There must be some issue with the ‘search’ functionality or I just dont know how to search, but I had tried to search for the thread on ‘Hatsun Agro’ at valuepickr but I could not find it. Wanted to confirm if I was aware of all the negatives, so I wanted to check it here! J
Dairy sector overview
Our farmers generally have small land holdings and such farmers usually donât go for crops like rice/wheat/sugarcane etc but rather focus on horticulture (fruits, vegetables, spices), dairy, poultry and so on. The advantage of dairy over horticulture is that the price of milk keeps raising while there can be ups and downs in horticulture. Dairy for a farmer would be the equivalent of debt instruments for an investor I presume!
Currently, in India, the total milk procurement is about 130 million metric tons, which is 16% of the total world production and 21% (I guess by value) of India’s agricultural production. Just around 1/4 th to 1/3rd (by different estimates) of the milk produced in India is consumed by the organized sector (cooperatives, private dairies) while the rest is by the unorganised sector. Upto the 90s, dairy industry mainly constituted of the cooperatives. Now the private sector contribution is around half of the total production by the organized sector. Cooperatives process 90% of the milk procured as liquid milk, while the private sector sells only 20% as liquid milk. Rest of them are value-added products like butter, ghee, milk powder, ice cream, yoghurt, sweets, spreads, cheese, flavoured milk, butter milk, paneer etc.
Company overview
The biggies in this sector amongst the cooperatives are Amul followed by KMF. KMF has the least margin (as in, it pays the most to the farmers) amongst all dairy companies while Amul pays almost 3/4 of the selling price of milk to its farmers. Hatsun agro is the largest private player in the industry but much smaller than the biggies in the cooperative industry. For comparison, Amul had revenues of US$2.4 billion in 2011 against US$260 million by Hatsun.
Hatsun procures around 2.4 million litres of milk.
**Hatsun Products **
Hatsun - Dairy Whitener, Skimmed Milk Powder, Agmark Certified Ghee, Butter, Cooking Butter Arokya - Milk, Curd, Paneer and Buttermilk through the Brand Hatsun Milk & Milk Products
Arun â Ice creams (mass market)
Ibaco â Specialty ice cream parlours, ice cream cakes for marriages/parties
Competition
Selling milk is a fairly commoditized market. While brands are important (with people usually sticking to one particular brand of milk), I donât think itâs good enough to command any sort of a premium. The margin of a dairy company is mainly decided by the value-added segment. Even in the value-added segment, the competition is intense. Each and every category, be it ghee, butter, butter-oil or milk powder, there are thousands of unorganized entities, hundreds of private dairies and cooperatives as well as foreign companies. The competition may be intense, but not cut-throat (yet), simply because the demand is far higher than the supply.
Positives of Hatsun
Hatsunâs goal is to sell less of liquid milk but instead go for more of value-added products. More so into flavoured milk (not yet), yoghurt (its in it already but a small player) and ice creams (Arun, Ibaco). The Arun brand of ice creams I guess is similar to Vadilal. Both are small players who mainly sell in a particular region (South India and West India respectively). Even though Hatsun claims to be the leading player in South India, I donât see a lot of it in Karnataka and so I guess its sales are mostly in Tamil Nadu. Less than 8% of Hatsunâs revenue came from ice creams but it is set to go higher as it is increasing its Ibaco ice cream parlours. There are no other listed players in the luxury ice cream segment. There are a number of foreign players in the speciality/luxury end of ice creams like Baskin Robbins, but they operate at a price point much higher than Ibaco (similar to Eicherâs Royal Enfield to a Harley Davidson! J ). Have been reading reviews of Ibaco and they have been fairly decent. Ibaco is THE reason why I bought shares of Hatsun.
Negatives of Hatsun
Current contribution of ice creams in Hatsunâs revenue is very small. Ibaco has just started and while its successful in its current form, the real question is whether Ibaco can be scaled up going forward. Nestle (Haagen Dazs) was in gourmet ice cream category many years back but had discontinued it; its set to re-enter the Indian market. Amul and Kwality Walls (HUL) have major plans for this segment. There are good quality Indian competitors (Natural ice creams, Pabraiâs Fresh & Naturelleâs).
Hatsun does not have a lot of debt but most of the promoterâs shares are pledged. I donât know why it is so. Is it possible that promoter can pledge their shares to use the extra cash to buy more shares from the market?
They have bought a stake in a wind mill company. IIRC its claimed in the AR that it was done to ensure continuos/cheap power supply. Not at all convincing, sounds like diworsification.
Instead of paying dividends, I would have preferred the company to invest into cold chains and extend its reach into other markets. Ibaco as of now is mainly in TN and it is very much possible that the company does not have the bandwidth to have a strong focus in other regions, even though its one of their goals.
In an interview, it was said that we can expect 17-18% growth in revenues in the coming years. That does not sound like a company that is getting into higher margin yoghurt, flavoured milk and importantly, gourmet ice cream sector. I am confused due to that statement. If it is indeed a company that will grow at less than 20%, then the current share price is very expensive!
Whatâs Ibaco (from Hatsunâs site)
At IBACO you can pick your own flavours, choose your own toppings (nuts, sauces, brownies, cookies, anything!) and make your own sundae. And just like we packed three owns into that last sentence, you can pack 3 flavours into one cup, maybe even 4 or 5. It’s your call.
The price of our serving is determined by its weight!
Disclaimer: This is one of the stocks that I have been holding from some time, had started buying it around 165. Would decide whether I need to buy more or sell everything after hearing views/analysis from the members of this forum.
Wanted to post in this forum from a long time but was feeling a little embarrassed. If there is anything wrong in the way I have posted, please let me know, will keep it in mind.