% 10.3% 10.7%

EBIT margin (%) 3.8% 5.9% 5.7% 7.0% 7.3%

Net profit margin (%) 1.3% 2.8% 3.1% 4.2% 4.4%

Dividend payout ratio (%) 60.1% 53.7% 14.6% 14.6% 14.6%

Net debt: equity (x) 2.7 2.8 2.4 2.0 1.7

Working capital turnover (x) 18.5 24.1 17.9 12.5 12.2

Gross block turnover (x) 3.2 3.2 2.9 2.5 2.4

RoCE (%) 12.1% 16.9% 17.3% 19.5% 19.3%

RoE (%) 19.5% 43.1% 43.9% 47.4% 42.1%


Valuation Parameters


EPS (`) 2.6 6.4 8.2 13.0 16.0

Diluted EPS (`) 2.6 6.4 8.2 13.0 16.0

Book value per share (`) 14.6 15.2 22.2 32.8 43.4

Dividend per share (`) 1.8 4.0 1.2 2.4 5.4

P/E (x) 141.8 57.0 44.5 28.1 22.7

P/BV (x) 25.1 24.1 16.5 11.1 8.4

EV/EBITDA (x) 31.0 20.3 17.7 13.4 11.1

Price/Sales (x) 1.9 1.6 1.4 1.2 1.0


Hatsun Agro


Appendix 1: Shareholding pattern and BoDs Exhibit 66: Hatsun Agro shareholding pattern as on Sep’16

Source: BSE India, Ambit Capital research

Exhibit 67: Share pledge by the promoter has reduced as his stake has increased in the company

Promoter shareholding %

% of promoter shareholding pledged

FY09 73.0% 45.5%

FY10 73.1% 49.7%

FY11 69.1% 42.6%

FY12 69.4% 21.0%

FY13 74.3% 31.3%

FY14 75.0% 21.5%

FY15 74.6% 19.8%

FY16 74.7% 5.3%


Exhibit 68: >50% of the directors on the board are independent directors

Board of Directors Since Designation Background

RG Chandramogan

Chairman & MD Promoter of Hatsun Agro. Was Board member of City Union Bank till Jul'16. Currently on board of Tonokya Food Pvt. Ltd. and Angel Equity Management P Ltd.

KS Thanrajan 1999 Joint MD Resigned in Dec'16

C Sathyan 2003 Executive Director Son of RG Chandramogan

P Vaidyanathan 1999 Independent Director Chairman, Integrated Enterprises India; ex-Chairman of City Union Bank

N Chandrasekaran 2005 Independent Director Managing Director, Fichtner Consulting Engineers Ltd

B Thenamuthan 2014 Independent Director Managing Director of Karnataka News Publications Private Limited

Balaji Tammineedi 2014 Independent Director Was the Managing Director of M/s.Jyothi Diary which Hatsun acquired in 2013

Chalini Madhivanan 2014 Independent Director Woman BoD; is an opthalmologist and Executive Director of M/s.M.N.Eye Hospital Private Limited


Promoters, 74.7%

Institutions, 3.3%

Others, 22.0%

Hatsun Agro


Appendix 2: John Kay’s IBAS framework “I don’t want an easy business for competitors. I want a business with a moat around it. I want a very valuable castle in the middle and I want the duke who is in charge of that castle to be very honest and hardworking and able. Then I want a moat around that castle. The moat can be various things. The moat around our auto insurance business, GEICO, is low cost.” – Warren Buffett

“I always try and spend the last few minutes… to touch on a competitor, or a company they do business with, such as a supplier or a customer. Although not all managements will talk about other companies, when they do, it can be very revealing. The ultimate commendation is when a company talks positively about a competitor. I always put a strong weight on such a view.”

– Anthony Bolton, the legendary fund manager who ran the Fidelity Special Situations fund

Sustainable competitive advantages allow firms to add more value than their rivals and to continue doing so over long periods of time. But where do these competitive advantages come from? And why is it that certain firms seem to have more of these advantages than others?

