Question based on Share Holder Value Maximizations ?
Hatsun Agro Product limited (HAPL) over the last Five years has shown a steady growth in its sales revenue and profits. The annual growth rate of company for profits over the last five years has been approximately 41%. The value addition the company has created to the shareholder can be analyzed based on the company's growth factor , profitability, risk and its capital market vital conditions. Company compared with two of the company's peers Modern Diaries limited and Heritage Food India Limited. All the three companies operate in the sector of Milk and Dairy product. The major revenue generators for the three companies are Dairy products, and the products are strongly brand driven in their respective market segments and its growth .
The profitability of HAPL over the last five years can be analyzed using profitability financial ratios like Return on Assets (ROA) and Return on Capital Employed (ROCE). In the last five years there has been a consistent increase in the return on assets (Table 1). Though there is a fall in the profitability of the company in the year 2005. During this year HAPL entered into international markets and the decline in profitability is due to increase in the input costs and entry level export pricing of milk and dairy products. There was an overall increase in the expenditure profile due to the creation of additional infrastructure. In the subsequent three years the ROA had been increasing when it compared with the peers, where their respective ROAs have been falling.
|
|
2004
|
2005
|
2006
|
2007
|
2008
|
|
Hatsun Agro Products Ltd.
|
5.20
|
0.52
|
2.66
|
4.67
|
7.74
|
|
Heritage Foods (India) Ltd.
|
15.12
|
9.39
|
11.43
|
0.18
|
0.33
|
|
Modern Dairies Ltd.
|
6.17
|
2.76
|
11.09
|
2.39
|
3.58
|
Table 1 : Return on Assets
The return on assets could be further analyzed based on the asset utilization ratio and profit margin. This will help in identifying the company's drivers for the profitability - sales turnover or profit margin.
|
(In Percentage)
|
2004
|
2005
|
2006
|
2007
|
2008
|
|
Hatsun Agro Products Ltd.
|
1.47
|
0.16
|
0.77
|
1.38
|
2.00
|
|
Heritage Foods (India) Ltd.
|
6.13
|
3.80
|
4.51
|
0.09
|
0.16
|
|
Modern Dairies Ltd.
|
2.19
|
1.30
|
7.10
|
1.65
|
1.59
|
Table 2 Profit Margin
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(In Percentage)
|
2004
|
2005
|
2006
|
2007
|
2008
|
|
Hatsun Agro Products Ltd.
|
281
|
296
|
331
|
322
|
327
|
|
Heritage Foods (India) Ltd.
|
212
|
255
|
231
|
157
|
166
|
|
Modern Dairies Ltd.
|
274
|
211
|
123
|
105
|
203
|
Table 3 Asset Utilization
The Profit Margin of HAPL for the last three years has been increasing marginally, but still the company operates at a very low profit margin. The peers in this industry are also having very thin profit margins. But the asset utilization for the company is increasing consistently and clearly indicates the company's driver is Sales turnover. In comparison with the peers this data leads to the understanding that the dairy industry is managed with a very thin profit margin and the Sales volume of the company is which improves the profitability of the company and in turn adds value to the shareholders. For the peers, the decline in the asset utilization is clearly the reason for the fall in profitability.
Also in the year 2005 there was a fall in the profit margin for the company and its peers. Milk procurement faced challenges due to intensified competition in milk procurement and severe droughts in South India. This resulted in shortage of milk and exorbitant increase in milk procurement prices. As per the directors report of Heritage foods India Limited, the selling price of fat related milk products prices declined by 19% during the period. This is the major reason for the fall in the operating margins for the companies. HAPL has improved its profitability after the decline in the year 2005.
The rating for the Hatsun Agro in-terms of Profitability will be a Positive (+).
