Hatsun Agro Products Ltd. share price target

Hatsun Agro’s ice cream business has strong potential to create value, in our view, as it has built multiple competitive advantages such as established brands (Arun and Ibaco), HAP Daily, three manufacturing units which help to cater to a large geography – this results in higher TAM at lower freight costs and storage units which help in reducing capex.

Hatsun reported gross/EBITDA margin expansion (+49bps/15bps YoY) in spite of Q2FY24’s relatively high base.

Hatsun reported strong Q1FY25 numbers led by volume-driven revenue growth and a 14-quarter high EBITDA margin. We reckon the deflationary trend in milk procurement prices persisting Q1FY25 and is likely the chief driver of gross/EBITDA margin expansion.

Hatsun reported highest gross margins in past 10 quarters underlining the cyclical recovery in margins due to lower milk procurement prices.

We are enthused by: (1) EBITDA margin expansion which has continued in Q2FY24 led by correction in commodity prices, (2) improvement in utilisation at new plants at Solapur (Maharashtra) and Govindapur (Andhra Pradesh) is leading to higher profitability and (3) sale of windmills is likely to be RoCE accretive.

We are enthused by EBITDA margin expansion posted by Hatsun in Q1FY24 YoY. Correction in milk procurement price has resulted in gross margin expansion of 110bps QoQ. We model the full benefits of lower input prices to be visible in Q2FY24. The sale of windmill assets is likely to be value accretive in our view as the RoCE on windmill operations was lower than cost of capital.

Hatsun’s Q4FY23 gross margin of 26.8% was lowest in past 24 quarters. Higher milk procurement led by lumpy skin disease, muted flush season and intense summer have impacted the margins.

Takeaways from Q3FY23: (1) Considering multiple rounds of price hike in 9MFY23, we believe volumes have likely declined in Q3FY23 and (2) Milk procurement prices continue to remain high due to muted flush season in FY23.

Revenue growth of 6.9% YoY is largely price led and we believe volumes were flat YoY.

Key takeaways from Q2FY22: (1) Hatsun registered strong revenue growth of 23.2% YoY and we believe it is largely volume led, (2) steady launches of new products and geographical expansion of HAP outlets continued during the quarter and (3) EBITDA margin declined 180bps YoY due to higher input prices, increase in freight costs and likely increase in ad-spend. Hatsun is on track to complete its expansion at its three plants, which are likely to be completed during FY22.

Launch of new premium products & diversify its product portfolio:Hatsun receives 90% of its revenues from dairy products and remaining from ice cream business. Milk and curd are sold through the brand Arokya and value added products are sold under brand 'Hatsun''. Products include panner, curd, ghee and butter which receive twice the margins of liquid milk. Arun Ice creams has been one of the well known brands in Tamil Nadu and is continuously launching new flavors.