In his 1993 book, ‘Foundations of Corporate Success’, John Kay, the British economist and Financial Times columnist, wrote more comprehensibly and clearly about this than any other business guru. John states that “sustainable competitive advantage is what helps a firm ensure that the value that it adds cannot be competed away by its rivals”. He goes on to state that sustainable competitive advantages can come from two sources: distinctive capabilities or strategic assets. Whilst strategic assets can be in the form of intellectual property (patents and proprietary knowhow), legal rights (licenses and concessions) or a natural monopoly, the distinctive capabilities are more intangible in nature.

Distinctive capabilities, says Kay, are those relationships that a firm has with its customers, suppliers or employees, which cannot be replicated by other competing firms and which allow the firm to generate more value additions than its competitors. He further divides distinctive capabilities into three categories:

Brands and reputation

Architecture

Innovation

Let us delve into these in more detail, as understanding them is at the core of understanding the strength of a company’s franchise.

Brands and reputation

"A product can be quickly outdated, but a successful brand is timeless." – Stephen King, American novelist, author & TV Producer

In many markets, product quality, in spite of being an important driver of the purchase decision, can only be ascertained by a long-term experience of using that product. Examples of such products are insurance policies and healthcare. In many other markets, the ticket price of the product is high; hence, consumers are only able to assess the quality of the product only after they have parted with their cash. A few examples of such products would be cars and high-end TVs.

In both these markets, customers use the strength of the company’s reputation as a proxy for the quality of the product or the service. For example, we gravitate towards the best hospital in town for critical surgery and we tend to prefer world-class brands whilst buying expensive home entertainment equipment. Since the reputation for such high-end services or expensive electronics takes many years to build, reputation tends to be difficult and costly to create. This in turn makes it a very powerful source for a competitive advantage.

Sustainable competitive advantages allow firms to add value and continue doing so over long periods

John Kay’s framework focusses on ‘Innovation’, ‘Brands’, ‘Architecture’ and ‘Strategic Assets’ as the sources of sustainable competitive advantage

“A product can be quickly outdated, but a successful brand is timeless”

Hatsun Agro


For products that we use daily, we tend to be generally aware of the strength of a firm’s brand. In more niche products or B2B products (e.g. industrial cables, mining equipment, municipal water purification, and semiconductors), investors often do not have first-hand knowledge of the key brands in the relevant market. In such instances, to assess the strength of the brand, they turn to:

Brand recognition surveys conducted by the trade press.

The length of the warranties offered by the firm (the longer the warranties, the more unequivocal the statement it makes about the firm’s brand).

The amount of time the firm has been in that market (e.g. “Established 1905” is a fairly credible way of telling the world that since you have been in business for over a century, your product must have something distinctive about it).

How much the firm spends on its marketing and publicity (a large marketing spend figure, relative to the firm’s revenues, is usually a reassuring sign).

How much of a price premium the firm is able to charge vis-a-vis its peers.

One way to appreciate the power of brands and the reputation to generate sustained profits and hence, shareholders’ returns, is to look at how India’s most-trusted brands, according to an annual Economic Times survey, have fared over the last decade. As can be seen in the table below, over the past decade, the listed companies with the most powerful brands have comfortably beaten the most widely acknowledged frontline stock market index by a comfortable margin on revenues, earnings and share price movement.

Exhibit 69: Performance of listed companies with the most-trusted brands

# Company Trusted Brands* 10-year Growth (FY04-14) (% CAGR)**

Revenues EPS Share price***

1 Colgate-Palmolive Colgate (1) 14 17 27

2 Hindustan Unilever

Clinic Plus (4), Lifebuoy (10), Rin (12), Surf (13), Lux (14), Ponds, etc

10 8 15

3 Nestle Maggi (9), Nestle Milk Chocolate (62), etc 15 16 23

4 GSK Consumer Horlicks (16) 15 21 33

5 Bharti Airtel Airtel (18) 33 18 15

Average for the listed companies with the top 5 brands 18 16 22

For the index, Nifty 12 13 14

Source: Economic Times and Ambit Capital analysis using Bloomberg data. Note: * Figures in brackets indicate the rank in the 2012 Economic Times ‘brand equity’ survey to find the 100 most-trusted brands in India. ** The FY14 data is based on Bloomberg consensus as on 7 April 2014. *** Share price performance has been measured from Mar-04 to Mar-14