The Growth prospects of the company can be analyzed based on the compounded annual growth rate of profits.
|
(In Percentage)
|
Over 5 yrs
|
|
Hatsun Agro Products Ltd.
|
41.27
|
|
Heritage Foods (India) Ltd.
|
-42.45
|
|
Modern Dairies Ltd.
|
28.42
|
Table 4 CAGR of PAT
The CAGR of profit after tax of HAPL for the last five years is approximately 41%. This is a clear indication of the growth prospects for the company also. When compared with the peers the CAGR of HAPL is very high. The CAGR for Heritage Foods India Ltd is negative because of huge investments made by the company in new retail outlets and capacity expansions. The AGR of Heritage Foods is 194% and that of Hatsun is 112%. The CAGR of Sales for HAPL is over the last five years is approximately 22%.
|
(In Percentage)
|
Over 5 yr
|
|
Hatsun Agro Products Ltd.
|
21.67
|
|
Heritage Foods (India) Ltd.
|
24.80
|
|
Modern Dairies Ltd.
|
29.42
|
Table 5 CAGR of Sales
The CAGR of sales for the peers is around an average of 25% and hence the growth of the sales for HAPL is in line with the market and not exceptionally growing when compared with the peers. The expected CAGR for future profits specific to HAPL is unavailable, but the dairy industry in India is growing at a CAGR of 4% compared to the world dairy industry CAGR of 1.1%.The world milk output is expected to grow at a rate of 1.9% over next 8 years and mainly the output growth would come from BRIC (Brazil, Russia, India and China) countries.
HAPL has shown a constant growth in exports of dairy products. The company is also doubling its milk powder production capacity to over 180 tonnes a day.As per the information provided by the company to the stock exchange, it plans to open a wholly-owned subsidiary in Dubai to maximize business opportunities in dairy products.
Given the company's expansion plans and the industry's growth, HAPL's growth prospects look positive.
The rating for the Hatsun Agro in-terms of Growth will be a Positive (+).
The risk involved in the business of HAPL can be identified from the standard deviation of profitability. The standard deviation of ROA will be a good measure to identify the risk the company has in the market.
|
( ROA of last 5 years Considered)
|
Covariance
|
Standard Deviation
|
|
Hatsun Agro Products Ltd.
|
0.654457
|
2.72
|
|
Heritage Foods (India) Ltd.
|
0.924743
|
6.74
|
|
Modern Dairies Ltd.
|
0.695054
|
3.61
|
Table 6 Standard Deviation of ROA
The standard deviation of ROA for the last five years for HAPL is low when compared to its peers. The same can be seen in the covariance of ROA over the last five years. The potential risk for the company could be the one faced by dairy industry like distortion in rainfall pattern, non-availability of fodder and water resources, and increase in procurement cost. This pattern was seen in the year 2005 were due to severe droughts the inputs cost raised which resulted in the dip in the profits. Seeing this as an industry wide risk, the risk factor for HAPL is not very high.
The rating for the Hatsun Agro in-terms of the Risk will be a Neutral (0).
The other influencing factor that has an effect on the value of the share is the capital market conditions of the company. HAPL owns two of the very strong brands in south India. Arun ice cream and Arokya milk are household names in most of the southern parts of India. The company is also in the process of building other brands like Komatha milk - low fat milk, which is targeted for a different market segment and Apurva Dal. The milk brand of HAPL stands for quality in addition to cost effectiveness. Arokya milk stands for higher quality in the minds of customer. The company has maintained a high reputation among the public and the market perception of the company are not negative.
The rating for the Hatsun Agro in its Capital market conditions will be a Neutral (0).
|
|
Profitability
|
Growth
|
Risk
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Capital Market Conditions
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Overall
|
|
Rating
|
+
|
+
|
0
|
0
|
2+
|
The P/E Ratio of Hatsun Agro as on 10 Jan 2009 is 7.41 and the rating of 2+ validates why market is ready to pay 7 times more than the earnings per share of the company. Based on the analysis using the four factors of share holder value maximization, HAPL is a significant value creator for its share holders.