Architecture

“A dream you dream alone is only a dream. A dream you dream together is reality.” – John Lennon

‘Architecture’ refers to the network of contracts, formal and informal, that a firm has with its employees, suppliers and customers. Thus, architecture would include the formal employment contracts that a firm has with its employees and it would also include the more informal obligation it has to provide ongoing training to its employees. Similarly, architecture would include the firm’s legal obligation to pay its suppliers on time and its more informal obligation to warn its suppliers in advance if it were planning to cut production in three months.

Such architecture is most often found in firms with a distinctive organisational style or ethos, because such firms tend to have a well-organised and long-established set of processes or routines for doing business. So, for example, if you have ever taken a home loan in India, you will find a marked difference in the speed and professionalism with which HDFC processes a home loan application as compared to other lenders. The HDFC branch manager asks the applicant more specific questions than other lenders do and this home loan provider’s due diligence on the applicant and the property appears to be done more swiftly and thoroughly than most other lenders in India.

Listed companies with the most-trusted brands have beaten the benchmark index on revenues, earnings and share price performance

‘Architecture’ refers to the network of contracts, formal and informal, that a firm has with its employees, suppliers and customers

Hatsun Agro


So, how can an investor assess whether the firm they are scrutinising has architecture or not? In fact, whilst investors will often not know the exact processes or procedures of the firm in question, they can assess whether a firm has such processes and procedures by gauging the:

extent to which the employees of the firm co-operate with each other across various departments and locations.

rate of staff attrition (sometimes given in the Annual Report).

extent to which the staff in different parts of the firm give the same message when asked the same question.

extent to which the firm is able to generate innovations in its products or services or production processes on an ongoing basis.

At the core of successful architecture is co-operation (within teams, across various teams in a firm and between a firm and its suppliers) and sharing (of ideas, information, customer insights and, ultimately, rewards). Built properly, architecture allows a firm with ordinary people to produce extraordinary results.

Perhaps the most striking demonstration of architecture in India is the unlisted non-profit agricultural co-operative, Gujarat Cooperative Milk Marketing Federation Ltd (GCMMF), better known to millions of Indians as ‘Amul’.

With its roots stretching back to India’s freedom movement, GCMMF was founded by the legendary Verghese Kurien in 1973. This farmer’s co-operative generated revenues of `137bn (around US$2.1bn) in FY13, thus making it significantly larger than its main private sector competitor, Nestle (FY13 revenues of `91bn or around US$1.5bn). Furthermore, GCMMF’s revenues have grown over the past five years by 21% as opposed to Nestle’s 16% over the same period. In fact, GCMMF’s revenue growth is markedly superior to the vast majority of the top Indian brands shown in exhibit 27.

GCMMF’s daily milk procurement of 13 million litres from over 16,000 village milk co-operative societies (which include 3.2 million milk producer members) has become legendary. The way GCMMF aggregates the milk produced by over 3 million families into the village co-operative dairy and then further aggregates that into the district co-operative which in turn feeds into the mother dairy has been studied by numerous management experts.

Not only does the GCMMF possess impressive logistical skills, its marketing acumen is comparable to that of the multinational giants cited in the table shown above: In key FMCG product categories such as butter, cheese and packaged milk, Amul has been the longstanding market leader in the face of sustained efforts by the multinationals to break its dominance. GCMMF is also India’s largest exporter of dairy products.

So how does GCMMF do it? How does it give a fair deal to farmers, its management team (which includes the alumnus from India’s best business schools), its 5,000 dealers, its 1 million retailers and its hundreds of millions of customers? Although numerous case studies have been written on GCMMF, at the core of this co-operative’s success appears to be: (a) its 50-year old brand with its distinctive imagery of the little girl in the polka red dotted dress; (b) the idea of a fair deal for the small farmer and the linked idea of the disintermediation of the unfair middle man; and (c) the spirit of Indian nationalism in an industry dominated by globe girdling for-profit corporates.

HDFC and GCMMF are the most striking demonstrations of architecture in India

Hatsun Agro


Innovation

“Learning is not compulsory … neither is survival.” – W Edwards Deming, American statistician, professor, author. The world’s

most famous prize for manufacturing excellence is named after him. "Innovation distinguishes between a leader and a follower."

– Steve Jobs Whilst innovation is often talked about as a source of competitive advantage, especially in the Technology and Pharmaceutical sectors, it is actually the most tenuous source of sustainable competitive advantage as:

Innovation is expensive.

Innovation is uncertain - the innovation process tends to be a ‘hit or miss’.

Innovation is hard to manage due to the random nature of the process.

Furthermore, even when the expensive innovation process yields a commercially useful result, the benefits can be competed away, as other firms replicate the innovator and/or employees who have driven the innovation process and tend to extract the benefits of innovation through higher compensation.

In fact, innovation is more powerful when it is twinned with the two other distinctive capabilities we have described above – reputation and architecture. Apple is the most celebrated example of a contemporary firm which has clearly built a reputation for innovation (think of the slew of products from Apple over the past decade which first changed how we access music, then changed how we perceive our phones and finally, how we use our personal computers).

Strategic assets

In contrast to the three distinctive capabilities discussed above, strategic assets are easier to identify as sources of competitive advantages. Such assets can come in different guises:

Intellectual property i.e. patents or proprietary knowhow (e.g. the recipe for Coke’s famous syrup which is a closely held secret and kept in the company’s museum in Atlanta, Georgia);

Licences and regulatory permissions to provide a certain service to the public, e.g., telecom, power, gas or public transport;

Access to natural resources such as coal or iron ore mines;

Political contacts either at the national, state or city level;

Sunk costs incurred by the first mover, which result in other potential competitors deciding to stay away from that market e.g. given that there already is a Mumbai-Pune highway operated by IRB, it does not make sense for anyone else to set up a competing road; and

Natural monopolies i.e. sectors or markets which accommodate only one or two firms; for example, the market for supplying power in Mumbai is restricted to one firm, Tata Power.

Whilst strategic assets can come in different forms, all of them result in a lower per unit cost of production for the firm owning the asset relative to its competitors. For example, Tata Steel’s decades-old access to coal and iron-ore from its captive mines allows it to make more money per tonne of steel produced than any other steel manufacturer in India. According to Ambit Capital’s analysts, on a tonne of steel produced, Tata Steel earns `45,000 vs `39,000 for SAIL and `38,000 for JSW Steel.

Unsurprisingly therefore among the top-50 companies by market cap in India since the Nifty was launched in 1995, there is only one conglomerate – Tata Sons - which has had three companies which have been in the index more or less throughout this period i.e., Tata Power, Tata Steel and Tata Motors.

Whilst most talked about, ‘Innovation’ is also the most tenuous source of sustainable competitive advantage …

… ’strategic assets’ on the other hand are easier to identify

Access to captive coal and iron ore results in more money per tonne of steel for Tata Steel vs its competitors due to lower cost of production

Hatsun Agro


Upon closer examination, the Tatas are an almost text book case of how to build businesses which, without being the most innovative players in town, combine architecture and brands to great effect, thereby creating robust sources of sustainable competitive advantages. The group seems to have created at least three specific mechanisms to ensure that these sources of competitive advantage endure:

Firstly, Tata Sons, an unlisted company (owned by several philanthropic trusts endowed by members of the Tata family), is the promoter of the major operating Tata companies and holds significant shareholdings in these companies. Tata Sons’ patient, long-term orientation in terms of building large and robust businesses gradually has played a major role in the stability of the listed Tata businesses.

Secondly, Tata Quality Management Services (TQMS), a division of Tata Sons, assists Tata companies in their business excellence initiatives through the Tata Business Excellence Model, Management of Business Ethics and the Tata Code of Conduct. TQMS, quite literally, provides the architecture to harmonise practices in various parts of the Tata empire.

Thirdly, Tata Sons is also the owner of the Tata name and several Tata trademarks, which are registered in India and around the world. These are used by various Tata companies under a license from Tata Sons as part of their corporate name and/or in relation to their products and services. The terms of use of the group mark and logo by Tata companies are governed by the Brand Equity and Business Promotion Agreement entered into between Tata Sons and Tata companies.

The Tatas have combined architecture with brand to create robust sources of sustainable competitive advantages

Hatsun Agro


Institutional Equities Team Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected] Pramod Gubbi, CFA Head of Equities (022) 30433124 [email protected]

Research Analysts

Name Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected] Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected] Abhishek Ranganathan, CFA Retail (022) 30433085 [email protected] Anuj Bansal Mid-caps (022) 30433122 [email protected] Aditi Singh Economy / Strategy (022) 30433284 [email protected] Ashvin Shetty, CFA Automobile (022) 30433285 [email protected] Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected] Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 [email protected] Dhiraj Mistry, CFA Consumer (022) 30433264 [email protected] Gaurav Khandelwal, CFA Automobile (022) 30433132 [email protected] Girisha Saraf Mid-caps / Small-caps (022) 30433211 [email protected] Karan Khanna, CFA Strategy (022) 30433251 [email protected] Mayank Porwal Retail (022) 30433214 [email protected] Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected] Paresh Dave, CFA Healthcare (022) 30433212 [email protected] Parita Ashar, CFA Metals & Mining / Aviation (022) 30433223 [email protected] Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 [email protected] Rahil Shah Banking / Financial Services (022) 30433217 [email protected] Ravi Singh Banking / Financial Services (022) 30433181 [email protected] Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 [email protected] Ritesh Vaidya, CFA Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected] Ritu Modi Automobile (022) 30433292 [email protected] Sagar Rastogi Technology (022) 30433291 [email protected] Sudheer Guntupalli Technology (022) 30433203 [email protected] Sumit Shekhar Economy / Strategy (022) 30433229 [email protected] Utsav Mehta, CFA E&C / Industrials (022) 30433209 [email protected] Vivekanand Subbaraman, CFA Media (022) 30433261 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 [email protected] Dharmen Shah India / Asia (022) 30433289 [email protected] Dipti Mehta India (022) 30433053 [email protected] Krishnan V India / Asia (022) 30433295 [email protected] Nityam Shah, CFA Europe (022) 30433259 [email protected] Punitraj Mehra, CFA India / Asia (022) 30433198 [email protected] Shaleen Silori India (022) 30433256 [email protected]

Singapore

Praveena Pattabiraman Singapore +65 6536 0481 [email protected] Shashank Abhisheik Singapore +65 6536 1935 [email protected]

USA / Canada

Ravilochan Pola – CEO Americas +1(646) 793 6001 [email protected] Hitakshi Mehra Americas +1(646) 793 6002 [email protected] Achint Bhagat, CFA Americas +1(646) 793 6752 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected] Sharoz G Hussain Production (022) 30433183 [email protected] Jestin George Editor (022) 30433272 [email protected] Richard Mugutmal Editor (022) 30433273 [email protected] Nikhil Pillai Database (022) 30433265 [email protected]
















































Hatsun Agro


Hatsun Agro Products Ltd (HTSMF IN, BUY)


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Hatsun Agro Products Ltd

Hatsun Agro


Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs

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Hatsun Agro


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Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. © Copyright 2016 AMBIT Capital Private Limited. All rights reserved.

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